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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

þ	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the Quarterly Period ended June 30, 2005
or
 	 	 	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from ___to ___
Commission File Number 000-31311
 
PDF SOLUTIONS, INC.
(Exact name of Registrant as Specified in its Charter)

Delaware	 	25-1701361	
(State or Other Jurisdiction of	 	(I.R.S. Employer	
Incorporation or Organization)	 	Identification No.)	
 	 	 	
333 West San Carlos Street, Suite 700	 	 	
San Jose, California	 	95110	
(Address of Principal Executive Offices)	 	(Zip Code)	
(408) 280-7900
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 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 such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes þ No o
The number of shares outstanding of the Registrant’s Common Stock as of August 5, 2005 was 26,124,862

 

TABLE OF CONTENTS
 	 	 	 	 	 	 	 	
 	 	 	 	Page	 	
PART I	 	FINANCIAL INFORMATION	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Item 1.	 	Financial Statements.	 	 	2	 	 	
 	 	Unaudited Consolidated Balance Sheets	 	 	2	 	 	
 	 	Unaudited Consolidated Statements of Operations	 	 	3	 	 	
 	 	Unaudited Consolidated Statements of Cash Flows	 	 	4	 	 	
 	 	Notes to Unaudited Consolidated Financial Statements	 	 	5	 	 	
 	 	 	 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	 	 	13	 	 	
 	 	 	 	 	 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk.	 	 	32	 	 	
 	 	 	 	 	 	 	 	
Item 4.	 	Controls and Procedures.	 	 	33	 	 	
 	 	 	 	 	 	 	 	
PART II	 	OTHER INFORMATION	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Item 1.	 	Legal Proceedings.	 	 	34	 	 	
 	 	 	 	 	 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds.	 	 	34	 	 	
 	 	 	 	 	 	 	 	
Item 3.	 	Defaults Upon Senior Securities.	 	 	34	 	 	
 	 	 	 	 	 	 	 	
Item 4.	 	Submission of Matters to a Vote of Security Holders.	 	 	34	 	 	
 	 	 	 	 	 	 	 	
Item 5.	 	Other Information.	 	 	35	 	 	
 	 	 	 	 	 	 	 	
Item 6.	 	Exhibits.	 	 	36	 	 	
 	 	 	 	 	 	 	 	
SIGNATURES	 	 	37	 	 	
 	 	 	 	 	 	 	 	
INDEX TO EXHIBITS	 	 	 	 	 	
 EXHIBIT 3.2	
 EXHIBIT 10.1	
 EXHIBIT 21.01	
 EXHIBIT 31.01	
 EXHIBIT 31.02	
 EXHIBIT 32.01	
 EXHIBIT 32.02	
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Item 1. Financial Statements.
PDF SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	
 	 	2005	 	2004	
ASSETS	 	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	51,862	 	 	$	45,660	 	
Accounts receivable, net of allowances of $254 in 2005 and 2004	 	 	18,852	 	 	 	15,978	 	
Prepaid expenses and other current assets	 	 	2,436	 	 	 	2,685	 	
Deferred tax assets	 	 	1,998	 	 	 	1,586	 	
Total current assets	 	 	75,148	 	 	 	65,909	 	
Property and equipment, net	 	 	3,614	 	 	 	3,321	 	
Goodwill	 	 	39,886	 	 	 	39,886	 	
Intangible assets, net	 	 	12,789	 	 	 	15,791	 	
Other assets	 	 	608	 	 	 	500	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	132,045	 	 	$	125,407	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	1,827	 	 	$	1,023	 	
Accrued compensation and related benefits	 	 	3,012	 	 	 	3,209	 	
Other accrued liabilities	 	 	2,036	 	 	 	2,593	 	
Taxes payable	 	 	4,013	 	 	 	3,286	 	
Deferred revenue	 	 	2,949	 	 	 	2,905	 	
Billings in excess of recognized revenue	 	 	1,921	 	 	 	1,581	 	
 	 	 	 	 	 	 	 	 	
Total current liabilities	 	 	15,758	 	 	 	14,597	 	
Long-term liabilities	 	 	290	 	 	 	311	 	
Deferred tax liabilities	 	 	1,469	 	 	 	1,701	 	
Total liabilities	 	 	17,517	 	 	 	16,609	 	

Stockholders’ equity:	 	 	 	 	 	 	 	 	
Preferred stock, $0.00015 par value, 5,000 shares authorized, no shares issued and outstanding in 2005 and 2004	 	 	—	 	 	 	—	 	
Common stock, $0.00015 par value, 70,000 shares authorized: shares issued and outstanding 25,973 in 2005 and 25,645 in 2004	 	 	4	 	 	 	4	 	
Additional paid-in-capital	 	 	137,181	 	 	 	134,191	 	
Treasury stock at cost, 506 shares in 2005 and 2004	 	 	(4,806	)	 	 	(4,806	)	
Deferred stock-based compensation	 	 	(75	)	 	 	(148	)	
Notes receivable from stockholders	 	 	(550	)	 	 	(550	)	
Accumulated deficit	 	 	(17,239	)	 	 	(19,975	)	
Accumulated other comprehensive income	 	 	13	 	 	 	82	 	
 	 	 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	114,528	 	 	 	108,798	 	

Total liabilities and stockholders’ equity	 	$	132,045	 	 	$	125,407	 	
 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements
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PDF SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	 	June 30,	 	June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	$	12,267	 	 	$	13,352	 	 	$	24,824	 	 	$	22,858	 	
Software licenses	 	 	3,197	 	 	 	161	 	 	 	6,646	 	 	 	2,350	 	
Gain share	 	 	2,892	 	 	 	1,656	 	 	 	4,979	 	 	 	2,637	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenue	 	 	18,356	 	 	 	15,169	 	 	 	36,449	 	 	 	27,845	 	

Cost and expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of design-to-silicon-yield solutions:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct costs of design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	 	5,766	 	 	 	5,308	 	 	 	11,516	 	 	 	9,660	 	
Software licenses	 	 	101	 	 	 	61	 	 	 	258	 	 	 	63	 	
Amortization of acquired core technology	 	 	1,266	 	 	 	1,327	 	 	 	2,532	 	 	 	2,677	 	
Research and development	 	 	5,655	 	 	 	4,822	 	 	 	10,991	 	 	 	10,040	 	
Selling, general and administrative	 	 	4,289	 	 	 	3,622	 	 	 	8,203	 	 	 	7,419	 	
Stock-based compensation amortization*	 	 	32	 	 	 	292	 	 	 	74	 	 	 	547	 	
Amortization of other acquired intangible assets	 	 	235	 	 	 	410	 	 	 	470	 	 	 	820	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	 	 	17,344	 	 	 	15,842	 	 	 	34,044	 	 	 	31,226	 	

Income (loss) from operations	 	 	1,012	 	 	 	(673	)	 	 	2,405	 	 	 	(3,381	)	
Interest and other income, net	 	 	350	 	 	 	138	 	 	 	622	 	 	 	291	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	 	1,362	 	 	 	(535	)	 	 	3,027	 	 	 	(3,090	)	
Tax provision (benefit)	 	 	20	 	 	 	(75	)	 	 	291	 	 	 	(788	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	1,342	 	 	$	(460	)	 	$	2,736	 	 	$	(2,302	)	

Net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.05	 	 	$	(0.02	)	 	$	0.11	 	 	$	(0.09	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.05	 	 	$	(0.02	)	 	$	0.10	 	 	$	(0.09	)	

Weighted average common shares:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	25,862	 	 	 	25,337	 	 	 	25,779	 	 	 	25,319	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	26,986	 	 	 	25,337	 	 	 	27,057	 	 	 	25,319	 	

* Stock-based compensation amortization:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of design-to-silicon-yield solutions	 	$	—	 	 	$	9	 	 	$	—	 	 	$	37	 	
Research and development	 	 	32	 	 	 	274	 	 	 	74	 	 	 	476	 	
Selling, general and administrative	 	 	—	 	 	 	9	 	 	 	—	 	 	 	34	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	32	 	 	$	292	 	 	$	74	 	 	$	547	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements
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PDF SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2005	 	2004	
Operating activities:	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	2,736	 	 	$	(2,302	)	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	1,116	 	 	 	1,281	 	
Stock-based compensation	 	 	74	 	 	 	390	 	
Amortization of acquired intangible assets	 	 	3,002	 	 	 	3,496	 	
Deferred taxes	 	 	(644	)	 	 	(2,070	)	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	
Accounts receivable	 	 	(2,874	)	 	 	133	 	
Prepaid expenses and other assets	 	 	141	 	 	 	250	 	
Accounts payable	 	 	804	 	 	 	891	 	
Accrued compensation and related benefits	 	 	(197	)	 	 	(52	)	
Other accrued liabilities	 	 	(557	)	 	 	(283	)	
Taxes payable	 	 	727	 	 	 	946	 	
Deferred revenue	 	 	44	 	 	 	349	 	
Billings in excess of recognized revenue	 	 	340	 	 	 	855	 	
 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	4,712	 	 	 	3,884	 	

Investing activities:	 	 	 	 	 	 	 	 	
Purchases of property and equipment	 	 	(1,409	)	 	 	(721	)	
 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	 	 	(1,409	)	 	 	(721	)	

Financing activities:	 	 	 	 	 	 	 	 	
Proceeds from exercise of stock options	 	 	2,182	 	 	 	928	 	
Proceeds from employee stock purchase plan	 	 	808	 	 	 	689	 	
Collection of notes receivable from stockholders	 	 	—	 	 	 	1,556	 	
Repurchase of common stock	 	 	—	 	 	 	(2,942	)	
Principal payments on long-term obligations	 	 	(22	)	 	 	(24	)	
 	 	 	 	 	 	 	 	 	
Net cash provided by financing activities	 	 	2,968	 	 	 	207	 	

Effect of exchange rate changes on cash and cash equivalents	 	 	(69	)	 	 	(8	)	

Net increase in cash and cash equivalents	 	 	6,202	 	 	 	3,362	 	
Cash and cash equivalents, beginning of period	 	 	45,660	 	 	 	39,110	 	

Cash and cash equivalents, end of period	 	$	51,862	 	 	$	42,472	 	

Supplemental disclosure of cash flow information —	 	 	 	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	 	 	 	
Taxes	 	$	192	 	 	$	267	 	
 	 	 	 	 	 	 	 	 	
Interest	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements
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PDF SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
     The interim unaudited consolidated financial statements included herein have been prepared by PDF Solutions, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments necessary, (consisting only of normal recurring adjustments) to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. A significant portion of the Company’s revenues require estimates with respect to total costs which may be incurred and revenues earned. Actual results could differ from these estimates.
     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all significant intercompany balances and transactions. Certain amounts from prior years have been reclassified to conform to current-year presentation.
Revenue Recognition
     The Company derives revenue from two sources: Design-to-Silicon-Yield solutions and gain share. The Company recognizes revenue in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 81-1,  Accounting for Performance of Construction-Type and Certain Production-Type Contracts  and SOP No. 97-2,  Software Revenue Recognition,  as amended.
     Design-to-Silicon-Yield Solutions — Design-to-silicon-yield solutions revenue is derived from integrated solutions and software licenses. Revenue recognition for each element of Design-to-Silicon-Yield solutions is summarized as follows:
     Integrated Solutions — The Company generates a significant portion of its revenue from fixed-price contracts delivered over a specific period of time. These contracts require the accurate estimation of the cost to perform obligations and the overall scope of each engagement. Revenue under contracts for solution implementation services is recognized as the services are performed using the cost-to-cost percentage of completion method of contract accounting. Losses on solution implementation contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated. On occasion, the Company has licensed its software products as a component of its fixed price integrated solutions implementations. In such instances, the software products are licensed to the customer over the specified term of the agreement with support and maintenance to be provided over the license term. Under these arrangements, where vendor-specific objective evidence of fair value (“VSOE”) does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the term of the agreement. Costs incurred under these arrangements are deferred and recognized in proportion to revenue recognized under these arrangements.
     Revenue from support and maintenance services is recognized ratably over the term of the support and maintenance contract, generally one year, while revenue from consulting, installation and training services is recognized as the services are performed. When bundled with software licenses in multiple element arrangements, support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training revenue is allocated to each element of a transaction based upon its fair value as determined by the Company’s VSOE. VSOE is generally established for maintenance based upon negotiated renewal rates while VSOE for consulting, installation, and training is established
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based upon the Company’s customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the term of the underlying element for which VSOE does not exist.
     Software Licenses — The Company also licenses its software products separately from its integrated solution implementations. In such cases revenue is recognized under the residual method when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by the Company’s VSOE and such services are recorded as integrated solutions. VSOE is generally established for maintenance based upon negotiated renewal rates while VSOE for consulting, installation and training services is established based upon the Company’s customary pricing for such services when sold separately. No revenue has been recognized for software licenses with extended payment terms in excess of amounts due.
     Gain Share — Gain share revenue represents profit sharing and performance incentives earned based upon the Company’s customer reaching certain defined operational levels. Upon achieving such operational levels, the Company receives either a fixed fee and/or variable fee based on the units manufactured by the customer. Due to the uncertainties surrounding attainment of such operational levels, the Company recognizes gain share revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from the customer supporting the determination of amounts and probability of collection.
Stock-Based Compensation
     The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25  Accounting for Stock Issued to Employees  (“APB No. 25”), and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123  , Accounting for Stock-Based Compensation,  (“SFAS No. 123”) as amended by SFAS No. 148,  Accounting for Stock-Based Compensation — Transition and Disclosures . Deferred compensation recognized under APB No. 25 is amortized to expense using the graded vesting method. The Company accounts for stock options and warrants issued to non-employees in accordance with the provisions of SFAS No. 123 and its related interpretations under the fair value based method.
     The Company adopted the disclosure-only provisions of SFAS No. 123, and accordingly, no expense has been recognized for options granted to employees under the various stock plans. The Company amortizes deferred stock-based compensation on the graded vesting method over the vesting periods of the applicable stock purchase rights and stock options, generally four years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater vesting in earlier years than the straight-line method. Had compensation expense been determined for employee awards based on the fair value at the grant date for the awards, consistent with the provisions of SFAS No. 123, the Company’s pro forma net income (loss) and pro forma net income (loss) per share would be as follows (in thousands, except per share data):
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 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Net income (loss) as reported:	 	$	1,342	 	 	$	(460	)	 	$	2,736	 	 	$	(2,302	)	
Add: stock-based employee compensation expense included in reported net loss under APB No. 25	 	 	32	 	 	 	292	 	 	 	74	 	 	 	547	 	
Deduct: total employee stock-based compensation determined under fair value based method for all awards, net of related tax effects	 	 	(1,432	)	 	 	(1,263	)	 	 	(2,760	)	 	 	(2,694	)	

Pro forma net income (loss)	 	$	(58	)	 	$	(1,431	)	 	$	50	 	 	$	(4,449	)	

Basic net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	0.05	 	 	$	(0.02	)	 	$	0.11	 	 	$	(0.09	)	

Pro forma	 	$	0.00	 	 	$	(0.06	)	 	$	0.00	 	 	$	(0.18	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	0.05	 	 	$	(0.02	)	 	$	0.10	 	 	$	(0.09	)	

Pro forma	 	$	0.00	 	 	$	(0.06	)	 	$	0.00	 	 	$	(0.18	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     During the three months ended June 30, 2004, the Company recorded $158,000 in compensation expense associated with the acceleration of vesting of certain options to a former employee of the Company. The compensation expense reflected the intrinsic value of such options at the time of acceleration.
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (R), Share-Based Payment  (“SFAS 123(R)”), which revised SFAS No. 123. Under the provision of SFAS No. 123(R), all companies will be required to expense the estimated fair value of equity instruments including stock options and similar awards. The accounting provisions of SFAS 123(R) will be effective for the Company beginning on January 1, 2006.
2. RECENT ACCOUNTING PRONOUNCEMENTS
     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), Share-Based Payment (“SFAS 123 (R)”), an amendment of SFAS No. 123 and SFAS No. 95 Statement of Cash Flows. The statement eliminates the ability to account for share-based compensation transactions using APB No. 25 and requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123 (R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing its shares, share options, or other equity instruments or by incurring liabilities based on the price of an entity’s shares or that require settlement by the issuance of equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 (“SAB 107”) which expresses views of the SEC staff regarding the application of SFAS No. 123 (R). Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123 (R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC amended the compliance dates for SFAS 123 (R) to provide that the provisions of this statement will be effective for the Company beginning on January 1, 2006. Although the Company is currently assessing the application of SFAS No. 123 (R), the Company believes that the adoption of this statement will have a material impact on its financial position and results of operations.
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     In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004  (“FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment of the Jobs Act to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Jobs Act was enacted on October 22, 2004. The provisions of FSP No 109-2 were effective December 21, 2004. The Company does not believe that the adoption of FSP No.109-2 will have a material effect on its financial position, results of operations or cash flows.
     On June 1, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3  (“SFAS 154”). This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included. SFAS 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 carries forward the guidance set forth in Opinion 20 for reporting the correction of an error included in previously issued financial statements. The provisions of SFAS 154 are effective for accounting changes and correction of errors made in fiscal periods beginning January 1, 2006. The Company does not believe that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.
     Reclassifications — Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
3. ACCOUNTS RECEIVABLE
     Accounts receivable include amounts that are unbilled at the end of the period. Unbilled accounts receivable are determined on an individual contract basis and were approximately $3.5 million and $2.8 million at June 30, 2005 and December 31, 2004, respectively.
4. NET INCOME (LOSS) PER SHARE
     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average common shares outstanding for the period (excluding outstanding stock options and shares subject to repurchase). Diluted net income (loss) per share reflects the weighted-average common shares outstanding plus the potential effect of dilutive securities which are convertible into common shares (using the treasury stock method), except in cases where the effect would be anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands, except per share data):
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 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Net income (loss)	 	$	1,342	 	 	$	(460	)	 	$	2,736	 	 	$	(2,302	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average common shares outstanding	 	 	25,864	 	 	 	25,401	 	 	 	25,785	 	 	 	25,431	 	
Weighted average common shares outstanding subject to repurchase	 	 	(2	)	 	 	(64	)	 	 	(6	)	 	 	(112	)	

Denominator for basic calculation	 	 	25,862	 	 	 	25,337	 	 	 	25,779	 	 	 	25,319	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares subject to repurchase	 	 	2	 	 	 	—	 	 	 	6	 	 	 	—	 	
Stock options outstanding	 	 	1,122	 	 	 	—	 	 	 	1,272	 	 	 	—	 	

Denominator for diluted computation	 	 	26,986	 	 	 	25,337	 	 	 	27,057	 	 	 	25,319	 	

Net income (loss) per share — basic	 	$	0.05	 	 	$	(0.02	)	 	$	0.11	 	 	$	(0.09	)	

Net income (loss) per share — diluted.	 	$	0.05	 	 	$	(0.02	)	 	$	0.10	 	 	$	(0.09	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table sets forth potential shares of common stock that are not included in the diluted net income (loss) per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Shares of common stock subject to repurchase	 	 	—	 	 	 	64	 	 	 	—	 	 	 	112	 	
Common stock options	 	 	1,121	 	 	 	735	 	 	 	741	 	 	 	980	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	1,121	 	 	 	799	 	 	 	741	 	 	 	1,092	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
5. COMPREHENSIVE INCOME (LOSS)
     The components of comprehensive income (loss) are as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Net income (loss)	 	$	1,342	 	 	$	(460	)	 	$	2,736	 	 	$	(2,302	)	
Foreign currency translation adjustments	 	 	(29	)	 	 	(8	)	 	 	(69	)	 	 	(8	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income (loss)	 	$	1,313	 	 	$	(468	)	 	$	2,667	 	 	$	(2,310	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
6. GOODWILL AND PURCHASED INTANGIBLE ASSETS
     On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The following table provides information relating to the
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intangible assets and goodwill contained within the Company’s consolidated balance sheets as of June 30, 2005 and December 31, 2004 (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	June 30, 2005	
 	 	 	 	 	 	Purchase Price	 	Accumulated	 	Net Carrying	
 	 	Cost	 	Adjustments	 	Amortization	 	Amount	
Goodwill	 	$	41,282	 	 	$	(834	)	 	$	(562	)	 	$	39,886	 	

Acquired identifiable intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Acquired core technology	 	$	21,602	 	 	$	(500	)	 	$	(10,349	)	 	$	10,753	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Brand name	 	 	2,000	 	 	 	—	 	 	 	(917	)	 	 	1,083	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other acquired intangible assets	 	 	2,460	 	 	 	—	 	 	 	(1,507	)	 	 	953	 	

Total	 	$	26,062	 	 	$	(500	)	 	$	(12,773	)	 	$	12,789	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2004	
 	 	 	 	 	 	Purchase Price	 	Accumulated	 	Net Carrying	
 	 	Cost	 	Adjustments	 	Amortization	 	Amount	
Goodwill	 	$	41,282	 	 	$	(834	)	 	$	(562	)	 	$	39,886	 	

Acquired identifiable intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Acquired core technology	 	$	21,602	 	 	$	(500	)	 	$	(7,817	)	 	$	13,285	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Brand name	 	 	2,000	 	 	 	—	 	 	 	(667	)	 	 	1,333	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other acquired intangible assets	 	 	2,460	 	 	 	—	 	 	 	(1,287	)	 	 	1,173	 	

Total	 	$	26,062	 	 	$	(500	)	 	$	(9,771	)	 	$	15,791	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     As required by SFAS No. 142, the Company performed its transitional impairment test of goodwill as of January 1, 2002, at which time the Company determined that the carrying value of goodwill had not been impaired. SFAS No. 142 also requires that goodwill be tested for impairment on an annual basis and more frequently in certain circumstances. Accordingly, the Company has selected December 31, to perform the annual testing requirements. As of December 31, 2004, the Company completed its annual testing requirements and determined that the carrying value of goodwill had not been impaired.
     During the year ended December 31, 2003, the Company recorded a non-cash adjustment of $172,000, relating to the reversal of excess accruals for acquisition-related expenses. Such adjustment resulted in a reduction of goodwill. During the year ended December 31, 2004, the Company recorded a non-cash adjustment of $704,000 relating to the reversal of estimated tax liabilities, which were resolved. Such adjustment resulted in a reduction of goodwill. Additionally, during the twelve months ended December 31, 2004, the Company recorded a non-cash adjustment of $42,000 relating to a change in estimate on abandoned leased facilities assumed during the acquisition of IDS Software Systems, Inc. (“IDS”). This adjustment resulted in an increase in goodwill.
     During the year ended December 31, 2004, the Company recorded a non-cash adjustment of $500,000 associated with a reversal of contingent incentive performance amounts originally recorded to acquired core technology in connection with the acquisition of WaferYield, Inc. (“WaferYield”).
          The Company expects the annual amortization of acquired intangible assets to be as follows (in thousands):
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Year Ending December 31,	 	Amount	
2005 (six-month period ending December 31, 2005)	 	$	3,002	 	
2006	 	 	6,004	 	
2007	 	 	3,783	 	
 	 	 	 	 	
Total	 	$	12,789	 	
 	 	 	 	 	
7. CUSTOMER AND GEOGRAPHIC INFORMATION
     The Company has adopted the disclosure requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.
     The Company’s chief operating decision maker, the Chief Executive Officer, reviews discrete financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly the Company considers itself to be in one operating segment, specifically the licensing and implementation of yield improvement solutions for integrated circuit manufacturers.
     The Company had revenues from individual customers in excess of 10% of total revenues as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
Customer	 	2005	 	2004	 	2005	 	2004	
A	 	 	11	%	 	 	18	%	 	 	11	%	 	 	19	%	
C	 	 	7	%	 	 	14	%	 	 	10	%	 	 	11	%	
G	 	 	11	%	 	 	13	%	 	 	12	%	 	 	13	%	
J	 	 	22	%	 	 	8	%	 	 	15	%	 	 	13	%	
M	 	 	11	%	 	 	5	%	 	 	15	%	 	 	3	%	
     The Company had gross accounts receivable from the following individual customers in excess of 10% of gross accounts receivable as follows:
 	 	 	 	 	 	 	 	 	
Customer	 	June 30, 2005	 	December 31, 2004	
A	 	 	10	%	 	 	13	%	
C	 	 	7	%	 	 	14	%	
J	 	 	21	%	 	 	2	%	
P	 	 	14	%	 	 	5	%	
     Revenues from customers by geographic area are as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	Six Months	
 	 	Ended June 30,	 	Ended June 30,	
 	 	2005	 	2004	 	2005	 	2004	
Asia	 	$	10,178	 	 	$	10,742	 	 	$	22,879	 	 	$	17,466	 	
United States	 	 	6,526	 	 	 	3,265	 	 	 	10,074	 	 	 	7,943	 	
Europe	 	 	1,652	 	 	 	1,162	 	 	 	3,496	 	 	 	2,436	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	18,356	 	 	$	15,169	 	 	$	36,449	 	 	$	27,845	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     As of June 30, 2005 and December 31, 2004, long-lived assets related to PDF Solutions GmbH (formerly AISS), located in Germany, totaled $801,000 and $795,000, respectively, of which $659,000 and $659,000,
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respectively, relates to acquired intangible assets and goodwill. The majority of the Company’s remaining long-lived assets are in the United States.
8. STOCK REPURCHASE PROGRAM
     In February 2003, the Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock in the open market. As of June 30, 2005, the Company has repurchased 505,579 shares at a weighted average price of $9.51 per share for a total cost of $4.8 million. Under this authorization, the Company may continue to make additional stock repurchases from time to time, depending on market conditions, stock price and other factors. At June 30, 2005, $5.2 million remained available under the program to repurchase additional shares.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
     The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative effect of terms like these or other comparable terminology. These statements are only predictions. These statements involve known and unknown risks and uncertainties and other factors that may cause actual events or results to differ materially. All forward-looking statements included in this document are based on information available to us on the date of filing, and we assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Certain Risks Which May Affect Our Future Results” set forth at the end of this Item 2 and set forth at the end of Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2004. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Overview
     Our technologies and services enable semiconductor companies to improve the yield and performance of integrated circuits, or ICs, by integrating the design and manufacturing processes. We believe that our solutions improve a semiconductor company’s time-to-market, yield and ultimately product profitability. Our solutions combine proprietary manufacturing process simulation software, yield and performance modeling software, design-for-manufacturability software, test chips, a proprietary electrical wafer test system, yield and performance enhancement methodologies, yield management systems, and professional services. We analyze yield loss mechanisms to identify, quantify and correct the issues that cause yield loss, as an integral part of the IC design process. This drives IC design and manufacturing improvements that enable our customers to have higher initial yields and achieve and exceed targeted IC yield and performance throughout product life cycles. Our solution is designed to increase the initial yield when a design first enters a manufacturing line, to increase the rate at which that yield improves, and to allow subsequent product designs to be added to manufacturing lines more quickly and easily.
     The result of implementing our solutions is the creation of value that can be measured based on improvements to our customers’ actual yield. We align our financial interests with the yield and performance improvements realized by our customers, and receive revenue based on this value. To date, we have sold our technologies and services to semiconductor companies including leading integrated device manufacturers, fabless semiconductor companies and foundries.
     From our incorporation in 1992 through late 1995, we were primarily focused on research and development of our proprietary manufacturing process simulation and yield and performance modeling software. From late 1995 through late 1998, we continued to refine and sell our software, while expanding our offering to include yield and performance improvement consulting services. In late 1998, we began to sell our software and consulting services, together with our newly developed proprietary technologies, as Design-to-Silicon-Yield solutions, reflecting our current business model. In April 2000, we expanded our research and development team and gained additional technology by acquiring AISS, now operating as PDF Solutions, GmbH, which continues to develop software and provide development services to the semiconductor industry. In July 2001, we completed the initial public offering of our common stock. In 2003, we further enhanced our product and service offerings through the acquisitions of IDS and WaferYield.
Industry Trend
     Demand for consumer electronics continues to drive technological innovation as the need for products which have greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. To meet this demand, IC manufacturers and designers are constantly challenged to improve the overall performance of ICs by designing and manufacturing ICs with more embedded applications to create greater functionality. As a result, in 2004 and through the first half of 2005 more and more companies have expanded or advanced their design and manufacturing processes to develop and produce deep submicron ICs containing component sizes measured at 130 nanometers and below. As this trend continues, companies will
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continually be challenged to improve process capabilities to optimally produce ICs with minimal systematic and yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe as volume production of deep submicron ICs continues to grow, the difficulties of integrating IC designs with their respective processes will create a greater need for products and services that address the performance yield loss issues the semiconductor industry is facing today and will face in the future.
Financial Highlights
     We continued to see greater adoption of our products and services through the expansion of our customer base both domestically and internationally. Financial highlights for the three months ended June 30, 2005 were as follows:
 	•	 	Revenue for the three months ended June 30, 2005 totaled $18.4 million, a quarterly high, and our 10th quarter of sequential revenue increases. This represents an increase of 21% from revenue of $15.2 million reported for the three months ended June 30, 2004. For the three months ended June 30, 2005, four customers each contributed over 10% of revenue and together accounted for 55% of total revenue compared to three customers each contributing over 10% of revenue and together accounting for 45% of total revenue for the three months ended June 30, 2004.	
 	 	 	 	
 	•	 	Net income for the three months ended June 30, 2005 of $1.3 million, increased by $1.8 million from a net loss of $460,000 for the three months ended June 30, 2004. The net income during the three months ended June 30, 2005 included amortization of acquired core technology and intangible assets of $1.5 million and stock-based compensation amortization of $32,000 while the net loss during the three months ended June 30, 2004 included amortization of acquired core technology and intangible assets of $1.7 million and stock based compensation amortization of $292,000. The increase in revenue and controlled expenses were the primary reasons for the improvement in profitability.	
 	 	 	 	
 	•	 	Net income per share increased to $0.05 during the three months ended June 30, 2005 from a net loss per share of $0.02 for the three months ended June 30, 2004.	
     Financial highlights for the six months ended June 30, 2005 were as follows:
 	•	 	Revenue for the six months ended June 30, 2005 totaled $36.4 million, an increase of 31%, from $27.8 million reported during the six months ended June 30, 2004. For the six months ended June 30, 2005, five customers each contributed over 10% of revenue and together accounted for 63% of total revenue compared to four customers each contributing over 10% of revenue and together accounting for 56% of total revenue during the six months ended June 30, 2004.	
 	 	 	 	
 	•	 	Net income for the six months ended June 30, 2005, of $2.7 million, increased from a net loss of $2.3 million for the six months ended June 30, 2004. The net income for the six months ended June 30, 2005 included amortization of acquired core technology and intangible assets of $3.0 million and stock-based compensation amortization of $74,000 while the net loss for the three months ended June 30, 2004 included amortization of acquired core technology and intangible assets of $3.5 million and stock based compensation amortization of $547,000. The increase in revenue and controlled expenses were the primary reasons for the improvement in profitability.	
 	 	 	 	
 	•	 	Net income per share increased to $0.10 for the six months ended June 30, 2005 from a loss per share of $0.09 for the six months ended June 30, 2004.	
 	 	 	 	
 	•	 	Cash increased $6.2 million, to $51.9 million, during the six months ended June 30, 2005. Net cash provided by operating activities during the six months ended June 30, 2005 totaled $4.7 million. Net cash used in investing activities during the six months ended June 30, 2005 totaled $1.4 million. Net cash provided by financing activities during the six months ended June 30, 2005 totaled $3.0 million.	
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Critical Accounting Policies
     Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The notes to the unaudited consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods that we use.
General
     Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, software development costs, recoverability of goodwill and acquired intangible assets, estimated useful lives of acquired intangibles and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.
Revenue Recognition
     We derive revenue from two sources: Design-to-Silicon-Yield solutions and gain share. We recognize revenue in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts  and SOP No. 97-2,  Software Revenue Recognition , as amended.
     Design-to-Silicon-Yield Solutions — Design-to-Silicon-Yield solutions revenue is derived from integrated solutions and software licenses. Revenue recognition for each element of Design-to-Silicon-Yield solutions is as follows:
     Integrated Solutions — We generate a significant portion our revenue from fixed-price contracts delivered over a specific period of time. These contracts require the accurate estimation of the cost to perform obligations and the overall scope of each engagement. Revenue under contracts for solution implementation services is recognized as the services are performed using the cost-to-cost percentage of completion method of contract accounting. Losses on solution implementation contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage the projects properly within the planned period of time or satisfy our obligations under contracts, resulting contract margins could be materially different than those anticipated when the contract was executed. Any such reductions in contract margin could have a material negative impact on our operating results.
     On occasion, we have licensed our software products as a component of our fixed price solutions implementations. In such instances, the software products are licensed to the customer over the specified term of the agreement with support and maintenance to be provided over the license term. Under these arrangements, where vendor-specific objective evidence of fair value (“VSOE”) does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the term of the agreement. Costs incurred under these arrangements are deferred and recognized in proportion to revenue recognized under these arrangements.
     Revenue from support and maintenance services is recognized ratably over the term of the support and maintenance contract, generally one year, while revenue from consulting, installation and training services is recognized as the services are performed. When bundled with software licenses in multiple element arrangements, support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE. VSOE is generally established for maintenance based upon negotiated renewal rates while VSOE for consulting, installation, and training is established based upon our
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customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the term of the underlying element for which VSOE does not exist.
     Software Licenses — We also license our software products separate from our integrated solutions. In such cases revenue is recognized under the residual method when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and the arrangement does not require services that are essential to the functionality of the software. When arrangements include multiple elements such as support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training, revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE and such services are recorded as integrated solutions. VSOE is generally established for maintenance based upon negotiated renewal rates while VSOE for consulting, installation and training services is established based upon our customary pricing for such services when sold separately. No revenue has been recognized for software licenses with extended payment terms in excess of amounts due.
     Gain Share — Gain share revenue represents profit sharing and performance incentives earned based upon our customers reaching certain defined operational levels. Upon achieving such operational levels, we receive either a fixed fee and/or variable fee based on the units sold by the customer. Due to the uncertainties surrounding attainment of such operational levels, we recognize gain share revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from our customers supporting the determination of amounts and probability of collection. Our continued receipt of gain share revenue is dependent on many factors which are outside our control, including among others, continued production of the related ICs by our customers, sustained yield improvements by our customers and our ability to enter into new Design-to-Silicon-Yield solutions contracts containing gain share provisions.
Software Development Costs
     Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86,  Computer Software to be Sold, Leased or Otherwise Marketed . Because we believe our current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
Goodwill and Acquired Intangible Assets
     As of June 30, 2005, we had $52.7 million of goodwill and intangible assets. In assessing the recoverability of our goodwill and intangible assets, we must make assumptions regarding estimated future cash flows and other factors. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We evaluate goodwill for impairment pursuant to the provisions of SFAS No. 142,  Goodwill and Other Intangible Assets . As of December 31, 2004, we completed our annual testing requirements and determined that the carrying value of goodwill had not been impaired.
     We are currently amortizing our acquired intangible assets over estimated useful lives of 4 years, which is based on the estimated period of benefit to be delivered from such assets. However, a decrease in the estimated useful lives of such assets would cause additional amortization expense or an impairment of such asset in future periods.
Realization of Deferred Tax Assets
     Realization of deferred tax assets is dependent on our ability to generate future taxable income and utilize tax-planning strategies. We have recorded a deferred tax asset in the amount that is more likely than not to be realized based on current estimations and assumptions. We evaluate the need for a valuation allowance on a quarterly basis. Any resulting changes to the valuation allowance will result in an adjustment to income in the period the determination is made.
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Results of Operations
     The following table sets forth, for years indicated, the percentage of total revenue represented by the line items reflected in our consolidated statements of operations:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	 	 	 	
 	 	2005	 	2004	 	2005	 	2004	
Revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	 	67	%	 	 	88	%	 	 	68	%	 	 	82	%	
Software licenses	 	 	17	 	 	 	1	 	 	 	18	 	 	 	9	 	
Gain share	 	 	16	 	 	 	11	 	 	 	14	 	 	 	9	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenue	 	 	100	 	 	 	100	 	 	 	100	 	 	 	100	 	

Cost and expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of design-to-silicon-yield solutions:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct costs of design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	 	31	 	 	 	35	 	 	 	32	 	 	 	35	 	
Software licenses	 	 	1	 	 	 	—	 	 	 	1	 	 	 	—	 	
Amortization of acquired core technology	 	 	7	 	 	 	9	 	 	 	7	 	 	 	9	 	
Research and development	 	 	31	 	 	 	32	 	 	 	30	 	 	 	36	 	
Selling, general and administrative	 	 	23	 	 	 	24	 	 	 	23	 	 	 	27	 	
Stock-based compensation amortization	 	 	—	 	 	 	2	 	 	 	—	 	 	 	2	 	
Amortization of other acquired intangible assets.	 	 	1	 	 	 	3	 	 	 	1	 	 	 	3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	 	 	94	 	 	 	105	 	 	 	94	 	 	 	112	 	

Income (loss) from operations	 	 	6	 	 	 	(5	)	 	 	6	 	 	 	(12	)	
Interest and other income, net	 	 	2	 	 	 	1	 	 	 	2	 	 	 	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	 	8	 	 	 	(4	)	 	 	8	 	 	 	(11	)	
Tax provision (benefit)	 	 	—	 	 	 	(1	)	 	 	1	 	 	 	(3	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	 	8	%	 	 	(3	)%	 	 	7	%	 	 	(8	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comparison of the Three Months Ended June 30, 2005 and 2004
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Revenue	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	$	12,267	 	 	$	13,352	 	 	$	(1,085	)	 	 	(8	)%	 	 	67	%	 	 	88	%	
Software licenses	 	 	3,197	 	 	 	161	 	 	 	3,036	 	 	 	1,886	%	 	 	17	%	 	 	1	%	
Gain share	 	 	2,892	 	 	 	1,656	 	 	 	1,236	 	 	 	75	%	 	 	16	%	 	 	11	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	18,356	 	 	$	15,169	 	 	$	3,187	 	 	 	21	%	 	 	100	%	 	 	100	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Design-to-Silicon-Yield Solutions. Design-to-Silicon-Yield solutions revenue is derived from integrated solutions (including solution implementations, software support and maintenance and training) and software licenses, provided during our customer yield improvement engagements and solution product sales.
     Integrated solutions. The decrease in integrated solutions revenue of $1.1 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily attributable to a lower number of solution implementations. Our integrated solutions revenue may fluctuate in the future and is dependent on a number of factors including our ability to obtain new customers at emerging technology nodes and our ability to estimate costs associated with such contracts.
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     Software licenses. The increase in software licenses revenue of $3.0 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was due to greater adoption of our software applications, principally from our existing customers, who continue to expand their usage of our software products. Software license revenue may fluctuate in the future and is dependent upon a number of factors including the semiconductor industry’s acceptance of our products, our ability to attract new customers and further penetration of our current customer base.
     Gain Share. Gain share revenue represents profit sharing and performance incentives earned based upon our customer reaching certain defined operational levels. Gain share revenue grew approximately $1.2 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. The increase in gain share revenue was primarily due to a greater number of engagements contributing to gain share at newer technology nodes, as well as a greater number of wafer starts at our customers’ sites. Our gain share revenue may continue to fluctuate from period to period. Our continued receipt of gain share revenue is dependent on many factors that are outside our control, including among others, continued production of ICs by our customers, sustained yield improvements by our customers and our ability to enter into new Design-to-Silicon-Yield solutions contracts containing gain share provisions.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Cost of Design-to-Silicon Yield	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Solutions	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct costs of design-to-silicon- yield solutions s	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	$	5,766	 	 	$	5,308	 	 	$	458	 	 	 	9	%	 	 	31	%	 	 	35	%	
Software licenses	 	 	101	 	 	 	61	 	 	 	40	 	 	 	66	%	 	 	1	%	 	 	—	 	
Amortization of acquired core technology	 	 	1,266	 	 	 	1,327	 	 	 	(61	)	 	 	(5	)%	 	 	7	%	 	 	9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	7,133	 	 	$	6,696	 	 	$	437	 	 	 	7	%	 	 	39	%	 	 	44	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Direct Costs of Design-to-Silicon-Yield Solutions. Direct costs of Design-to-Silicon-Yield solutions consists of costs incurred to provide and support our integrated solutions and costs recognized in connection with licensing our software.
     Integrated solutions. Integrated solutions costs consist of material, labor and overhead costs associated with solution implementations. Costs include purchased material, employee compensation and benefits, travel and facilities-related costs. The increase in direct costs of Design-to-Silicon-Yield integrated solutions of $458,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily attributable to increased personnel-related costs and higher travel expenses. If we do not accurately estimate the resources required or the scope of work to be performed, or we do not manage the projects properly within the planned period of time or satisfy our obligations under contracts, resulting contract margins could be materially different than those anticipated when the contract was executed. Any such reductions in contract margin could have a material negative impact on our operating results.
     Software Licenses. Software license costs consist of costs associated with licensing third-party software sold in conjunction with our software products and expenses incurred to produce and distribute our product documentation. The increase in direct costs of Design-to-Silicon-Yield solutions software licenses of $40,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily attributable to an increase in license fees and royalties associated with third party software licenses and third party equipment sold in conjunction with our software. We expect the cost of software licenses to fluctuate in the future as a result of royalties and license fees paid for third party applications incorporated in our software products.
     Amortization of Acquired Core Technology. The decrease in amortization of acquired core technology of $61,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily attributable to certain acquired core technology being fully amortized in prior periods. We anticipate amortization
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of acquired core technology to be $2.5 million for the remaining six months in 2005, $5.1 million in 2006 and $3.2 million in 2007.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Research and Development	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	$	5,655	 	 	$	4,822	 	 	$	833	 	 	 	17	%	 	 	31	%	 	 	32	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Research and Development. Research and development expenses consist primarily of personnel-related costs to support product development activities, including compensation and benefits, outside development services, travel and facilities cost allocations. The increase in research and development expenses of $833,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily due to increased personnel-related expenses. We anticipate that we will continue to commit considerable resources to research and development in the future and that these expenses may increase in absolute dollars.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Selling, General and	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Administrative	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative	 	$	4,289	 	 	$	3,622	 	 	$	667	 	 	 	18	%	 	 	23	%	 	 	24	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Selling, General and Administrative. Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel in addition to outside sales commissions, legal and accounting services, marketing communications, travel and facilities cost allocations. The increase in selling, general and administrative expenses of $667,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily due to an increase in personnel expenses, external accounting fees, a reduction in our allowance for doubtful accounts recorded during the three months ended June 30, 2004, partially offset by a decrease in outside sales commissions and legal fees. We expect that selling, general and administrative expenses will increase in absolute dollars to support increased selling and administrative efforts in the future.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Stock-Based Compensation	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Amortization	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation amortization	 	$	32	 	 	$	292	 	 	$	(260	)	 	 	(89	)%	 	 	—	 	 	 	2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Stock-Based Compensation Amortization. The Company amortizes deferred stock-based compensation to expense under Accounting Principles Board Opinion No. 25  Accounting for Stock Issued to Employees , using the graded vesting method. The decrease in stock-based compensation amortization of $260,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily due to the effects of the graded vesting method of amortization which results in higher amortization expense during the initial periods following the respective option grants and due to the recognition of compensation expense of $158,000 associated with the acceleration of vesting of certain options to a former employee during the three months ended June 30, 2004. We anticipate amortization of stock-based compensation to continue to decrease throughout 2005.
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 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Amortization of Other	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Acquired Intangible Assets	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of Other Acquired Intangible Assets	 	$	235	 	 	$	410	 	 	$	(175	)	 	 	(43	)%	 	 	1	%	 	 	3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Amortization of Other Acquired Intangible Assets. Amortization of other acquired intangible assets decreased $175,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004, as a result of certain intangible assets being fully amortized in prior periods. We anticipate amortization of these other acquired intangible assets to continue to decrease in future periods.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Interest and Other	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Income, net	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and Other Income, net	 	$	350	 	 	$	138	 	 	$	212	 	 	 	154	%	 	 	2	%	 	 	1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Interest and Other Income, Net. The increase in interest and other income, net of $212,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily due to increased interest earned on higher average cash and cash equivalent balances during the period coupled with higher interest rates.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended June 30,	 	Three Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Tax provision (Benefit)	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax provision (Benefit)	 	$	20	 	 	$	(75	)	 	$	95	 	 	 	(127	)%	 	 	—	 	 	 	(1	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Tax provision (Benefit). The increase in the tax provision of $95,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was primarily due to taxes on operating income earned during the three months ended June 30, 2005, partially offset by certain tax credits recognized during the period. This compares to an operating loss recognized during the three months ended June 30, 2004.
Comparison of the Six Months Ended June 30, 2005 and 2004
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Revenue	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
%’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Design-to-silicon-yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	$	24,824	 	 	$	22,858	 	 	$	1,966	 	 	 	9	%	 	 	68	%	 	 	82	%	
Software licenses	 	 	6,646	 	 	 	2,350	 	 	 	4,296	 	 	 	183	%	 	 	18	%	 	 	9	%	
Gain share	 	 	4,979	 	 	 	2,637	 	 	 	2,342	 	 	 	89	%	 	 	14	%	 	 	9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	36,449	 	 	$	27,845	 	 	$	8,604	 	 	 	31	%	 	 	100	%	 	 	100	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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     Design-to-Silicon-Yield Solutions.
     Integrated solutions. The increase in integrated solutions revenue of $2.0 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was attributable to an overall increase in the total value of solution implementations and an increase in available capacity to deliver upon such solution implementations.
     Software licenses. The increase in software licenses revenue of $4.3 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was due to greater adoption of our software applications, principally from our existing customers, who continue to expand their usage of our software products.
     Gain Share. Gain share revenue increased $2.3 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. The increase in gain share revenue was primarily due to a greater number of engagements contributing to gain share at newer technology nodes, as well as a greater number of wafer starts at our customers’ sites.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Cost of Design-to-Silicon	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Yield Solutions	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct costs of design-to-silicon- yield solutions	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Integrated solutions	 	$	11,516	 	 	$	9,660	 	 	$	1,856	 	 	 	19	%	 	 	32	%	 	 	35	%	
Software licenses	 	 	258	 	 	 	63	 	 	 	195	 	 	 	310	%	 	 	1	%	 	 	—	 	
Amortization of acquired core technology	 	 	2,532	 	 	 	2,677	 	 	 	(145	)	 	 	(5	)%	 	 	7	%	 	 	9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	14,306	 	 	$	12,400	 	 	$	1,906	 	 	 	15	%	 	 	40	%	 	 	44	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Direct Costs of Design-to-Silicon-Yield Solutions.
     Integrated solutions. Costs include purchased material, employee compensation and benefits, travel and facilities-related costs. The increase in direct costs of Design-to-Silicon-Yield integrated solutions of $1.9 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily attributable to increased personnel-related costs and higher travel expenses.
     Software Licenses. The increase in direct costs of Design-to-Silicon-Yield solutions software licenses of $195,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily attributable to an increase in license fees and royalties associated with third party software licenses and third party equipment sold in conjunction with our software during the period.
     Amortization of Acquired Core Technology. The decrease in amortization of acquired core technology of $145,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily attributable to certain acquired core technology being fully amortized in prior periods.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Research and Development	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	$	10,991	 	 	$	10,040	 	 	$	951	 	 	 	9	%	 	 	30	%	 	 	36	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Research and Development. The increase in research and development expenses of $951,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to increased personnel-related expenses.
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 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Selling, General and	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Administrative	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative	 	$	8,203	 	 	$	7,419	 	 	$	784	 	 	 	11	%	 	 	23	%	 	 	27	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Selling, General and Administrative. The increase in selling, general and administrative expenses of $784,000 in for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to increases in employee and outside sales commissions, personnel-related expenses and a reduction in our allowance for doubtful accounts recorded during the six months ended June 30, 2004, partially offset by a decrease in legal fees.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Stock-Based Compensation	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Amortization	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation amortization	 	$	74	 	 	$	547	 	 	$	(473	)	 	 	(86	)%	 	 	0	%	 	 	2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Stock-Based Compensation Amortization. The decrease in stock-based compensation amortization of $473,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to the effects of the graded vesting method of amortization which results in higher amortization expense during the initial periods following the respective option grants and due to the recognition of compensation expense of $158,000 associated with the acceleration of vesting of certain options to a former employee during the six months ended June 30, 2004.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Amortization of Other	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Acquired Intangible Assets	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of Other Acquired Intangible Assets	 	$	470	 	 	$	820	 	 	$	(350	)	 	 	(43	)%	 	 	1	%	 	 	3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Amortization of Other Acquired Intangible Assets. Amortization of other acquired intangible assets decreased $350,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 as a result of certain intangible assets being fully amortized in prior periods.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
Interest and Other	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Income, net	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and Other Income, net	 	$	622	 	 	$	291	 	 	$	331	 	 	 	114	%	 	 	2	%	 	 	1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Interest and Other Income, Net. The increase in interest and other income, net of $331,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to increased interest earned on higher average cash and cash equivalent balances during the period coupled with higher interest rates.
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 	 	Six Months Ended June 30,	 	Six Months Ended June 30,	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2005	 	2004	
 	 	 	 	 	 	 	 	 	 	$	 	%	 	% of	 	% of	
Tax provision (Benefit)	 	2005	 	2004	 	Change	 	Change	 	Revenue	 	Revenue	
(In thousands, except for %’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax provision (Benefit)	 	$	291	 	 	$	(788	)	 	$	1,079	 	 	 	(137	)%	 	 	1	%	 	 	(3	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Tax provision (Benefit). The increase in the tax provision of $1.1 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to taxes on operating income earned during the six months ended June 30, 2005, partially offset by certain tax credit recognized during the period. This compares to an operating loss recognized during the six months ended June 30, 2004.
Liquidity and Capital Resources
     Net cash provided by operating activities was $4.7 million for the six months ended June 30, 2005 compared to net cash provided by operating activities of $3.9 million for the six months ended June 30, 2004. After adjusting the net income of $2.7 million by the amortization of acquired intangible assets of $3.0 million, depreciation and amortization of $1.1 million, stock-based compensation of $74,000, and the offset in the change in deferred taxes of $644,000, our adjusted results provided approximately $6.3 million in cash. Net cash was also provided by decreases in prepaid expenses and other assets of $141,000 and increases in accounts payable of $804,000, billings in excess of revenue recognized of $340,000, taxes payable of $727,000 and deferred revenue of $44,000, offset by an increase in accounts receivable of $2.9 million and decreases in accrued liabilities of $557,000 and accrued compensation and related benefits of $197,000. The increase in accounts receivable and in billings in excess of revenue recognized was due to increased revenues during the period as well as the timing of billing milestones specified in the contract agreements. The decrease in prepaid expenses and other assets was primarily the result of the recognition of certain capitalized costs associated with our yield ramp engagements. The increase in accounts payable was due to the timing of vendor payments coupled with moderate increases in our operating activities. The decrease in accrued liabilities was primarily the result of payments made associated with employee variable compensation. The increase in taxes payable was primarily due to the increase in taxable income. The increase in deferred revenue was primarily the result of renewals of software support and maintenance contracts.
     Net cash used in investing activities was $1.4 million for the six months ended June 30, 2005 compared to $721,000 for the six months ended June 30, 2004. Net cash used in investing activities was the result of purchases of property and equipment to support our growing operations.
     Net cash provided by financing activities was $3.0 million for the six months ended June 30, 2005 compared to $207,000 for the six months ended June 30, 2004. Net cash provided by financing activities during the six months ended June 30, 2005 primarily consisted of $2.2 million in proceeds from the exercise of employee stock options and $808,000 in proceeds from the issuance of shares under the Employee Stock Purchase Plan. Net cash provided by financing activities during the six months ended June 30, 2004 primarily consisted of the repayment of employee notes receivable of $1.6 million, proceeds from the exercise of employee stock options of $928,000 and proceeds from the issuance of shares under the Employee Stock Purchase Plan of $689,000, partially offset by the repurchase of 307,300 shares of our common stock for $2.9 million.
     As of June 30, 2005, our working capital was $59.4 million, compared with $51.3 million as of December 31, 2004. Cash and cash equivalents as of June 30, 2005 were $51.9 million compared to $45.7 million as of December 31, 2004, an increase of $6.2 million. Increases in cash were primarily attributable to operating activities. We expect to experience growth in our overall expenses, in order to execute our business plan. As a result, we anticipate that our overall expenses, as well as planned capital expenditures, may constitute a material use of our cash resources. In addition, we may use cash resources to fund potential investments in, or acquisitions of, complementary products, technologies or businesses. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for at least the next twelve months. However, in the event that during such period, or thereafter, we are not successful in generating sufficient cash flows from operations we may need to raise additional capital through private or public financings, strategic relationships or other arrangements, which may not be available to us on acceptable terms or at all.
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     We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt, other than operating leases on our facilities. Additionally, we have not entered into any derivative contracts. As of June 30, 2005, we had no foreign currency contracts outstanding.
     We lease our facilities under operating lease agreements that expire at various dates through 2012. The following table represents our future minimum annual lease payments (in thousands):
 	 	 	 	 	
Year Ending December 31,	 	Amount	
2005 (remaining six months)	 	$	1,244	 	
2006	 	 	2,417	 	
2007	 	 	2,407	 	
2008	 	 	706	 	
2009	 	 	466	 	
Thereafter	 	 	931	 	
 	 	 	 	 	
Total	 	$	8,171	 	
 	 	 	 	 	
Recent Accounting Pronouncements
     In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment (“SFAS 123 (R)”), an amendment of SFAS No. 123 and SFAS No. 95  Statement of Cash Flows . The statement eliminates the ability to account for share-based compensation transactions using APB No. 25 and requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing its shares, share options, or other equity instruments or by incurring liabilities based on the price of an entity’s shares or that require settlement by the issuance of equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 (“SAB 107”) which expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123 (R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC amended the compliance dates for SFAS 123 (R) to provide that the provisions of this statement will be effective for fiscal years beginning on January 1, 2006 for calendar year companies. Although we are currently assessing the application of SFAS No. 123 (R), we believe that the adoption of this statement will have a material impact on its financial position and results of operations
     In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004  (“FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109,  Accounting for Income Taxes  (“SFAS No. 109”), with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment of the Jobs Act to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Jobs Act was enacted on October 22, 2004. The provisions of FSP No. 109-2 were effective December 21, 2004. We do not believe that the adoption of FSP No.109-2 will have a material effect on our financial position, results of operation or cash flows.
     On June 1, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3  (“SFAS 154”). This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included. SFAS 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 carries forward the guidance set forth in Opinion 20 for reporting the correction of an error included in previously issued financial statements. The provisions of SFAS 154 are effective for accounting changes and correction of errors made in fiscal periods beginning January 1, 2006. We do not believe that the adoption of this statement will have a material impact on our financial position, results of operations or cash flows.
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CERTAIN RISKS WHICH MAY AFFECT OUR FUTURE RESULTS
If semiconductor designers and manufacturers do not adopt our Design-to-Silicon-Yield solutions, we may be unable to increase or maintain our revenue.
     If semiconductor designers and manufacturers do not continue to adopt our Design-to-Silicon-Yield solutions, our revenue could decline. To date, we have worked with a limited number of semiconductor companies on a limited number of IC products and processes. To be successful, we will need to continue to enter into agreements covering a larger number of IC products and processes with existing customers and new customers. Our existing customers are primarily large integrated device manufacturers, or IDMs. We target as new customers additional IDMs, fabless semiconductor companies and foundries, as well as system manufacturers. Factors that may limit adoption of our Design-to-Silicon-Yield solutions by semiconductor companies include:
 	•	 	our customers’ failure to achieve satisfactory yield improvements using our Design-to-Silicon-Yield solutions;	
 	 	 	 	
 	•	 	a decrease in demand for semiconductors generally or the demand for deep submicron semiconductors failing to grow as rapidly as expected;	
 	 	 	 	
 	•	 	the industry may develop alternative methods to enhance the integration between the semiconductor design and manufacturing processes due to a rapidly evolving market and the likely emergence of new technologies;	
 	 	 	 	
 	•	 	our existing and potential customers’ reluctance to understand and accept our innovative gain share fee component; and	
 	 	 	 	
 	•	 	our customers’ concern about our ability to keep highly competitive information confidential.	
Our earnings per share and other key operating results may be unusually high in a given quarter, thereby raising investors’ expectations, and then unusually low in the next quarter, thereby disappointing investors, which could cause our stock price to drop.
     Historically, our quarterly operating results have fluctuated. Our future quarterly operating results will likely fluctuate from time to time and may not meet the expectations of securities analysts and investors in some future period. The price of our common stock could decline due to such fluctuations. The following factors may cause significant fluctuations in our future quarterly operating results:
 	•	 	the size and timing of sales volumes achieved by our customers’ products;	
 	 	 	 	
 	•	 	the loss of any of our large customers or an adverse change in any of our large customers’ businesses;	
 	 	 	 	
 	•	 	the size of improvements in our customers’ yield and the timing of agreement as to those improvements;	
 	 	 	 	
 	•	 	our long and variable sales cycle;	
 	 	 	 	
 	•	 	changes in the mix of our revenue;	
 	 	 	 	
 	•	 	changes in the level of our operating expenses needed to support our projected growth; and	
 	 	 	 	
 	•	 	delays in completing solution implementations for our customers.	
Our gain share revenue is dependent on factors outside of our control, including the volume of integrated circuits, or ICs, our customers are able to sell to their customers.
     Our gain share revenue for a particular product is largely determined by the volume of that product our customer is able to sell to its customers, which is outside of our control. We have limited ability to predict the success or failure of our customers’ IC products. Further, our customers may implement changes to their manufacturing processes during the gain share period, which could negatively affect yield results, which is beyond
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our control. We may commit a significant amount of time and resources to a customer who is ultimately unable to sell as many units as we had anticipated when contracting with them or who makes unplanned changes to their processes. Since we currently work on a small number of large projects, any product that does not achieve commercial viability or a significant increase in yield could significantly reduce our revenue and results of operations below expectations. In addition, if we work with two directly competitive products, volume in one may offset volume, and any of our related gain share, in the other product. Further, decreased demand for semiconductor products decreases the volume of products our customers are able to sell, which may adversely affect our gain share revenue.
Gain share measurement requires data collection and is subject to customer agreement, which can result in uncertainty and cause quarterly results to fluctuate.
     We can only recognize gain share revenue once we have reached agreement with our customers on their level of yield performance improvements. Because measuring the amount of yield improvement is inherently complicated and dependent on our customers’ internal information systems, there may be uncertainty as to some components of measurement. This could result in our recognition of less revenue than expected. In addition, any delay in measuring gain share could cause all of the associated revenue to be delayed until the next quarter. Since we currently have only a few large customers and we are relying on gain share as a significant component of our total revenue, any delay could significantly harm our quarterly results.
Changes in the structure of our customer contracts, including the mix between fixed and variable revenue and the mix of elements, can adversely affect the size and timing of our total revenue.
     Our long-term success is largely dependent upon our ability to structure our future customer contracts to include a larger gain share component relative to the fixed fee component. If we are successful in increasing the gain share component of our customer contracts, we will experience an adverse impact on our operating results in the short term as we reduce the fixed fee component, which we typically recognize earlier than gain share fees. Due to acquisitions and expanded business strategies, the mix of elements in some of our contracts has changed recently and the relative importance of the software component in some of our contracts has increased. We have experienced, and may in the future experience, delays in the expected recognition of revenue associated with generally accepted accounting principles regarding the timing of revenue recognition in multi-element software arrangements, including the effect of acceptance criteria. If we fail to meet contractual acceptance criteria on time or at all, the total revenue we receive under a contract could be delayed or decline. In addition, by increasing the gain share or the software component, we may increase the variability or timing of recognition of our revenue, and therefore increase the risk that our total future revenue will be lower than expected and fluctuate significantly from period to period.
We generate a large percentage of our total revenue from a limited number of customers, so the loss of any one of these customers could significantly reduce our revenue and results of operations below expectations.
     Historically, we have had a small number of large customers for our core Design-to-Silicon-Yield solutions and we expect this to continue in the near term. In the six months ended June 30, 2005, five customers accounted for 63% of our total net revenue, with Texas Instruments representing 15%, Hiroshima Elpida representing 15%, Matsushita representing 12%, Toshiba representing 11% and Sony representing 10%, respectively. In the six months ended June 30, 2004, four customers accounted for 56% of our total net revenue, with Toshiba representing 19%, Texas Instruments representing 13%, Matsushita representing 13% and Sony representing 11%, respectively. The loss of any of these customers or a decrease in the sales volumes of their products could significantly reduce our total revenue below expectations. In particular, such a loss could cause significant fluctuations in results of operations because our expenses are fixed in the short term and it takes us a long time to replace customers.
It typically takes us a long time to sell our unique solutions to new customers, which can result in uncertainty and delays in generating additional revenue.
     Because our gain share business model is unique and our Design-to-Silicon-Yield solutions are unfamiliar, our sales cycle is lengthy and requires a significant amount of our senior management’s time and effort. Furthermore, we need to target those individuals within a customer’s organization who have overall responsibility for the profitability of an IC. These individuals tend to be senior management or executive officers. We may face difficulty identifying and establishing contact with such individuals. Even after initial acceptance, due to the complexity of structuring the gain share component, the negotiation and documentation processes can be lengthy. It
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can take nine months or more to reach a signed contract with a customer. Unexpected delays in our sales cycle could cause our revenue to fall short of expectations.
We have a history of losses, we may incur losses in the future and we may be unable to maintain profitability.
     While we were profitable in our four most recent quarters, we have experienced losses in the seven prior quarters. We may not maintain profitability if our revenue increases more slowly than we expect or not at all. In addition, virtually all of our operating expenses are fixed in the short term, so any shortfall in anticipated revenue in a given period could significantly reduce our operating results below expectations. Our accumulated deficit was $17.2 million as of June 30, 2005. We expect to continue to incur significant expenses in connection with:
 	•	 	funding for research and development;	
 	 	 	 	
 	•	 	expansion of our solution implementation teams;	
 	 	 	 	
 	•	 	expansion of our sales and marketing efforts; and	
 	 	 	 	
 	•	 	additional non-cash charges relating to amortization of intangibles and deferred stock compensation.	
     As a result, we will need to significantly increase revenue to maintain profitability on a quarterly or annual basis. Any of these factors could cause our stock price to decline.
The semiconductor industry is cyclical in nature.
     Our revenue is highly dependent upon the overall condition of the semiconductor industry, especially in light of our gain share revenue component. The semiconductor industry is highly cyclical and subject to rapid technological change and has been subject to significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. The semiconductor industry also periodically experiences increased demand and production capacity constraints. As a result, we may experience significant fluctuations in operating results due to general semiconductor industry conditions and overall economic conditions.
We must continually attract and retain highly talented executives, engineers and research and development personnel or we will be unable to expand our business as planned.
     We will need to continue to hire highly talented executives, engineers and research and development personnel to support our planned growth. We have experienced, and we expect to continue to experience, delays and limitations in hiring and retaining highly skilled individuals with appropriate qualifications. We intend to continue to hire foreign nationals, particularly as we expand our operations internationally. We have had, and expect to continue to have, difficulty in obtaining visas permitting entry into the United States for several of our key personnel, which disrupts our ability to strategically locate our personnel. If we lose the services of any of our key executives or a significant number of our engineers, it could disrupt our ability to implement our business strategy. Competition for executives and qualified engineers can be intense, especially in Silicon Valley where we are principally based.
If our products, technologies, services and integrated solutions fail to keep pace with the rapid technological changes in the semiconductor industry, we could lose customers and revenue.
     We must continually devote significant engineering resources to enable us to keep up with the rapidly evolving technologies and equipment used in the semiconductor design and manufacturing processes. These innovations are inherently complex and require long development cycles. Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, we also rely heavily on the judgment of our advisors and management to anticipate future market trends. Our customers expect us to stay ahead of the technology curve and expect that our products, technologies, services and integrated solutions will support any new design or manufacturing processes or materials as soon as they are deployed. If we are not able to timely predict industry changes, or if we are unable to modify our products, technologies, services and integrated solutions on a timely basis, our existing solutions will be rendered obsolete and we may lose customers. If we do not keep pace with technology, our existing and potential customers may choose to develop their own solutions internally as an alternative to ours and we could lose market share, which could adversely affect our operating results.
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We intend to pursue additional strategic relationships, which are necessary to maximize our growth, but could substantially divert management attention and resources.
     In order to establish and maintain strategic relationships with industry leaders at each stage of the IC design and manufacturing processes, we may need to expend significant resources and will need to commit a significant amount of management’s time and attention, with no guarantee of success. If we are unable to enter into strategic relationships with these companies, we will not be as effective at modeling existing technologies or at keeping ahead of the technology curve as new technologies are introduced. In the past, the absence of an established working relationship with key companies in the industry has meant that we have had to exclude the effect of their component parts from our modeling analysis, which reduces the overall effectiveness of our analysis and limits our ability to improve yield. We may be unable to establish key industry strategic relationships if any of the following occur:
 	•	 	potential industry partners become concerned about our ability to protect their intellectual property;	
 	 	 	 	
 	•	 	potential industry partners develop their own solutions to address the need for yield improvement;	
 	 	 	 	
 	•	 	our potential competitors establish relationships with industry partners with which we seek to establish a relationship; or	
 	 	 	 	
 	•	 	potential industry partners attempt to restrict our ability to enter into relationships with their competitors.	
We may not be able to expand our proprietary technologies if we do not consummate potential acquisitions or investments or successfully integrate them with our business.
     To expand our proprietary technologies, we may acquire or make investments in complementary businesses, technologies or products if appropriate opportunities arise. We may be unable to identify suitable acquisition or investment candidates at reasonable prices or on reasonable terms, or consummate future acquisitions or investments, each of which could slow our growth strategy. We may have difficulty integrating the acquired products, personnel or technologies of any acquisitions we might make. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses.
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Competition in the market for solutions that address yield improvement and integration between IC design and manufacturing may intensify in the future, which could slow our ability to grow or execute our strategy.
     Competition in our market may intensify in the future, which could slow our ability to grow or execute our strategy. Our current and potential customers may choose to develop their own solutions internally, particularly if we are slow in deploying our solutions. Many of these companies have the financial and technical capability to develop their own solutions. Also, competitors could establish non-domestic operations with a lower cost structure than our engineering organization, which would give any such competitor’s products a competitive advantage over our solutions. There may be other providers of commercial solutions for systematic IC yield and performance enhancement of which we are not aware. We currently face indirect competition from the internal groups at IC companies and some direct competition from providers of yield management software such as Spotfire or HPL Technologies. Some providers of yield management software or inspection equipment may seek to broaden their product offerings and compete with us. For example, KLA-Tencor has announced adding the use of test structures to one of their inspection product lines. In addition, we believe that the demand for solutions that address the need for better integration between the silicon design and manufacturing processes may encourage direct competitors to enter into our market. For example, large integrated organizations, such as IDMs, electronic design automation software providers, IC design service companies or semiconductor equipment vendors, may decide to spin-off a business unit that competes with us. Other potential competitors include fabrication facilities that may decide to offer solutions competitive with ours as part of their value proposition to their customers. If these potential competitors are able to attract industry partners or customers faster than we can, we may not be able to grow and execute our strategy as quickly or at all. In addition, customer preferences may shift away from our solutions as a result of the increase in competition.
We face operational and financial risks associated with international operations.
     We derive a majority of our revenue from international sales, principally from customers based in Asia. Revenue generated from customers in Asia accounted for 63% of total revenue in the six months ended June 30, 2005. During the six months ended June 30, 2004 revenue generated from customers in Asia was 63%. We expect that a significant portion of our total future revenue will continue to be derived from companies based in Asia. We are subject to risks inherent in doing business in international markets. These risks include:
 	•	 	some of our key engineers and other personnel who are foreign nationals may have difficulty gaining access to the United States and other countries in which our customers or our offices may be located;	
 	 	 	 	
 	•	 	greater difficulty in collecting account receivables resulting in longer collection periods;	
 	 	 	 	
 	•	 	language and other cultural differences may inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign research and development teams;	
 	 	 	 	
 	•	 	compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar;	
 	 	 	 	
 	•	 	currency risk due to the fact that expenses for our international offices are denominated in the local currency, including the Euro, while virtually all of our revenue is denominated in U.S. dollars;	
 	 	 	 	
 	•	 	in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk; and	
 	 	 	 	
 	•	 	economic or political instability.	
 	 	 	 	
 	 	 	In Japan, in particular, we face the following additional risks:	
 	 	 	 	
 	•	 	any recurrence of an overall downturn in Asian economies could limit our ability to retain existing customers and attract new ones in Asia;	
 	 	 	 	
 	•	 	if the U.S. dollar increases in value relative to the Japanese Yen, the cost of our solutions will be more expensive to existing and potential Japanese customers and therefore less competitive; and	
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 	•	 	if any of these risks materialize, we may be unable to continue to market our solutions successfully in international markets.	
We must effectively manage and support our operations and recent and planned growth in order for our business strategy to succeed.
     We will need to continue to grow in all areas of operation and successfully integrate and support our existing and new employees into our operations, or we may be unable to implement our business strategy in the time frame we anticipate, if at all. We have in the past, and may in the future, experience interruptions in our information systems. Further, physical damage to, failure of, or digital damage (such as significant viruses or worms) to, our information systems could delay time-sensitive services or computing operations that we perform for our customers, which could negatively impact our business results and reputation. We may need to switch to a new accounting system in the near future, which could disrupt our business operations and distract management. In addition, we will need to expand our intranet to support new data centers to enhance our research and development efforts. Our intranet is expensive to expand and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the support necessary for our growth places significant demands on our management and resources. These demands may divert these resources from the continued growth of our business and implementation of our business strategy. Further, we must adequately train our new personnel, especially our client service and technical support personnel, to adequately, and accurately, respond to and support our customers. If we fail to do this, it could lead to dissatisfaction among our customers, which could slow our growth.
Our solution implementations may take longer than we anticipate, which could cause us to lose customers and may result in adjustments to our operating results.
     Our solution implementations require a team of engineers to collaborate with our customers to address complex yield loss issues by using our software and other technologies. We must estimate the amount of time needed to complete an existing solution implementation in order to estimate when the engineers will be able to commence a new solution implementation. In addition, our accounting for solution implementation contracts, which generate fixed fees, sometimes require adjustments to profit and loss based on revised estimates during the performance of the contract. These adjustments may have a material effect on our results of operations in the period in which they are made. The estimates giving rise to these risks, which are inherent in fixed-price contracts, include the forecasting of costs and schedules, and contract revenues related to contract performance.
Key executives, including our chief executive officer and our chief strategy officer, are critical to our business and we cannot guarantee that they will remain with us indefinitely.
     Our future success will depend to a significant extent on the continued services of our key executives, including John Kibarian, our President and Chief Executive Officer, and David Joseph, our Chief Strategy Officer. If we lose the services of any of our key executives, it could slow execution of our business plan, hinder our product development processes and impair our sales efforts. Searching for replacements could divert other senior management’s time and increase our operating expenses. In addition, our industry partners and customers could become concerned about our future operations, which could injure our reputation. We do not have long-term employment agreements with our executives and we do not maintain any key person life insurance policies on their lives.
Inadvertent disclosure of our customers’ confidential information could result in costly litigation and cause us to lose existing and potential customers.
     Our customers consider their product yield information and other confidential information, which we must gather in the course of our engagement with the customer, to be extremely competitively sensitive. If we inadvertently disclosed or were required to disclose this information, we would likely lose existing and potential customers, and could be subject to costly litigation. In addition, to avoid potential disclosure of confidential information to competitors, some of our customers may, in the future, ask us not to work with key competitive products.
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If we fail to protect our intellectual property rights, customers or potential competitors may be able to use our technologies to develop their own solutions which could weaken our competitive position, reduce our revenue or increase our costs.
     Our success depends largely on the proprietary nature of our technologies. We currently rely primarily on copyright, trademark and trade secret protection. Whether or not patents are granted to us, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Litigation could also divert our resources, including our managerial and engineering resources. In the future, we intend to rely primarily on a combination of patents, copyrights, trademarks and trade secrets to protect our proprietary rights and prevent competitors from using our proprietary technologies in their products. These laws and procedures provide only limited protection. Our pending patent applications may not result in issued patents, and even if issued, they may not be sufficiently broad to protect our proprietary technologies. Also, patent protection in foreign countries may be limited or unavailable where we need such protection.
Our technologies could infringe the intellectual property rights of others causing costly litigation and the loss of significant rights.
     Significant litigation regarding intellectual property rights exists in the semiconductor industry. It is possible that a third party may claim that our technologies infringe their intellectual property rights or misappropriate their trade secrets. Any claim, even if without merit, could be time consuming to defend, result in costly litigation or require us to enter into royalty or licensing agreements, which may not be available to us on acceptable terms, or at all. A successful claim of infringement against us in connection with the use of our technologies could adversely affect our business.
Defects in our proprietary technologies, hardware and software tools and the cost of support to remedy any such defects could decrease our revenue and our competitive market share.
     If the software, hardware or proprietary technologies we provide to a customer contain defects that increase our customer’s cost of goods sold and time to market, these defects could significantly decrease the market acceptance of our solutions. Further, the cost of support resources required to remedy any defects in our technologies, hardware or software tools could exceed our expectations. Any actual or perceived defects with our software, hardware or proprietary technologies may also hinder our ability to attract or retain industry partners or customers, leading to a decrease in our revenue. These defects are frequently found during the period following introduction of new software, hardware or proprietary technologies or enhancements to existing software, hardware or proprietary technologies. Our software, hardware or proprietary technologies may contain errors not discovered until after customer implementation of the silicon design and manufacturing process recommended by us. If our software, hardware or proprietary technologies contain errors or defects, it could require us to expend significant resources to alleviate these problems, which could reduce margins, and result in the diversion of technical and other resources from our other development efforts.
We may have difficulty maintaining the effectiveness of our internal financial controls.
     Pursuant to Section 404 of the Sarbanes-Oxley Act, we were required to furnish a report on our management’s assessment of the design and effectiveness of our system of internal controls over financial reporting as part of our Annual Report on Form 10-K for the fiscal year ending December 31, 2004. Our auditors were also required to attest to, and report on, our management’s assessment. In order to issue their report, our management documented both the design of our system of internal controls and our testing processes that support our management’s evaluation and conclusion. During the course of future testing, we may identify deficiencies, including those arising from turnover of qualified personnel or arising as a result of acquisitions, which we may not be able to remediate in time to meet the continuing reporting deadlines imposed by Section 404 and the costs of which may have a material adverse impact of our results of operations. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that our management can conclude on an ongoing basis that we have effective internal controls. We also may not be able to retain independent auditors with sufficient resources to attest to and report on our internal controls in a timely manner. Moreover, our auditors may not agree with our management’s future assessments and may send us a deficiency notice that we are unable to remediate on a timely basis. If we are unable to assert as of December 31, 2005 and beyond, that we maintain effective internal controls, our investors could lose confidence in the accuracy and completeness in our financial reports that in turn could cause our stock price to decline.
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Change in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.
     Technology companies in general and PDF in particular have a history of depending upon and using broad based employee stock option programs to hire, incentivize and retain employees in a competitive marketplace. In December 2004, FASB released SFAS 123(R), which will require all companies to measure compensation costs for all share-based payments, including employee stock options, at fair value. The provisions of SFAS 123(R) may be applied in one of two retroactive or prospective transition and is effective for PDF beginning January 1, 2006. We are currently evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations. While we have not determined which transition method we will apply to measure such compensation costs, we believe that our adoption of SFAS 123(R) will have a material impact on our financial position and results of operations. In addition, we believe that the adoption of SFAS 123(R) may impact our ability to utilize broad based employee stock option plans to hire, incentivize and retain employees and could result in a competitive disadvantage to us in the employee marketplace.
Worldwide events may reduce our revenues and harm our business.
     Future political or related events similar or comparable to the September 11, 2001 terrorist attacks, or significant military conflicts or long-term reactions of governments and society to such events, may cause significant delays or reductions in technology purchases or limit our ability to travel to certain parts of the world. In addition, such events have had and may continue to have negative effects on financial markets, including significant price and volume fluctuations in securities markets. If such events continue or escalate, our business and results of operations could be harmed and the market price of our common stock could decline.
We may not be able to raise necessary funds to support our growth or execute our strategy.
     We currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, unanticipated efforts to support more rapid expansion, develop or enhance Design-to-Silicon-Yield solutions, respond to competitive pressures or acquire complementary businesses or technologies could impact our future capital requirements and the adequacy of our available funds. In such event, we may need to raise additional funds through public or private financings, strategic relationships or other arrangements. We may not be able to raise any necessary funds on terms favorable to us, or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. We do not currently own any equity investments, nor do we expect to own any in the foreseeable future. This discussion contains forward-looking statements that are subject to risks and uncertainties. Our actual results could vary materially as a result of a number of factors.
     Interest Rate Risk. As of June 30, 2005, we had cash and cash equivalents of $51.9 million, consisting of cash and highly liquid money market instruments with maturities of 90 days or less. Because of the short maturities of those instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 10% from the market rates in effect at June 30, 2005 would cause the fair value of these investments to decrease by an immaterial amount which would not have significantly impacted our financial position or results of operations. Declines in interest rates over time will result in lower interest income and increased interest expense.
     Foreign Currency and Exchange Risk. Virtually all of our revenue is denominated in U.S. dollars, although such revenue is derived substantially from foreign customers. Foreign sales to date, generated by our German subsidiary PDF Solutions GmbH since the date of its acquisition, have for the most part, been invoiced in local currencies, creating receivables denominated in currencies other than the U.S. dollar. The risk due to foreign currency fluctuations associated with these receivables is partially reduced by local payables denominated in the same currencies, and presently we do not consider it necessary to hedge these exposures. We intend to monitor our foreign currency exposure. There can be no assurance that exchange rate fluctuations will not have a materially negative impact on our business.
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Item 4. Controls and Procedures.
     Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by the quarterly report on Form 10-Q, have concluded that our disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the timeframes specified in the SEC’s rules and forms.
     Changes in Internal Controls Over Financial Reporting. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
     Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     (b) Use of Proceeds. Our first registration statement, filed on Form S-1 (Registration No. 333-43192) related to our initial public offering was declared effective by the SEC on July 26, 2001. There has been no change to the disclosure contained in our report on Form 10-K for the year ended December 31, 2004, as amended, with respect to the use of proceeds generated by our initial public offering.
     (c) Stock Repurchases. The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the six months ended June 30, 2005:
ISSUER PURCHASES OF EQUITY SECURITIES
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	(c) Total Number	 	(d) Maximum Number	
 	 	 	 	 	 	 	 	 	 	of Shares (or	 	(or Approximate	
 	 	(a) Total	 	 	 	 	 	Units) Purchased	 	Dollar Value) of Shares	
 	 	Number of	 	(b) Average	 	as Part of	 	(or Units) that May Yet	
 	 	Shares (or	 	Price Paid	 	Publicly	 	Be Purchased Under	
 	 	Units)	 	Per Share	 	Announced Plans	 	the Plans or	
Period	 	Purchased	 	(or Unit)	 	or Programs (1)	 	Programs(1)	
Month #1 (April 1, 2005 through April 30, 2005)	 	 	—	 	 	 	—	 	 	 	—	 	 	$	5,193,678	 	
Month #2 (May 1, 2005 through May 31, 2005)	 	 	—	 	 	 	—	 	 	 	—	 	 	$	5,193,678	 	
Month #3 (June 1, 2005 through June 30, 2005)	 	 	—	 	 	 	—	 	 	 	—	 	 	$	5,193,678	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	—	 	 	 	—	 	 	 	—	 	 	 	 	 	

 	 	 	
(1)	 	On March 26, 2003, we announced that our Board of Directors had approved a share repurchase program, pursuant to which up to $10.0 million of our outstanding common stock may be repurchased; the repurchase program has no set expiration or termination date. As of June 30, 2005, 505,579 shares had been repurchased under this program at a weighted average per share price of $9.51 and approximately $5.2 million remained available for repurchases.	
Item 3. Defaults Upon Senior Securities.
     Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
     During the quarter ended June 30, 2005, we submitted the following matters to our stockholders for approval at our Annual Meeting of Stockholders held on May 27, 2005 and the following proposals were adopted by our stockholders by the margins indicated:
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Proposals:
1. To elect two (2) Class I nominees to the Board of Directors.
 	 	 	 	 	 	 	 	 	
Election of Director	 	Votes For	 	Votes Withheld	
Donald L. Lucas — Class I Director	 	 	21,714,377	 	 	 	487,786	 	
B. J. Cassin — Class I Director	 	 	21,745,877	 	 	 	456,286	 	
     As a result, Mr. Lucas and Mr. Cassin were re-elected as Class I directors of the Registrant for a three year term expiring upon the Annual Meeting next following the fiscal year ending December 31, 2007, or until their respective successors have been duly qualified and elected. Lucio Lanza, Kimon Michaels, Susan Billat and John Kibarian continued as directors of the Registrant.
     2. To ratify the appointment by the Audit Committee of Deloitte & Touche LLP as the independent auditors of the Company for the fiscal year ending December 31, 2005.
 	 	 	 	 	 	 	 	 	 	 	 	 	
Votes for	 	Votes Against	 	Votes Abstained	 	Broker Non-votes	
22,142,483	 	 	59,680	 	 	 	0	 	 	 	0	 	
Item 5. Other Information.
     Not Applicable.
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Item 6. Exhibits.
 	 	 	
Exhibit	 	 	
Number	 	Description	
3.1	 	Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. *	
 	 	 	
3.2	 	Amended and Restated Bylaws of PDF Solutions, Inc.	
 	 	 	
4.1	 	Specimen Stock Certificate**	
 	 	 	
4.2	 	Second Amended and Restated Rights Agreement dated July 6, 2001*	
 	 	 	
10.01	 	Indemnity Agreement with Kevin MacLean, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
10.02	 	Indemnity Agreement with Albert Y. C. Yu, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
10.03	 	Indemnity Agreement with R. Stephen Heinrichs, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
21.01	 	Subsidiaries of Registrant	
 	 	 	
31.01	 	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	 	 	
31.02	 	Certification of the Chief Financial Officer and Vice President of Finance and Administration pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	 	 	
32.01	 	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***	
 	 	 	
32.02	 	Certification the Chief Financial Officer and Vice President of Finance and Administration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***	

†	 	Indicates a management contract.	
 	 	 	
*	 	Incorporated by reference to PDF’s Registration Statement on Form S-1, Amendment No. 7 filed July 9, 2001 (File No. 333-43192).	
 	 	 	
**	 	Incorporated by reference to PDF’s Report on Form 10-Q filed September 6, 2001 (File No. 000-31311).	
 	 	 	
***	 	As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.	

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 	 	 	 	 	 	 	
Date: August 9, 2005	 	By:	 	/s/ John K. Kibarian	 	 	
 	 	 	 	 	 	 	
 	 	 	 	John K. Kibarian	 	 	
 	 	 	 	President and Chief Executive Officer	 	 	
 	 	 	 	 	 	 	
 	 	By:	 	/s/ P. Steven Melman	 	 	
 	 	 	 	 	 	 	
 	 	 	 	P. Steven Melman	 	 	
 	 	 	 	Chief Financial Officer and Vice President,	 	 	
 	 	 	 	Finance and Administration	 	 	
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EXHIBIT INDEX
 	 	 	
Exhibit	 	 	
Number	 	Description	
3.1	 	Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc.*	
 	 	 	
3.2	 	Amended and Restated Bylaws of PDF Solutions, Inc.	
 	 	 	
4.1	 	Specimen Stock Certificate**	
 	 	 	
4.2	 	Second Amended and Restated Rights Agreement dated July 6, 2001*	
 	 	 	
10.01	 	Indemnity Agreement with Kevin MacLean, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
10.02	 	Indemnity Agreement with Albert Y. C. Yu, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
10.03	 	Indemnity Agreement with R. Stephen Heinrichs, incorporated by reference to the Registrant’s standard form of Indemnification Agreement filed herewith as exhibit 10.01 †	
 	 	 	
21.01	 	Subsidiaries of Registrant	
 	 	 	
31.01	 	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	 	 	
31.02	 	Certification of the Chief Financial Officer and Vice President of Finance and Administration pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	
 	 	 	
32.01	 	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***	
 	 	 	
32.02	 	Certification the Chief Financial Officer and Vice President of Finance and Administration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***	

†	 	Indicates a management contract.	
 	 	 	
*	 	Incorporated by reference to PDF’s Registration Statement on Form S-1, Amendment No. 7 filed July 9, 2001 (File No. 333-43192).	
 	 	 	
**	 	Incorporated by reference to PDF’s Report on Form 10-Q filed September 6, 2001 (File No. 000-31311).	
 	 	 	
***	 	As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.	

 
EXHIBIT 3.2
BYLAWS
OF
PDF SOLUTIONS, INC.
(As Amended and Restated Effective August 1, 2005)

 
TABLE OF CONTENTS
 	 	 	 	 	
 	 	Page	 	
ARTICLE I — CORPORATE OFFICES	 	 	1	 	
1.1 REGISTERED OFFICE	 	 	1	 	
1.2 OTHER OFFICES	 	 	1	 	
 	 	 	 	 	
ARTICLE II — MEETINGS OF STOCKHOLDERS	 	 	1	 	
 	 	 	 	 	
2.1 PLACE OF MEETINGS	 	 	1	 	
2.2 ANNUAL MEETING	 	 	1	 	
2.3 SPECIAL MEETING	 	 	2	 	
2.4 NOTICE OF STOCKHOLDER’S MEETINGS; AFFIDAVIT OF NOTICE	 	 	2	 	
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND OTHER STOCKHOLDER PROPOSALS	 	 	3	 	
2.6 QUORUM	 	 	4	 	
2.7 ADJOURNED MEETING; NOTICE	 	 	4	 	
2.8 CONDUCT OF BUSINESS	 	 	4	 	
2.9 VOTING	 	 	4	 	
2.10 WAIVER OF NOTICE	 	 	4	 	
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING	 	 	5	 	
2.12 PROXIES	 	 	5	 	
 	 	 	 	 	
ARTICLE III — DIRECTORS	 	 	6	 	
 	 	 	 	 	
3.1 POWERS	 	 	6	 	
3.2 NUMBER OF DIRECTORS	 	 	6	 	
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS	 	 	6	 	
3.4 RESIGNATION AND VACANCIES	 	 	6	 	
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE	 	 	7	 	
3.6 REGULAR MEETINGS	 	 	7	 	
3.7 SPECIAL MEETINGS; NOTICE	 	 	7	 	
3.8 QUORUM	 	 	8	 	
3.9 WAIVER OF NOTICE	 	 	8	 	
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING	 	 	9	 	
3.11 FEES AND COMPENSATION OF DIRECTORS	 	 	9	 	
3.12 APPROVAL OF LOANS TO OFFICERS	 	 	9	 	
3.13 REMOVAL OF DIRECTORS	 	 	9	 	
3.14 CHAIRMAN OF THE BOARD OF DIRECTORS	 	 	10	 	
 	 	 	 	 	
ARTICLE IV — COMMITTEES	 	 	11	 	
 	 	 	 	 	
4.1 COMMITTEES OF DIRECTORS	 	 	11	 	
4.2 COMMITTEE MINUTES	 	 	11	 	
4.3 MEETINGS AND ACTION OF COMMITTEES	 	 	11	 	
 	 	 	 	 	
ARTICLE V — OFFICERS	 	 	12	 	
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5.1 OFFICERS	 	 	12	 	
5.2 APPOINTMENT OF OFFICERS	 	 	12	 	
5.3 SUBORDINATE OFFICERS	 	 	12	 	
5.4 REMOVAL AND RESIGNATION OF OFFICERS	 	 	12	 	
5.5 VACANCIES IN OFFICES	 	 	13	 	
5.6 CHIEF EXECUTIVE OFFICER	 	 	13	 	
5.7 PRESIDENT	 	 	13	 	
5.8 VICE PRESIDENTS	 	 	13	 	
5.9 SECRETARY	 	 	14	 	
5.10 CHIEF FINANCIAL OFFICER	 	 	14	 	
5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS	 	 	14	 	
5.12 AUTHORITY AND DUTIES OF OFFICERS	 	 	15	 	
 	 	 	 	 	
ARTICLE VI — INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS	 	 	15	 	
 	 	 	 	 	
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS	 	 	15	 	
6.2 INDEMNIFICATION OF OTHERS	 	 	15	 	
6.3 PAYMENT OF EXPENSES IN ADVANCE	 	 	16	 	
6.4 INDEMNITY NOT EXCLUSIVE	 	 	16	 	
6.5 INSURANCE	 	 	16	 	
6.6 CONFLICTS	 	 	16	 	
 	 	 	 	 	
ARTICLE VII — RECORDS AND REPORTS	 	 	17	 	
 	 	 	 	 	
7.1 MAINTENANCE AND INSPECTION OF RECORDS	 	 	17	 	
7.2 INSPECTION BY DIRECTORS	 	 	17	 	
7.3 ANNUAL STATEMENT TO STOCKHOLDERS	 	 	17	 	
 	 	 	 	 	
ARTICLE VIII — GENERAL MATTERS	 	 	17	 	
 	 	 	 	 	
8.1 CHECKS	 	 	17	 	
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS	 	 	18	 	
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES	 	 	18	 	
8.4 SPECIAL DESIGNATION ON CERTIFICATES	 	 	18	 	
8.5 LOST CERTIFICATES	 	 	19	 	
8.6 CONSTRUCTION; DEFINITIONS	 	 	19	 	
8.7 DIVIDENDS	 	 	19	 	
8.8 FISCAL YEAR	 	 	19	 	
8.9 SEAL	 	 	20	 	
8.10 TRANSFER OF STOCK	 	 	20	 	
8.11 STOCK TRANSFER AGREEMENTS	 	 	20	 	
8.12 REGISTERED STOCKHOLDERS	 	 	20	 	
 	 	 	 	 	
ARTICLE IX	 	 	20	 	
 ii

 
BYLAWS
OF
PDF SOLUTIONS, INC.
ARTICLE I
     CORPORATE OFFICES
     1.1 REGISTERED OFFICE.
               The address of the Corporation’s registered office in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle. The name of its registered agent at such address is Corporation Service Company.
     1.2 OTHER OFFICES.
               The Board of Directors may at any time establish other offices at any place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
     2.1 PLACE OF MEETINGS.
               Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders’ meetings shall be held at the registered office of the Corporation.
     2.2 ANNUAL MEETING.
               (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by resolution of the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted.
               (b) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2.
               (c) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the

 
stockholder must have given timely notice thereof in writing to the secretary of the Corporation, as provided in Section 2.5, and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware.
               (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in these Bylaws. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting.
               (e) For purposes of this Section 2.2, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service.
               (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
     2.3 SPECIAL MEETING.
               (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president.
               (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5.
     2.4 NOTICE OF STOCKHOLDER’S MEETINGS; AFFIDAVIT OF NOTICE.
               All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
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     2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND OTHER STOCKHOLDER PROPOSALS.
               Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the Corporation. Stockholders may bring other business before the annual meeting, provided that timely notice is provided to the secretary of the Corporation in accordance with this section, and provided further that such business is a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the anniversary date of the prior year’s meeting; provided, however, that in the event that (i) the date of the annual meeting is more than 30 days prior to or more than 60 days after such anniversary date, and (ii) less than 60 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10 th  day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a directors, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including, without limitation, such person’s written consent to being name in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of the stockholder, as they appear on the Corporation’s books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned of record by such stockholder and beneficially by such beneficial owner. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so
3

 
declare to the meeting and the defective nomination shall be disregarded.
2.6 QUORUM.
               The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.
     2.7 ADJOURNED MEETING; NOTICE.
               When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
     2.8 CONDUCT OF BUSINESS.
               The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business.
     2.9 VOTING.
               (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements).
               (b) Except as may be otherwise provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.
     2.10 WAIVER OF NOTICE.
               Whenever notice is required to be given under any provision of the General
4

 
Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws.
     2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.
               In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If the Board of Directors does not so fix a record date:
               (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
               (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
               A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
     2.12 PROXIES.
               Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the Corporation, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder’s name is placed on the proxy (whether by manual signature, typewriting, electronic or telegraphic transmission or otherwise) by the stockholder or the stockholder’s attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware.
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ARTICLE III
DIRECTORS
     3.1 POWERS.
     Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors.
     3.2 NUMBER OF DIRECTORS.
               The number of directors constituting the entire Board of Directors shall be seven.
               Thereafter, this number may be changed by a resolution of the Board of Directors or of the stockholders, subject to Section 3.4 of these Bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before such director’s term of office expires.
     3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
               Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the Certificate of Incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal.
     3.4 RESIGNATION AND VACANCIES.
               Any director may resign at any time upon written notice to the attention of the secretary of the Corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. A vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified.
6

 
               Unless otherwise provided in the Certificate of Incorporation or these Bylaws:
               (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director.
               (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.
               If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware.
               If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable.
     3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
               The Board of Directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
     3.6 REGULAR MEETINGS.
               Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors.
     3.7 SPECIAL MEETINGS; NOTICE.
7

 
     Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors.
     Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director’s address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy, telegram, telex or other similar means of communication, it shall be delivered at least twenty-four (24) hours before the time of the holding of the meeting, or on such shorter notice as the person or persons calling such meeting may deem necessary and appropriate in the circumstances. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation.
     3.8 QUORUM.
               At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
               A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
     3.9 WAIVER OF NOTICE.
               Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws.
8

 
     3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
               Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original.
     3.11 FEES AND COMPENSATION OF DIRECTORS.
               Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.
     3.12 APPROVAL OF LOANS TO OFFICERS.
               The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this Section 3.2 contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute.
     3.13 REMOVAL OF DIRECTORS.
               Unless otherwise restricted by statute, by the Certificate of Incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the Corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors.
               No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director’s term of office.
9

 
     3.14 CHAIRMAN OF THE BOARD OF DIRECTORS.
               The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board of Directors who shall not be considered an officer of the Corporation.
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ARTICLE IV
COMMITTEES
     4.1 COMMITTEES OF DIRECTORS.
               The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series),(b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, (d) recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (e) amend the Bylaws of the Corporation; and, unless the board resolution establishing the committee, the Bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware.
     4.2 COMMITTEE MINUTES.
               Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
     4.3 MEETINGS AND ACTION OF COMMITTEES.
               Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone),
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Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
     5.1 OFFICERS.
               The officers of the Corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The Corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person.
     5.2 APPOINTMENT OF OFFICERS.
               The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment.
     5.3 SUBORDINATE OFFICERS.
               The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine.
     5.4 REMOVAL AND RESIGNATION OF OFFICERS.
               Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power
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of removal may be conferred by the Board of Directors.
               Any officer may resign at any time by giving written notice to the attention of the secretary of the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.
     5.5 VACANCIES IN OFFICES.
               Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors.
     5.6 CHIEF EXECUTIVE OFFICER.
               Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws.
     5.7 PRESIDENT.
               Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the Corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws.
     5.8 VICE PRESIDENTS.
               In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board.
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     5.9 SECRETARY.
               The secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors’ meetings or committee meetings, the number of shares present or represented at stockholders’ meetings, and the proceedings thereof.
               The secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation’s transfer agent or registrar, as determined by resolution of the Board Of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation.
               The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws.
     5.10 CHIEF FINANCIAL OFFICER.
               The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
               The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.
     5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
               The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this Corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations
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standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority.
     5.12 AUTHORITY AND DUTIES OF OFFICERS.
               In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
     6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
               The Corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.1, a “director” or “officer” of the Corporation includes any person (a) who is or was a director or officer of the Corporation, (b) who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a Corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation.
     6.2 INDEMNIFICATION OF OTHERS.
               The Corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.2, an “employee” or “agent” of the Corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the Corporation, (b) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation.
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     6.3 PAYMENT OF EXPENSES IN ADVANCE.
               Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the Corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI.
     6.4 INDEMNITY NOT EXCLUSIVE.
               The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may been titled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Certificate of Incorporation.
     6.5 INSURANCE.
               The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware.
     6.6 CONFLICTS.
               No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears:
               (a) That it would be inconsistent with a provision of the Certificate of Incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or
               (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
ARTICLE VII
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RECORDS AND REPORTS
     7.1 MAINTENANCE AND INSPECTION OF RECORDS.
               The Corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records.
               Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business.
     7.2 INSPECTION BY DIRECTORS.
               Any director shall have the right to examine the Corporation’s stockledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.
     7.3 ANNUAL STATEMENT TO STOCKHOLDERS.
               The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation.
ARTICLE VIII
GENERAL MATTERS
     8.1 CHECKS.
               From time to time, the Board of Directors shall determine by resolution which
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person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments.
     8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
               The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
     8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
               The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.
               The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.
     8.4 SPECIAL DESIGNATION ON CERTIFICATES.
               If the Corporation is authorized to issue more than one class of stock or more
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than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
     8.5 LOST CERTIFICATES.
               Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or the owner’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
     8.6 CONSTRUCTION; DEFINITIONS.
               Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.
     8.7 DIVIDENDS.
               The directors of the Corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the Certificate of Incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation’s capital stock.
               The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies.
     8.8 FISCAL YEAR.
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               The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors.
     8.9 SEAL.
               The Corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced.
     8.10 TRANSFER OF STOCK.
               Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.
     8.11 STOCK TRANSFER AGREEMENTS.
               The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware.
     8.12 REGISTERED STOCKHOLDERS.
               The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
               The Bylaws of the Corporation may be adopted, amended or repealed by the stockholders entitled to vote, as specified in the Certificate of Incorporation; provided, however, that the Corporation may, in its Certificate of Incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws.
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EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
     This Indemnification Agreement (the “Agreement”) is made as of ___, by and between PDF Solutions, Inc., a Delaware corporation (the “ Company ”), and ___ (the “ Indemnitee ”).
RECITALS
     The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law.
AGREEMENT
     In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows:
     1. Indemnification.
               (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order,

 
settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.
               (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee’s duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.
               (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith.
     2. No Employment Rights. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.
     3. Expenses; Indemnification Procedure.
               (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby.
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               (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.
               (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.
               (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
               (e) Selection of Counsel. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After
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delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.
     4. Additional Indemnification Rights; Nonexclusivity.
               (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee’s rights and the Company’s obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights and obligations hereunder.
               (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company’s Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding.
     5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.
     6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange
4

 
Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.
     7. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company.
     8. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.
     9. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:
               (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate;
5

 
               (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous;
               (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company; or
               (d) Claims under Section 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
     10. Construction of Certain Phrases.
               (a) For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
               (b) For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “ fines ” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “ serving at the request of the Company ” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “ not opposed to the best interests of the Company ” as referred to in this Agreement.
     11. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this
6

 
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.
     12. Miscellaneous.
               (a) Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law.
               (b) Entire Agreement; Enforcement of Rights. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
               (c) Construction. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.
               (d) Notices. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party’s address as set forth below or as subsequently modified by written notice.
               (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.
               (f) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee’s heirs, legal representatives and assigns.
               (g) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights.
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[Signature Page Follows]
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     The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement.
 	 	 	 	 	 	 	
 	 	PDF SOLUTIONS, INC.	
 	 	 	 	 	 	 	
 	 	By:	 	 	 	 	
 	 	 	 	 	 	 	
 	 	Name:	 	 	 	 	
 	 	Title:	 	 	 	 	
 	 	 	 	 	 	 	
 	 	Address:	 	333 West San Carlos St.
Suite 700
San Jose, CA 95110	 	 	
 	 	 	 	 	 	 	
AGREED TO AND ACCEPTED:	 	 	 	 	 	 	

 	 	 	 	 	 	 	
(Signature)	 	 	 	 	 	 	
 	 	 	 	 	 	 	
Address:	 	 	 	 	 	 	
 	 	 	 	 	 	 	
9

 
EXHIBIT 21.01
SUBSIDIARIES OF REGISTRANT
 	 	 	
Name of Entity	 	Jurisdiction of Incorporation or Organization	
PDF Solutions GmbH	 	Germany	
 	 	 	
PDF Solutions KK	 	Japan	
 	 	 	
PDF Solutions International Services, Inc.	 	Delaware	

 
EXHIBIT 31.01
CERTIFICATIONS
I, John K. Kibarian, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 	 	 	
 	 	/s/ JOHN K. KIBARIAN	
 	 	 	
 	 	John K. Kibarian	
 	 	President and Chief Executive Officer	
 	 	(Principal Executive Officer)	
Date: August 9, 2005	 	 	

 
EXHIBIT 31.02
CERTIFICATIONS
I, P. Steven Melman, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of PDF Solutions, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 	 	 	
 	 	/s/ P. STEVEN MELMAN	
 	 	 	
 	 	P. Steven Melman	
 	 	Chief Financial Officer and Vice President of Finance and Administration	
 	 	(Principal Financial Officer)	
Date: August 9, 2005	 	 	

 
EXHIBIT 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2005 as filed with the Securities and Exchange Commission on August 9, 2005 (the “Report”), I, John K. Kibarian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 	 	 	
 	 	/s/ JOHN K. KIBARIAN	
 	 	 	
 	 	John K. Kibarian	
 	 	President and Chief Executive Officer	
 	 	(Principal Executive Officer)	
Date: August 9, 2005	 	 	

 
EXHIBIT 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report of PDF Solutions, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2005 as filed with the Securities and Exchange Commission on August 9, 2005 (the “Report”), I, P. Steven Melman, Chief Financial Officer and Vice President of Finance and Administration of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 	 	 	
 	 	/s/ P. STEVEN MELMAN	
 	 	 	
 	 	P. Steven Melman	
 	 	Chief Financial Officer and Vice President	
 	 	of Finance and Administration	
Date: August 9, 2005