<PAGE>   1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 2000
 
                                                    REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------
 
                                    FORM S-1
 
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                               ------------------
 
                              PDF SOLUTIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<CAPTION>
               DELAWARE                                 7379                                25-1701361
<S>                                    <C>                                    <C>
   (STATE OR OTHER JURISDICTION OF          (PRIMARY STANDARD INDUSTRIAL                 (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)          CLASSIFICATION CODE NUMBER)               IDENTIFICATION NUMBER)
</TABLE>

 
                     333 WEST SAN CARLOS STREET, SUITE 700
                               SAN JOSE, CA 95110
                                 (408) 280-7900
   (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                               ------------------
 
                                JOHN K. KIBARIAN
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                           333 WEST SAN CARLOS STREET
                                   SUITE 700
                               SAN JOSE, CA 95110
                                 (408) 280-7900
           (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
 
                                   COPIES TO:
 

<TABLE>
<S>                                            <C>
                  PETER COHN                                 MARK A. BERTELSEN
                LOWELL D. NESS                                 JOSE F. MACIAS
              M. ELISE ALEXANDER                              BURKE F. NORTON
      ORRICK, HERRINGTON & SUTCLIFFE LLP                      ELISE M. BRINCK
               1020 MARSH ROAD                        WILSON SONSINI GOODRICH & ROSATI
             MENLO PARK, CA 94025                         PROFESSIONAL CORPORATION
                (650) 614-7400                               650 PAGE MILL ROAD
                                                            PALO ALTO, CA 94304
                                                               (650) 493-9300
</TABLE>

 
                               ------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
 
    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
 
    If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]
---------------
 
    If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
---------------
 
    If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
---------------
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]

                        CALCULATION OF REGISTRATION FEE
 

<TABLE>
<S>                                                <C>                       <C>
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
                                                       PROPOSED MAXIMUM
     TITLE OF EACH CLASS OF SECURITIES TO BE              AGGREGATE                 AMOUNT OF
                   REGISTERED                         OFFERING PRICE(1)          REGISTRATION FEE
-----------------------------------------------------------------------------------------------------
Common Stock, $0.0001 par value..................        $75,000,000                 $19,800
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>

 
(1) Estimated solely for the purpose of computing the amount of the registration
    fee pursuant to Rule 457(o) under the Securities Act. Includes proceeds from
    the sale of shares which the Underwriters have the option to purchase to
    cover over-allotments, if any.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>   2
 
      THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
      MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
      THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
      NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
      BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
      PERMITTED.
 
            SUBJECT TO COMPLETION, DATED                     , 2000
 
                                            Shares
 
                           [PDF Solutions, Inc. Logo]
 
                                  Common Stock
 
                               ------------------
 
     Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $       and $     per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "PDFS."
 
     The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
 
     INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
 

<TABLE>
<CAPTION>

                                                                     UNDERWRITING
                                                        PRICE TO     DISCOUNTS AND    PROCEEDS TO
                                                         PUBLIC       COMMISSIONS    PDF SOLUTIONS
                                                       -----------   -------------   -------------
<S>                                                    <C>           <C>             <C>
Per Share............................................       $                   $               $
Total................................................  $              $               $
</TABLE>

 
     Delivery of the shares of common stock will be made on or about           ,
2000.
 
     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
 
CREDIT SUISSE FIRST BOSTON
 
                                      LEHMAN BROTHERS
 
                                                           DAIN RAUSCHER WESSELS
 
           The date of this prospectus is                     , 2000.

<PAGE>   3
 
                              [INSIDE FRONT COVER]
 
                                [COLOR ARTWORK]
 
     [The artwork depicts a bridge connecting two cliffs separated by a gap. The
bridge is labeled "design-to-silicon yield solutions." The gap is labeled
"design-to-silicon yield gap." The left cliff is labeled "integrated circuit
design." The right cliff is labeled "manufacturing process." The tag line at the
bottom reads "Bridging the design-to-silicon yield gap."]

<PAGE>   4
 
                               ------------------
 
                               TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
PROSPECTUS SUMMARY....................    3
RISK FACTORS..........................    6
SPECIAL NOTE REGARDING FORWARD-
  LOOKING STATEMENTS..................   15
USE OF PROCEEDS.......................   15
DIVIDEND POLICY.......................   15
CAPITALIZATION........................   16
DILUTION..............................   17
SELECTED CONSOLIDATED FINANCIAL
  DATA................................   18
MANAGEMENT'S DISCUSSION AND ANALYSIS
  OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.......................   20
BUSINESS..............................   29
</TABLE>

 

<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
MANAGEMENT............................   38
RELATED-PARTY TRANSACTIONS............   48
PRINCIPAL STOCKHOLDERS................   50
DESCRIPTION OF CAPITAL STOCK..........   53
SHARES ELIGIBLE FOR FUTURE SALE.......   55
UNDERWRITING..........................   57
NOTICE TO CANADIAN RESIDENTS..........   60
LEGAL MATTERS.........................   61
EXPERTS...............................   61
WHERE TO FIND ADDITIONAL DOCUMENTS....   61
INDEX TO CONSOLIDATED FINANCIAL
  STATEMENTS..........................  F-1
</TABLE>

 
                               ------------------
 
     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
 
                     DEALER PROSPECTUS DELIVERY OBLIGATION
 
     UNTIL             , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

<PAGE>   5
 

                               PROSPECTUS SUMMARY
 
     You should read the following summary together with the more detailed
information and our Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus. Unless otherwise stated, information in
this prospectus assumes no exercise of the underwriters' over-allotment option.
 
                              PDF SOLUTIONS, INC.
 
     We provide comprehensive infrastructure technologies and services to
improve yield and optimize performance of integrated circuits. We believe that
our solutions can significantly improve a semiconductor company's time to
market, rate of yield improvement and product profitability. To date, we have
sold our technologies and services to, and established ongoing relationships
with, key integrated device manufacturers such as Toshiba Corporation, Sony
Corporation, Conexant Systems, Inc., Philips Semiconductor and Texas Instruments
Incorporated.
 
     Integrated circuits, or ICs, are becoming increasingly complex and
geometries are rapidly shrinking to meet market demand for new applications and
greater functionality at a lower cost. The introduction of diverse new IC
technologies and novel manufacturing processes has resulted in increasingly
complex manufacturing challenges. Demand -- largely driven by consumers in
search of the next, more powerful yet smaller device -- has dramatically
compressed product life cycles. This has reduced the time for semiconductor
companies to successfully bring a product to market in high volumes to achieve
dominant market share and high-margin revenues. In the current environment,
semiconductor companies have encountered significant challenges in their attempt
to achieve competitive yields and optimize performance, which are critical
drivers of IC companies' financial results. Disaggregation of the semiconductor
industry into many separate specialized organizations and entities has further
complicated IC companies' ability to maximize yield and optimize performance by
fragmenting design and manufacturing process knowledge. The combination of these
factors has left a void, which we call the design-to-silicon yield gap.
 
     We provide comprehensive silicon infrastructure solutions to address and
bridge the design-to-silicon yield gap. Our solutions combine proprietary
manufacturing process simulation, IC yield and performance modeling software,
comprehensive test chips, proven yield and performance enhancement
methodologies, and professional services. These solutions drive design and
manufacturing changes that enable our customers to improve IC yield and
performance earlier in product life cycles, thereby enabling our customers to
simultaneously generate additional revenue and reduce costs. The result of
implementing our solutions is the creation of value that can be measured based
on improvements to our customers' actual IC yield and performance. By using a
unique approach that we call gain share, we align our financial interests with
the demonstrated yield and performance improvements our customers realize on
specific products or processes. As a result, our recurring revenues scale to the
extent our customers continue to realize these improvements.
 
     Our objective is to provide the industry standard in design-to-silicon
yield solutions. To achieve this objective, we intend to leverage our
results-based gain share model to deepen our relationships with our customers
and rapidly generate market-driven improvements to our solutions. In addition,
we intend to focus our solutions on key high-volume, high-growth IC product
segments. We will also seek to extend and enhance our relationships with leading
companies at key stages of the design-to-silicon process, thereby increasing our
insight into future industry needs, and increasing industry awareness of our
solutions. We intend to continue expanding our research and development efforts,
and to selectively acquire complementary businesses and technologies to increase
the scope of our solutions. Further, we plan to expand geographically to gain
access to international engineering talent and to maintain proximity to our
expanding customer base.
 
     We were incorporated in Pennsylvania in November 1992. We reincorporated in
California in November 1995 and will reincorporate in Delaware in September
2000. Our principal executive office is located at 333 West San Carlos Street,
Suite 700, San Jose, CA 95110. Our telephone number at that
 
                                        3

<PAGE>   6
 
location is (408) 280-7900. Our Internet address on the world wide web is
http://www.pdf.com. Information on our web site does not constitute part of this
prospectus.
                               ------------------
 
     PDF Solutions(R), Circuit Surfer(R) and pdFab(R) are our registered
trademarks and Characterization Vehicle(TM), CV(TM), pdEx(TM) and Optissimo(TM)
are trademarks of PDF. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
 
                                  THE OFFERING
 
Common stock offered................                shares
 
Common stock to be outstanding after
this offering.......................                shares
 
Use of proceeds.....................     For general corporate purposes,
                                         including working capital, and
                                         repayment of indebtedness. See "Use of
                                         Proceeds."
 
Proposed Nasdaq National Market
symbol..............................     PDFS
 
     The number of shares to be outstanding after this offering is based on:
 
     - 15,071,879 shares of our common stock outstanding on June 30, 2000;
 
     - automatic conversion of all Series A preferred stock outstanding on June
       30, 2000 into 8,750,000 shares of our common stock upon completion of
       this offering; and
 
     - automatic conversion of all Series B preferred stock issued on August 4,
       2000 into 526,315 shares of our common stock upon completion of this
       offering.
 
     The number of shares to be outstanding after this offering excludes:
 
     - 1,236,744 shares issuable upon exercise of stock options and stock
       purchase rights outstanding on June 30, 2000 at a weighted average
       exercise price of $1.53 per share;
 
     - 2,740,572 shares reserved under our 1997 stock plan as of June 30, 2000
       and available for grant prior to completion of this offering; and
 
     - 3,300,000 shares reserved under our 2000 stock plans and available for
       grant following completion of this offering.
 
                                        4

<PAGE>   7
 
                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                                                     SIX MONTHS
                                                       YEAR ENDED DECEMBER 31,     ENDED JUNE 30,
                                                      -------------------------   ----------------
                                                       1997     1998     1999      1999     2000
                                                      ------   ------   -------   ------   -------
<S>                                                   <C>      <C>      <C>       <C>      <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenue.......................................  $2,621   $6,227   $11,824   $5,334   $ 8,276
Total costs and expenses............................   3,019    6,417    11,541    5,268     9,865
Income (loss) from operations.......................    (398)    (190)      283       66    (1,589)
Net loss............................................    (268)    (404)     (145)    (183)   (1,821)
Net loss per share -- basic and diluted.............  $(0.04)  $(0.05)  $ (0.02)  $(0.02)  $ (0.17)
Shares used in computing basic and diluted net loss
  per share.........................................   6,152    7,416     9,128    8,576    10,474
Pro forma net loss per share -- basic and diluted...                    $ (0.01)           $ (0.09)
Shares used in computing pro forma basic and diluted
  net loss per share................................                     17,878             19,224
</TABLE>

 

<TABLE>
<CAPTION>
                                                                         JUNE 30, 2000
                                                           -----------------------------------------
                                                                                          PRO FORMA
                                                             ACTUAL        PRO FORMA     AS ADJUSTED
                                                           -----------    -----------    -----------
<S>                                                        <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................    $1,443         $ 6,403           $
Working capital..........................................       434           5,394
Total assets.............................................     9,093          14,053
Long-term obligations, less current portion..............        54              54
Convertible preferred stock..............................     3,497              --
Total shareholders' equity (deficiency)..................      (419)          8,038
</TABLE>

 
---------------
     See Notes 1 and 8 of Notes to Consolidated Financial Statements for an
explanation of the determination of the amounts used in computing net loss per
share and pro forma net loss per share amounts. See also Note 12 of Notes to
Consolidated Financial Statements for the pro forma effects resulting from the
sale, issuance and assumed conversion of the Series B preferred stock.
 
     The pro forma balance sheet data above gives effect to receipt of the net
proceeds from our sale of 526,315 shares of Series B preferred stock on August
4, 2000 and reflects the conversion of all shares of our preferred stock into
9,276,315 shares of common stock automatically upon completion of this offering.
 
     The pro forma as adjusted balance sheet data gives effect to the sale of
shares of common stock in this offering at an assumed initial public offering
price of $     per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, and the application of the net
proceeds.
 
                                        5

<PAGE>   8
 

                                  RISK FACTORS
 
     You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock in
this offering.
 
                         RISKS RELATING TO OUR BUSINESS
 
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 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
integrated circuit, or IC, products and processes. To be successful, we will
need to enter into agreements covering a larger number of IC products and
processes with existing customers and new customers. Our existing customers are
large integrated device manufacturers, or IDMs. We will need to target as new
customers additional IDMs, as well as semiconductor companies in different
segments of the semiconductor market, such as fabless semiconductor companies,
foundries and system manufacturers. Factors that may limit adoption of our
design-to-silicon yield solutions by semiconductor companies include:
 
     - our customers may fail to achieve satisfactory yield improvements using
       our design-to-silicon yield solutions;
 
     - 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' may be reluctant to understand and
       accept our unique gain share fee component, which is a fee based on
       improvements in our customers' yields;
 
     - semiconductor companies may not use our design-to-silicon yield solutions
       if there is a decrease in demand for semiconductors generally or if the
       demand for deep submicron semiconductors fails to grow as rapidly as
       expected; and
 
     - customers may be concerned about our ability to keep highly competitive
       information confidential.
 
OUR LIMITED OPERATING HISTORY AND RECENT ADOPTION OF A NOVEL AND UNPROVEN
BUSINESS MODEL MAKE IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
 
     We have a limited operating history on which you can base your evaluation
of our business. In 1998, we began selling software, services and other
technologies together as a design-to-silicon yield solution. In addition,
because we have not demonstrated our ability to generate significant revenue,
our business model is unproven, especially with respect to gain share fees,
which we expect will constitute a significant portion of our revenue for the
foreseeable future. Our ability to generate gain share revenue is uncertain
since our business model is unproven. Our existing and potential customers may
resist this approach and may seek to limit or restrict our gain share fees. As a
result, it will be difficult for financial markets analysts and investors to
evaluate our future prospects.
 
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
 
     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;
                                        6

<PAGE>   9
 
     - 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 LARGELY DEPENDENT ON THE VOLUME OF ICS OUR CUSTOMERS
ARE ABLE TO SELL TO THEIR CUSTOMERS, WHICH IS OUTSIDE OUR CONTROL.
 
     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 customer's IC products. 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. Since we currently work on a
small number of large projects, any product that does not achieve commercial
viability could significantly harm our revenue and results of operations. 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.
 
WE GENERATE VIRTUALLY ALL OF OUR TOTAL REVENUE FROM A LIMITED NUMBER OF
CUSTOMERS, SO THE LOSS OF ANY ONE OF THESE CUSTOMERS COULD HAVE A SIGNIFICANT
NEGATIVE EFFECT ON OUR REVENUE AND RESULTS OF OPERATIONS.
 
     Historically, we have had a small number of large customers and we expect
this to continue in the near term. The loss of any one customer may have a
significant adverse effect on our total revenue. In particular, such a loss
could cause significant fluctuations in results of operations due to our
expenses being fixed in the short term, our lengthy sales cycle and because any
offsetting gain share revenue from new customers would not begin to be
recognized until much later.
 
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO INCUR LOSSES IN THE FUTURE AND WE MAY
BE UNABLE TO ACHIEVE OR SUBSEQUENTLY MAINTAIN PROFITABILITY.
 
     We may not achieve or subsequently 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, so any shortfall in anticipated revenue in
any given period could cause our operating results to decrease. We have not been
profitable in any quarter, and our accumulated deficit was approximately
$419,000 as of June 30, 2000. We expect to continue to incur significant
expenses in connection with:
 
     - increased 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 achieve and
maintain profitability. If we do achieve profitability, we may be unable to
sustain or increase profitability on a quarterly or annual basis. Any of these
factors could cause our stock price to decline.
 
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
 
                                        7

<PAGE>   10
 
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.
 
WE HAVE A LONG AND VARIABLE SALES CYCLE, WHICH CAN RESULT IN UNCERTAINTY AND
DELAYS IN GENERATING ADDITIONAL REVENUE.
 
     Because our gain share business model is novel 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 our 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. We typically send one or more of
our senior executives and several engineers to meet with a prospective customer.
Even after initial acceptance, due to the complexity of structuring the gain
share component, the negotiation and documentation processes can be lengthy. It
can take six months or more to reach a signed contract with a customer.
 
CHANGES IN THE STRUCTURE OF OUR CUSTOMER CONTRACTS, PARTICULARLY THE MIX BETWEEN
FIXED AND VARIABLE REVENUE, CAN ADVERSELY AFFECT OUR OPERATING RESULTS.
 
     Our 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. In addition, by increasing the
gain share component, we increase the variability 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 MUST CONTINUALLY ATTRACT AND RETAIN HIGHLY TALENTED EXECUTIVES, ENGINEERS AND
RESEARCH AND DEVELOPMENT PERSONNEL OR WE WILL BE UNABLE TO EXECUTE OUR BUSINESS
STRATEGY.
 
     We will need to continue to hire highly talented executives, engineers and
research and development personnel. We have experienced, and we expect to
continue to experience, delays and limitations in hiring and retaining highly
skilled individuals with appropriate qualifications to support our planned
growth. 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. In addition, we have a number of openings for key executive
positions that we will need to fill in order to successfully execute our
business strategy. We may have difficulty recruiting these executives or
integrating them into our existing management team. In addition, 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 is intense, especially in the Silicon Valley
area where we are principally based.
 
IF OUR DESIGN-TO-SILICON YIELD SOLUTIONS FAIL TO KEEP PACE WITH THE RAPID
TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY, WE COULD LOSE CUSTOMERS AND
OUR OPERATING RESULTS COULD DECLINE.
 
     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 design-to-silicon yield
                                        8

<PAGE>   11
 
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 design-to-silicon yield 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 to competitors, which could adversely
affect our operating results.
 
WE INTEND TO PURSUE ADDITIONAL STRATEGIC RELATIONSHIPS, WHICH ARE NECESSARY TO
MAXIMIZE OUR GROWTH AND WHICH COULD SUBSTANTIALLY DIVERT MANAGEMENT ATTENTION
AND RESOURCES.
 
     In order to establish 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 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 FACE OPERATIONAL AND FINANCIAL RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
 
     We derive a majority of our revenue from international sales, principally
from customers based in Japan. 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, while virtually all of our revenue
       is denominated in U.S. dollars; and
 
     - economic or political instability.
 
If any of these risks materialize, we may be unable to continue to market our
design-to-silicon yield solutions successfully in international markets.
 
                                        9

<PAGE>   12
 
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. 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 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 design-to-silicon yield solutions
as a result of the increase in competition.
 
WE MUST EFFECTIVELY MANAGE AND SUPPORT OUR 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 expect to outgrow our principal office facilities by
the end of 2000 and will need to relocate to a larger facility, which could be
difficult in the very competitive Silicon Valley office leasing market. We will
also need to switch to a new accounting system in the near future, which could
result in reporting errors and other difficulties that may 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 customer's 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 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. Given the time pressures
involved in bringing IC products to market, targeted customers may proceed
without us if we are not able to commence their solution implementation on time.
Due to our lengthy sales cycle, we may be unable to replace these targeted
implementations in a timely manner, which could cause fluctuations in our
operating results.
 
     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.
 
                                       10

<PAGE>   13
 
OUR CHIEF EXECUTIVE OFFICER AND OUR HEAD OF PRODUCTS AND METHODS 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 John Kibarian, our President and Chief Executive Officer, and David
Joseph, our Vice President, Products and Methods. If we lose the services of
either of these key executives, it could slow execution of our business plan,
hinder our product development processes and impair our sales efforts. Searching
for their replacements could divert our 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 these
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.
 
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 and require us to enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, 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 AND SOFTWARE TOOLS COULD DECREASE OUR
REVENUE AND OUR COMPETITIVE MARKET SHARE.
 
     If the software 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
design-to-silicon yield solutions. Any actual or perceived defects with our
software or
 
                                       11

<PAGE>   14
 
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 or proprietary technologies or enhancements to existing software or
proprietary technologies. Our software 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 or proprietary
technologies contain errors or defects, it could require us to expend
significant resources to alleviate these problems, which could result in the
diversion of technical and other resources from our other development efforts.
 
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, combined with
the net proceeds from this offering, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we may need to raise additional funds in order to:
 
     - support more rapid expansion;
 
     - develop or enhance design-to-silicon yield solutions;
 
     - respond to competitive pressures; or
 
     - acquire complementary businesses or technologies.
 
     These factors will impact our future capital requirements and the adequacy
of our available funds. We may need to raise additional funds through public or
private financings, strategic relationships or other arrangements. We cannot
guarantee that we will be able to raise any necessary funds on terms favorable
to us, or at all.
 
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 our recently acquired German company or of any additional
acquisitions we might make. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
 
                         RISKS RELATING TO OUR INDUSTRY
 
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.
 
SEMICONDUCTOR COMPANIES ARE SUBJECT TO RISK OF NATURAL DISASTERS.
 
     Semiconductor companies have in the past experienced major reductions in
foundry capacity due to earthquakes in Taiwan, Japan and California. In light of
our gain share revenue component, our results of operations can be significantly
decreased if one of our customers must shut down IC production due to a natural
disaster such as earthquake, fire, tornado or flood. Moreover, since
semiconductor product life
                                       12

<PAGE>   15
 
cycles have become relatively short, a significant delay in the production of a
product could result in lost revenue, not merely delayed revenue.
 
                        RISKS RELATING TO THIS OFFERING
 
MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS FROM THIS
OFFERING AND, AS A RESULT, WE MAY NOT USE THE PROCEEDS TO THE SATISFACTION OF
OUR STOCKHOLDERS.
 
     Our board of directors and management will have broad discretion in
allocating the net proceeds of this offering. They may choose to allocate such
proceeds in ways that do not yield a favorable return or are not supported by
our stockholders. We have designated only limited specific uses for the net
proceeds from this offering. Please see "Use of Proceeds."
 
THE CONCENTRATION OF OUR CAPITAL STOCK OWNERSHIP WITH INSIDERS UPON THE
COMPLETION OF THIS OFFERING WILL LIKELY LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS.
 
     The concentration of ownership of our outstanding capital stock with our
directors and executive officers after this offering may limit your ability to
influence corporate matters. Upon completion of this offering, our directors and
executive officers, and their affiliates, will beneficially own    % of our
outstanding capital stock. As a result, these stockholders, if acting together,
will have the ability to control all matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any corporate transactions.
 
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY.
 
     Provisions of our certificate of incorporation and bylaws in effect after
completion of this offering and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Please see "Description of Capital Stock."
 
NEGOTIATIONS BETWEEN THE UNDERWRITERS AND US DETERMINED THE INITIAL PUBLIC
OFFERING PRICE, BUT THE MARKET PRICE MAY BE LESS OR MAY BE VOLATILE, AND YOU MAY
NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
 
     The initial public offering price for the shares has been determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. An active
public market for our common stock may not develop or be sustained after this
offering. The market price of our common stock may fluctuate significantly in
response to factors, some of which are beyond our control, including:
 
     - actual or anticipated fluctuations in our operating results;
 
     - changes in market valuations of other technology companies;
 
     - conditions or trends in the semiconductor industry;
 
     - announcements by us or our potential competitors of significant technical
       innovations, contracts, acquisitions or partnerships;
 
     - additions or departures of key personnel;
 
     - any deviations in revenue or in losses from levels expected by securities
       analysts;
 
     - volume fluctuations, which are particularly common among highly volatile
       securities of technology related companies; and
 
     - sales of substantial amounts of our common stock or other securities in
       the open market.
 
     General political or economic conditions, such as a recession, or interest
rate or currency rate fluctuations could also cause the market price of our
common stock to decline. Please see "Underwriting."
                                       13

<PAGE>   16
 
OUR STOCK PRICE IS LIKELY TO BE EXTREMELY VOLATILE AS THE MARKET FOR TECHNOLOGY
COMPANIES' STOCK HAS RECENTLY EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS.
 
     Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
Despite the strong pattern of operating losses of technology companies, the
market demand, valuation and trading prices of these companies have been high.
At the same time, the share prices of these companies' stocks have been highly
volatile and have recorded lows well below their historical highs. As a result,
investors in these companies often buy the stock at very high prices only to see
the price drop substantially a short time later, resulting in an extreme drop in
value in the stock holdings of these investors. Our stock may not trade at the
same levels as other technology stocks. In addition, technology stocks in
general may not sustain current market prices.
 
A LARGE NUMBER OF SHARES BECOMING ELIGIBLE FOR SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
 
     Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. Our current stockholders hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. Beginning on the effective date of this prospectus,
only the shares sold in the offering will be immediately available for sale in
the public market. Beginning 180 days after the effective date, approximately
        shares will be eligible for sale pursuant to Rule 701 and approximately
        additional shares will be eligible for sale pursuant to Rule 144, of
which all but         shares are held by affiliates. An additional
shares will be eligible for sale pursuant to Rule 144 by             , 2000.
Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to
volume restrictions. Please see "Shares Eligible for Future Sale."
 
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF THE STOCK
YOU PURCHASE.
 
     The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
This is referred to as dilution. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $     , at an
initial public offering price of $   per share, in the book value per share of
our common stock from the price you pay for our common stock. Please see
"Dilution."
 
IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES AT A PRICE
LOWER THAN THE INITIAL PUBLIC OFFERING PRICE, YOU WILL INCUR ADDITIONAL
DILUTION.
 
     If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price, you will be subject to
additional dilution. If we are unable to access the public markets in the
future, or if our performance or prospects decreases, we may need to consummate
a private placement or public offering of our capital stock at a lower price
than the initial public offering price. In addition, any new securities may have
rights, preferences or privileges senior to those securities held by you.
 
EXERCISE OF REGISTRATION RIGHTS AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
 
     If holders of registration rights exercise those rights after this
offering, a large number of securities could be registered and sold in the
public market, which could result in a decline in the price of our common stock.
If we were to include in a company-initiated registration shares held by these
holders pursuant to the exercise of their registration rights, our ability to
raise needed capital could suffer. After this offering, the holders of 9,276,315
shares of our common stock, which will represent a total of approximately    %
of our outstanding stock after completion of this offering, are entitled to
rights with respect to registration under the Securities Act of 1933.
 
                                       14

<PAGE>   17
 
WE DO NOT INTEND TO PAY DIVIDENDS.
 
     We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
     This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology; for instance, may, will,
should, intend, expect, plan, anticipate, believe, estimate, predict, potential
or continue, the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in "Risk Factors." These factors may cause
our actual results to differ materially from any forward-looking statement.
 
     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
 

                                USE OF PROCEEDS
 
     Our net proceeds from the sale of           shares of common stock in this
offering at an assumed initial public offering price of $     per share are
estimated to be $          ($          if the underwriters' over-allotment
option is exercised in full). The principal purpose of the offering is to obtain
additional working capital. We expect to use the net proceeds of this offering
for working capital and other general corporate purposes. In addition, we expect
to use a portion of the net proceeds of this offering to repay $995,000 in notes
payable incurred in connection with our acquisition of Applied Integrated
Systems and Software GmbH. We may also use a portion of the net proceeds of this
offering for potential acquisitions of complementary products, technologies or
businesses, although we have no current agreements or negotiations with respect
to any transactions of this type. Pending these uses, we intend to invest the
net proceeds from this offering in short-term interest-bearing, investment grade
securities.
 

                                DIVIDEND POLICY
 
     We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future.
 
                                       15

<PAGE>   18
 

                                 CAPITALIZATION
 
     The following table sets forth our capitalization as of June 30, 2000, on
the following three bases:
 
     - on an actual basis;
 
     - on a pro forma basis to give effect to receipt of the proceeds from our
       sale of 526,315 shares of Series B preferred stock on August 4, 2000
       (including the effect of the related deemed dividend of approximately
       $684,000) and to reflect the conversion of all shares of our preferred
       stock into 9,276,315 shares of common stock automatically upon completion
       of this offering; and
 
     - on a pro forma as adjusted basis to reflect the sale of shares of common
       stock in this offering at an assumed initial public offering price of
       $          per share, after deducting estimated underwriting discounts
       and commissions and estimated offering expenses, and the application of
       the net proceeds.
 
     You should read this information together with our Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
 

<TABLE>
<CAPTION>
                                                                       JUNE 30, 2000
                                                            ------------------------------------
                                                                                      PRO FORMA
                                                             ACTUAL     PRO FORMA    AS ADJUSTED
                                                            --------    ---------    -----------
                                                             (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                         <C>         <C>          <C>
Current portion of long-term obligations..................  $  1,009    $  1,009      $     14
                                                            ========    ========      ========
Long-term obligations, less current portion...............  $     54    $     54      $     54
Series A convertible preferred stock, $0.0001 par value;
  shares authorized: 8,750,000 actual and pro forma and
  none pro forma as adjusted; issued and outstanding:
  8,750,000 actual and none pro forma and pro forma as
  adjusted................................................     3,497          --            --
Shareholders' equity (deficit):
  Preferred stock, $0.0001 par value; shares authorized:
     none actual and pro forma and 5,000,000 pro forma as
     adjusted; issued and outstanding: none actual, pro
     forma and pro forma
     as adjusted..........................................
  Common stock, $0.0001 par value; shares authorized:
     50,000,000 actual and pro forma and 75,000,000 pro
     forma as adjusted; shares issued and outstanding:
     15,071,879 actual, 24,348,194 pro forma and
     pro forma as adjusted................................         2           2
  Additional paid-in capital..............................    19,011      28,152
  Deferred stock-based compensation.......................   (14,512)    (14,512)      (14,512)
  Note receivable from shareholders.......................    (2,321)     (2,321)       (2,321)
  Accumulated deficit.....................................    (2,602)     (3,286)       (3,286)
  Cumulative other comprehensive income...................         3           3             3
                                                            --------    --------      --------
     Total shareholders' equity (deficiency)..............      (419)      8,038
                                                            --------    --------      --------
     Total capitalization.................................  $  3,132    $  8,092      $
                                                            ========    ========      ========
</TABLE>

 
---------------
 
     This table excludes:
 
     - an aggregate of 1,236,744 shares subject to outstanding options and
       purchase rights as of June 30, 2000 at a weighted average exercise price
       of $1.53 per share;
 
     - 2,740,572 shares reserved under our 1997 stock plan as of June 30, 2000
       and available for grant prior to completion of this offering; and
 
     - 3,300,000 shares reserved under our 2000 stock plans and available for
       grant following completion of this offering.
 
See "Management -- Benefit Plans," "Related-Party Transactions" and Notes 7 and
12 of Notes to Consolidated Financial Statements.
 
                                       16

<PAGE>   19
 
                                    DILUTION
 
     Our pro forma net tangible book value as of June 30, 2000 was approximately
$6,024,000 or $0.25 per share of common stock. Pro forma net tangible book value
per share of common stock represents the amount of pro forma total assets, after
giving effect to the net proceeds of our Series B preferred stock financing on
August 4, 2000, reduced by the amount of total liabilities and intangible
assets, divided by the total number of shares of common stock outstanding
assuming conversion of our preferred stock, including shares of Series B
preferred stock issued on August 4, 2000. After giving effect to the adjustments
set forth above, and the sale of shares of common stock in this offering at an
assumed initial public offering price of $     per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, our pro forma net tangible book value as of June 30, 2000 would have
been $   or $   per share of common stock. This represents an immediate increase
in pro forma net tangible book value of $   per share to existing stockholders
and an immediate dilution of $   per share to new investors. The following table
illustrates this per share dilution:
 

<TABLE>
<S>                                                           <C>       <C>
Assumed initial public offering price per share.............            $
  Pro forma net tangible book value per share before this
     offering...............................................  $ 0.25
  Increase per share attributable to new public investors...
                                                              ------
Pro forma net tangible book value per share after this
  offering..................................................
Dilution per share to new public investors..................            $
                                                                        ======
</TABLE>

 
     The following table summarizes on a pro forma basis as of June 30, 2000,
the differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid. The pro forma
basis gives effect to the issuance of 526,315 shares of Series B preferred stock
on August 4, 2000 and the automatic conversion of all preferred stock into
common stock upon completion of this offering.
 

<TABLE>
<CAPTION>
                                       SHARES PURCHASED       TOTAL CASH CONSIDERATION
                                     ---------------------    ------------------------    AVERAGE PRICE
                                       NUMBER      PERCENT       AMOUNT        PERCENT      PER SHARE
                                     ----------    -------    -------------    -------    -------------
<S>                                  <C>           <C>        <C>              <C>        <C>
Existing stockholders..............  24,348,194          %     $11,054,827           %        $0.45
New investors
                                     ----------     -----      -----------      -----
  Totals...........................                 100.0%     $                100.0%
                                     ==========     =====      ===========      =====
</TABLE>

 
     As of June 30, 2000, options and rights to purchase 1,236,744 shares were
outstanding with a weighted average price of $1.53 per share. As of June 30,
2000, 2,740,572 shares were reserved under our 1997 stock plan and available for
grant prior to completion of this offering. Upon completion of this offering, we
will have 3,300,000 shares reserved under our 2000 stock plans and available for
grant upon completion of this offering. The issuance of common stock under these
plans will result in further dilution to new investors. See
"Management -- Benefit Plans," "Related-Party Transactions" and Notes 7 and 12
of Notes to Consolidated Financial Statements.
 
                                       17

<PAGE>   20
 

                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto and the other information contained in
this prospectus.
 
     The selected consolidated balance sheets data as of December 31, 1998 and
1999 and the selected consolidated statements of operations data for each year
in the three years ended December 31, 1999, have been derived from our audited
Consolidated Financial Statements appearing elsewhere in this prospectus. The
balance sheets data as of June 30, 2000 and for the six months ended June 30,
2000 have been derived from our unaudited Consolidated Financial Statements
appearing elsewhere in this prospectus. The selected consolidated balance sheets
data as of December 31, 1995, 1996 and 1997, and the selected consolidated
statements of operations data for the years ended December 31, 1995 and 1996
have been derived from our unaudited Consolidated Financial Statements not
included in this prospectus. The unaudited Consolidated Financial Statements
have been prepared by us on a basis consistent with the audited Consolidated
Financial Statements appearing elsewhere in this prospectus and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of this data. Historical
results are not necessarily indicative of future results.
 

<TABLE>
<CAPTION>
                                                                                                   SIX MONTHS ENDED
                                                               YEAR ENDED DECEMBER 31,                 JUNE 30,
                                                     -------------------------------------------   ----------------
                                                      1995     1996     1997     1998     1999      1999     2000
                                                     ------   ------   ------   ------   -------   ------   -------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>      <C>      <C>      <C>      <C>       <C>      <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
  Design-to-silicon yield solutions................  $  510   $  916   $2,621   $6,035   $10,567   $5,334   $ 5,968
  Gain share.......................................      --       --       --      192     1,257       --     2,308
                                                     ------   ------   ------   ------   -------   ------   -------
     Total revenue.................................     510      916    2,621    6,227    11,824    5,334     8,276
                                                     ------   ------   ------   ------   -------   ------   -------
Costs and expenses:
  Cost of design-to-silicon yield solutions........     104      163      596    1,533     4,091    1,822     2,905
  Research and development.........................     101      624    1,005    1,864     3,087    1,244     2,242
  Selling, general and administrative..............     133      454    1,404    2,959     4,295    2,202     3,025
  Stock-based compensation amortization*...........      --       --       14       61        68       --     1,693
                                                     ------   ------   ------   ------   -------   ------   -------
     Total costs and expenses......................     338    1,241    3,019    6,417    11,541    5,268     9,865
                                                     ------   ------   ------   ------   -------   ------   -------
  Income (loss) from operations....................     172     (325)    (398)    (190)      283       66    (1,589)
  Interest income and other........................      10      175      139      128       105       52        41
                                                     ------   ------   ------   ------   -------   ------   -------
  Income (loss) before taxes.......................     182     (150)    (259)     (62)      388      118    (1,548)
  Tax provision(1).................................      --       --        9      342       533      301       273
                                                     ------   ------   ------   ------   -------   ------   -------
  Net income (loss)................................  $  182   $ (150)  $ (268)  $ (404)  $  (145)  $ (183)  $(1,821)
                                                     ======   ======   ======   ======   =======   ======   =======
  Net income (loss) per share -- basic and
     diluted(2)....................................  $ 0.04   $(0.03)  $(0.04)  $(0.05)  $ (0.02)  $(0.02)  $ (0.17)
                                                     ======   ======   ======   ======   =======   ======   =======
  Shares used in computing basic and diluted net
     income (loss) per share(2)....................   5,113    5,059    6,152    7,416     9,128    8,576    10,474
                                                     ======   ======   ======   ======   =======   ======   =======
  Pro forma net loss per share -- basic and
     diluted.......................................                                      $ (0.01)           $ (0.09)
                                                                                         =======            =======
  Shares used in computing pro forma basic and
     diluted net loss per share....................                                       17,878             19,224
                                                                                         =======            =======
  --------------------
  *STOCK-BASED COMPENSATION AMORTIZATION:
     Cost of design-to-silicon yield solutions.....      --       --        4       18        20       --       295
     Research and development......................      --       --       10       43        48       --     1,190
     Selling, general and administrative...........      --       --       --       --        --       --       208
                                                     ------   ------   ------   ------   -------   ------   -------
                                                         --       --       14       61        68       --     1,693
                                                     ======   ======   ======   ======   =======   ======   =======
</TABLE>

 
(1) Through November 1995, we were a Subchapter S corporation and all tax
    liabilities were attributable to the common shareholders.
 
(2) Amounts presented for 1995 represent diluted net income per share and shares
    used for computing diluted net income per share. Shares used to compute
    basic net income per share, which equaled $0.04 per share, totaled
    4,466,000.
 
                                       18

<PAGE>   21
 

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                 ------------------------------------------   JUNE 30,
                                                  1995     1996     1997     1998     1999      2000
                                                 ------   ------   ------   ------   ------   --------
                                                                    (IN THOUSANDS)
<S>                                              <C>      <C>      <C>      <C>      <C>      <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents......................  $3,555   $3,357   $2,208   $2,155   $1,933    $1,443
Working capital................................   3,687    3,277    2,854    2,501    2,153       434
Total assets...................................   3,727    3,797    5,351    4,837    5,644     9,093
Long term obligations, less current portion....      --       --       --       --       72        54
Convertible preferred stock....................   3,497    3,497    3,497    3,497    3,497     3,497
Total shareholders' equity (deficiency)........     252      100     (155)    (480)    (512)     (419)
</TABLE>

 
                                       19

<PAGE>   22
 

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
     This prospectus contains certain statements of a forward-looking nature
relating to future events or our future financial performance. Prospective
investors are cautioned that such statements involve risks and uncertainties,
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated by such forward-looking statements.
 
OVERVIEW
 
     We provide comprehensive infrastructure technologies and services that
improve yield and optimize performance of integrated circuits. Our
design-to-silicon yield solutions combine proprietary manufacturing process
simulation, yield and performance modeling software, comprehensive test chips,
proven yield and performance enhancement methodologies, and professional
services.
 
     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 complete 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
Applied Integrated Systems and Software GmbH, which develops software and
provides development services to the semiconductor industry.
 
Sources of Revenue
 
     We derive revenue from two sources: design-to-silicon yield solutions and a
unique arrangement we call gain share.
 
     Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue is derived from solution implementations, software and technology
licenses and software support and maintenance. Our solution implementations
involve delivery, installation and application of our software and other
technologies by our integration engineers for: (1) assessment, which involves
extensive diagnosis, analysis and prioritization of yield loss components; and
(2) implementation, which involves modifications to the design or manufacturing
process to improve IC yield and optimize performance. Solution implementations
typically take 9 to 15 months to perform and our customer contracts generally
provide for fixed price milestone payments during the course of the engagement.
Revenue from solution implementations is recognized on the percentage of
completion method as we perform the services. The majority of the software and
other technologies that we license are bundled with solution implementations.
Accordingly, these license fees are recognized as a component of solution
implementation contracts. In some cases, we license selected software and
technologies without solution implementation services to our existing customers.
In addition, we may license our software and technologies without services to
potential strategic industry partners to accelerate the adoption of our
design-to-silicon yield solutions. If collection of the resulting receivable is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate a portion of the total license fee to any
undelivered elements of the arrangement, then these license fees are recognized
upon delivery of our software or authorization codes. Otherwise, these license
fees are recognized over the term of the license. Software support and
maintenance fees are generally allocated based on vendor specific objective
evidence and recognized ratably over the term of the maintenance agreement,
typically 12 months.
 
     Gain Share. In addition to the revenue we derive from our design-to-silicon
yield solutions, many of our solution implementation contracts provide that we
will receive revenue that varies based on the value we create for our customers.
To date, we have determined this value based on our customer's actual yield
 
                                       20

<PAGE>   23
 
improvements relative to a negotiated yield target, or baseline, for specific
products or processes. This target is typically based on the customer's
projected yield without our solutions. We refer to these value-based fees as
gain share. We have historically determined gain share fees based on one of two
ways: as a percentage of the reduction in our customers' cost of goods sold or a
percentage of incremental revenue achieved by our customers, in each case,
relative to the baseline. Our customer contracts typically contain limitations
on the scope of our gain share fees. Gain share may vary significantly because a
customer's financial benefits of yield improvements can be affected by forces
that are beyond our control, such as market demand for an end product, as well
as a company's internal manufacturing performance and pricing decisions.
Typically, gain share is measured on a quarterly basis, after mass production
begins, and runs for periods of time exceeding one year. We recognize gain share
revenue following agreement as to the level of performance achieved.
 
Stock-Based Awards
 
     During the six months ended June 30, 2000, we issued 3,258,290 common stock
options to employees at a weighted average exercise price of $1.21 per share.
The weighted average exercise price was below the weighted average deemed fair
value of $6.03 per share. The cumulative deferred stock-based compensation with
respect to these grants was $15.7 million, and is being amortized to expense on
an accelerated method over the four year vesting periods of the options. During
the six months ended June 30, 2000, we amortized $1.3 million to stock-based
compensation expense and the remaining balance of $14.4 million will be
amortized over the remaining vesting periods through June 2004. Subsequent to
June 30, 2000 and through July 31, 2000, we granted an additional 332,500
options to employees at exercise prices below the deemed fair value. The
aggregate deferred stock-based compensation of $1.7 million with respect to
these options will be amortized on an accelerated method over periods of four
years. Due to the accelerated method of amortization, most of the deferred
stock-based compensation charge will be incurred over the first one to two years
of the vesting of the options. Through December 31, 1999 the cumulative deferred
stock-based compensation amortization related to non-employee awards was not
material. During the six months ended June 30, 2000, the Company recorded
stock-based compensation amortization of approximately $469,000 related to
non-employee awards.
 
Customer Concentration
 
     To date, a small number of IC companies have accounted for virtually all of
our total revenue. In the year ended December 31, 1997, two customers accounted
for 90% of our total revenue, with Toshiba representing 70% and Texas
Instruments representing 20%. In the year ended December 31, 1998, two customers
accounted for 82% of our total revenue, with Toshiba representing 66% and
Fujitsu representing 16%. In the year ended December 31, 1999, three customers
accounted for 87% of our total revenue, with Toshiba representing 53%, Fujitsu
representing 19% and Sony representing 15%. In the six months ended June 30,
2000, four customers accounted for 94% of our total revenue, with Toshiba
representing 34%, Sony representing 34%, Conexant representing 15% and Philips
representing 11%.
 
     To date, companies based in Japan have accounted for the majority of our
total revenue. Revenue generated from customers in Japan accounted for 70% of
our total revenue in the year ended December 31, 1997, 82% in the year ended
December 31, 1998, 90% in the year ended December 31, 1999, and 68% in the six
months ended June 30, 2000. We expect that a significant portion of our total
future revenue will continue to be derived from companies based in Japan.
Virtually all of our total revenue generated internationally has been
denominated in U.S. dollars.
 
Recent Acquisition
 
     On April 27, 2000, we acquired all of the outstanding stock of Applied
Integrated Systems and Software GmbH, or AISS, for $1.25 million, consisting of
$995,000 in notes payable and $255,000 in cash. We expect to repay these notes
with the net proceeds of this offering. AISS develops software and provides
development services to the semiconductor industry. The acquisition was
accounted for using the purchase method and our Consolidated Financial
Statements reflect the results of operations of AISS from
 
                                       21

<PAGE>   24
 
the date of acquisition. The excess of the purchase price over the fair value of
the tangible assets and liabilities assumed was $2.1 million and represents
acquired technology, employee workforce and goodwill which is being amortized on
a straight line basis over a period of four years.
 
RESULTS OF OPERATIONS
 
     We have historically experienced fluctuations from period to period. We
expect these fluctuations to continue, therefore historical results are not
indicative of future results.
 
     SIX MONTHS ENDED JUNE 30, 1999 AND 2000
 
Revenue
 
     Total revenue increased from $5.3 million for the six months ended June 30,
1999 to $8.3 million for the six months ended June 30, 2000.
 
     Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue increased 12% from $5.3 million for the six months ended June 30, 1999
to $6.0 million for the six months ended June 30, 2000. This increase was
primarily attributable to a greater number of solution implementations during
the six months ended June 30, 2000 compared to the corresponding period in the
prior year.
 
     Gain Share. Gain share revenue increased from zero for the six months ended
June 30, 1999 to $2.3 million for the six months ended June 30, 2000. This
increase was due to the attainment of gain share yield targets for three
customers.
 
Costs and Expenses
 
     Cost of Design-to-Silicon Yield Solutions. Cost of design-to-silicon yield
solutions consists primarily of compensation, benefits and related personnel
costs of the engineers who perform solution implementations and software support
and maintenance as well as allocated facilities costs. Cost of design-to-silicon
yield solutions increased from $1.8 million for the six months ended June 30,
1999 to $2.9 million for the six months ended June 30, 2000. This increase was
due to a greater number and increased average size of solution implementations,
as well as the execution of our business strategy to aggressively increase
capacity ahead of revenue, resulting in the hiring of additional personnel. As a
percentage of design-to-silicon yield solutions revenue, cost of
design-to-silicon yield solutions increased from 34% for the six months ended
June 30, 1999 to 49% for the six months ended June 30, 2000. This percentage
increase was primarily the result of increasing capacity in anticipation of
expanding our customer base and being awarded new design-to-silicon solutions
contracts. We anticipate that our cost of design-to-silicon yield solutions will
increase in absolute dollars as we support an expanding number of solution
implementations. We expect, however, that cost of design-to-silicon yield
solutions revenue will decrease as a percentage of design-to-silicon yield
solution revenue in the long term as capacity to deliver solution
implementations is more efficiently balanced with the number of ongoing solution
implementation contracts.
 
     Research and Development. Research and development expenses consist
primarily of compensation, benefits and related personnel costs of the engineers
engaged in research and development as well as allocated facilities costs.
Research and development expenses increased from $1.2 million for the six months
ended June 30, 1999 to $2.2 million for the six months ended June 30, 2000. This
increase was due to our expanding research and development efforts in software
and technologies. As a percentage of total revenue, research and development
expenses increased from 23% for the six months ended June 30, 1999 to 27% for
the six months ended June 30, 2000. A significant portion of this increase was
due to the addition of personnel and the increase in personnel-related costs for
development of existing and new technologies, including as a result of our
acquisition of AISS. We anticipate that we will continue to commit considerable
resources to research and development in the future and that these expenses will
continue to increase significantly in absolute dollars.
 
     Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of compensation, benefits and related personnel costs
as well as allocated facilities costs, outside sales
 
                                       22

<PAGE>   25
 
representative commissions, recruiting and relocation costs, accounting and
administrative expenses, training, costs for legal and professional services and
general corporate expenses. Selling, general and administrative expenses
increased from $2.2 million for the six months ended June 30, 1999 to $3.0
million for the six months ended June 30, 2000. This increase was due to
increased spending in personnel and related costs and legal and other
professional services in connection with building the necessary administrative
infrastructure to support the growth of our operations. As a percentage of total
revenue, selling, general and administrative expenses decreased from 41% for the
six months ended June 30, 1999 to 37% for the six months ended June 30, 2000. We
expect that selling, general and administrative expenses will increase in
absolute dollars to support increased selling and administrative efforts.
 
     Stock-Based Compensation Amortization. Stock-based compensation
amortization expense increased from zero during the six months ended June 30,
1999 to $1.7 million during the six months ended June 30, 2000. The increase was
attributable primarily to options granted to employees at exercise prices below
the deemed fair value of our common stock.
 
Interest and Other Income
 
     Interest and other income decreased from approximately $51,000 for the six
months ended June 30, 1999 to approximately $41,000 for the six months ended
June 30, 2000. This decrease was due to lower average cash and short-term
investment balances.
 
Provision for Taxes
 
     Provision for taxes decreased from approximately $301,000 for the six
months ended June 30, 1999 to approximately $273,000 for the six months ended
June 30, 2000. These provisions for taxes primarily represented foreign
withholding taxes on some revenue from Japanese customers.
 
     YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
 
Revenue
 
     Total revenue increased from $2.6 million for the year ended December 31,
1997, to $6.2 million for the year ended December 31, 1998, to $11.8 million for
the year ended December 31, 1999.
 
     Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue increased 131% from $2.6 million for the year ended December 31, 1997 to
$6.0 million for the year ended December 31, 1998, and further increased 75% to
$10.6 million for the year ended December 31, 1999. These increases were
primarily the result of a greater number and size of solution implementations.
 
     Gain Share. Gain share revenue increased from zero for the year ended
December 31, 1997, to approximately $192,000 for the year ended December 31,
1998, to $1.3 million for the year ended December 31, 1999. This increase was
due to the introduction of our gain share business model in late 1997 and the
achievement of yield improvements over negotiated contract baselines.
 
Costs and Expenses
 
     Cost of Design-to-Silicon Yield Solutions. Cost of design-to-silicon yield
solutions increased from approximately $595,000 for the year ended December 31,
1997, to $1.5 million for the year ended December 31, 1998, to $4.1 million for
the year ended December 31, 1999. As a percentage of design-to-silicon yield
solutions revenue, cost of design-to-silicon yield solutions increased from 23%
for the year ended December 31, 1997, to 25% for the year ended December 31,
1998, to 39% for the year ended December 31, 1999. These increases in absolute
dollars and as a percentage of design-to-silicon yield solutions revenue were
due to the hiring of additional engineers as we built our solution
implementation teams in anticipation of increased demand for our solutions.
 
     Research and Development. Research and development expenses increased from
$1.0 million for the year ended December 31, 1997, to $1.9 million for the year
ended December 31, 1998, to $3.1 million for
 
                                       23

<PAGE>   26
 
the year ended December 31, 1999. These increases were due to an increase in
personnel and related costs in each period. As a percentage of total revenue,
research and development expenses decreased from 38% for the year ended December
31, 1997, to 30% for the year ended December 31, 1998, to 26% for the year ended
December 31, 1999.
 
     Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.4 million for the year ended December 31, 1997, to
$3.0 million for the year ended December 31, 1998, to $4.3 million for the year
ended December 31, 1999. These increases were due to additional personnel and
related costs, outside sales representative commissions, recruiting and
relocation costs, accounting and administrative expenses, training and costs for
legal and professional services. As a percentage of total revenue, selling,
general and administrative expenses decreased from 54% for the year ended
December 31, 1997, to 48% for the year ended December 31, 1998, to 36% for the
year ended December 31, 1999.
 
     Stock-Based Compensation Amortization. Stock-based compensation
amortization expense increased from approximately $14,000 for the year ended
December 31, 1997, to approximately $61,000 for the year ended December 31,
1998, to approximately $68,000 for the year ended December 31, 1999. These
increases were primarily attributable to timing of the vesting of options and
warrants granted to non-employees and the resulting revaluation of compensation
expense related to such vested options and warrants.
 
Interest and Other Income
 
     Interest and other income decreased from approximately $139,000 for the
year ended December 31, 1997, to approximately $128,000 for the year ended
December 31, 1998, to approximately $105,000 for the year ended December 31,
1999. These decreases were due to lower average balances of cash and cash
equivalents.
 
Tax Provision
 
     The tax provision increased from approximately $9,000 for the year ended
December 31, 1997, to approximately $341,000 for the year ended December 31,
1998, to approximately $533,000 for the year ended December 31, 1999. These
provisions primarily represented foreign withholding taxes on some revenue from
Japanese customers. These increases were attributable to the increased number of
contracts and the revenue subject to these withholding requirements.
 
     SIX QUARTERS ENDED JUNE 30, 2000
 
     The following tables set forth our consolidated statement of operations
data for each quarter in the six quarters ended June 30, 2000. This unaudited
quarterly information has been prepared on the same basis as our audited
Consolidated Financial Statements and, in the opinion of management, includes
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of such data. We believe that quarterly revenues,
particularly the mix of the revenue components, and operating
 
                                       24

<PAGE>   27
 
results are likely to vary significantly in the future and that period-to-period
comparisons of our results of operations should not be relied upon as
indications of future performance.
 

<TABLE>
<CAPTION>
                                                                 QUARTER ENDED
                                          ------------------------------------------------------------
                                          MAR 31,   JUNE 30,   SEPT 30,   DEC 31,   MAR 31,   JUNE 30,
                                           1999       1999       1999      1999      2000       2000
                                          -------   --------   --------   -------   -------   --------
                                                                 (IN THOUSANDS)
<S>                                       <C>       <C>        <C>        <C>       <C>       <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
  DATA:
Revenue:
  Design-to-silicon yield solutions....   $2,451     $2,883     $2,575    $2,658    $2,194    $ 3,774
  Gain share...........................       --         --        500       757     1,500        808
                                          ------     ------     ------    ------    ------    -------
     Total revenue.....................    2,451      2,883      3,075     3,415     3,694      4,582
                                          ------     ------     ------    ------    ------    -------
Costs and expenses:
  Cost of design-to-silicon yield
     solutions.........................      722      1,100      1,133     1,136     1,252      1,653
  Research and development.............      650        594        816     1,027       946      1,296
  Selling, general and
     administrative....................    1,142      1,060      1,084     1,009     1,446      1,579
  Stock-based compensation
     amortization......................       --         --         27        41       259      1,434
                                          ------     ------     ------    ------    ------    -------
     Total costs and expenses..........    2,514      2,754      3,060     3,213     3,903      5,962
                                          ------     ------     ------    ------    ------    -------
  Income (loss) from operations........      (63)       129         15       202      (209)    (1,380)
  Interest income and other............       27         25         26        27        17         24
                                          ------     ------     ------    ------    ------    -------
  Income (loss) before taxes...........      (36)       154         41       229      (192)    (1,356)
  Tax provision........................      201        100        102       130       107        166
                                          ------     ------     ------    ------    ------    -------
  Net income (loss)....................   $ (237)    $   54     $  (61)   $   99    $ (299)   $(1,522)
                                          ======     ======     ======    ======    ======    =======
</TABLE>

 
     The trends discussed in the annual comparisons of operating results from
1997 through 1999 as well as for the six month periods ended June 30, 1998 and
1999, generally apply to the comparisons of results for our six most recent
quarters ended June 30, 2000.
 
     A significant portion of our revenue has been, and will continue to be,
derived from a small number of substantial contracts with large corporations,
which involve extended contract negotiations. We attempt to maximize utilization
of our implementation teams by minimizing the time between completion of one
solution implementation and commencement of the next. Accordingly, the timing
and performance of these contracts may cause material fluctuations in our
operating results, particularly on a quarterly basis, although in the past this
has been offset by gain share revenue resulting from previous engagements. For
example, design-to-silicon yield solutions revenue decreased from the second
quarter of 1999 to the third quarter of 1999 and from the fourth quarter of 1999
to the first quarter of 2000 as a result of a delay between completion of
existing solution implementations and commencement of the next.
 
     Some of our gain share arrangements provide for non-recurring incentive
payments upon the achievement of negotiated yield targets within a specified
time. Gain share revenue may increase significantly in the quarter in which
these targets are met. For example, in the first quarter of 2000, we recognized
revenue in connection with the achievement of one of these targets. In addition,
our quarterly operating results, particularly as they pertain to gain share,
have in the past and will in the future vary significantly depending upon
factors such as our customers production cycles, our customers ability to
measure, on a timely basis, the performance of their production facilities,
changes in market demand for our customers' products, and our ability to deliver
results above negotiated gain share baselines. These factors, among others, have
made and will continue to make gain share revenues difficult to forecast.
 
     Historically, research and development expenses have fluctuated depending
on the rate of hiring engineers and on whether we use engineering resources for
development projects or solution implementations. For example, in the fourth
quarter of 1999, we experienced an increase in research and development expenses
due to these factors.
 
                                       25

<PAGE>   28
 
     Selling, general and administrative expense levels have remained in a
narrow range over most of the past six quarters. Recently, expenses have
increased in the finance and administration functions as we have built the
infrastructure necessary to support the growth of the business.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, we have funded our operations primarily with the net
proceeds from the sale of common and preferred stock, which amounted to $8.7
million and, to a lesser extent, from cash flow from operations, bank borrowings
and capital equipment leases.
 
     On December 4, 1995, we issued 8,750,000 shares of Series A preferred stock
at $0.40 per share resulting in net proceeds of $3.5 million. On August 4, 2000,
we issued 526,315 shares of Series B preferred stock at $9.50 per share
resulting in net proceeds of $5.0 million. Upon the closing of the Series B
preferred stock financing, we will record a charge to net loss attributable to
common shareholders of approximately $684,000 for the beneficial conversion
feature inherent in the Series B preferred stock. The beneficial conversion
feature is equal to the difference between the price of the Series B preferred
stock and the estimated fair value of our common stock into which the Series B
preferred stock is convertible. The beneficial conversion feature is similar to
a dividend on preferred stock that increases net loss to arrive at net loss
attributable to common shareholders.
 
     Net cash used in operating activities was approximately $828,000 for the
year ended December 31, 1997. Net cash provided by operating activities was
approximately $212,000 for the year ended December 31, 1998 and approximately
$272,000 for the year ended December 31, 1999. Net cash used in 1997 was
principally the result of a net loss and an increase in accounts receivable
partially offset by increases in deferred revenues, accounts payable, and
accrued compensation and related benefits. Net cash provided by operating
activities in 1998 was the result of decreases in accounts receivable and
increases in accounts payable and other accrued liabilities partially offset by
a loss and a decrease in deferred revenues. Net cash provided by operating
activities in 1999 resulted from increases in accrued compensation and related
benefits and net income, after adjustment for depreciation and amortization,
partially offset by increases in accounts receivable. Net cash provided by
operating activities was approximately $100,000 for the six months ended June
30, 2000. This resulted primarily from net income for the period of
approximately $163,000, as adjusted for depreciation and amortization, including
amortization of deferred stock compensation costs of $1.7 million, and increases
in accounts payable of approximately $824,000 and deferred revenues of
approximately $455,000, partially offset by increases in accounts receivable of
$1.0 million and accrued compensation and related benefits of approximately
$155,000.
 
     Net cash used in investing activities was approximately $321,000 for the
year ended December 31, 1997, approximately $281,000 for the year ended December
31, 1998 and was approximately $537,000 for the year ended December 31, 1999,
all primarily the result of purchases of property and equipment. Our capital
expenditures consisted primarily of computer hardware and software and office
furniture. Net cash used in investing activities was approximately $791,000 for
the six months ended June 30, 2000, primarily due to the purchase of property
and equipment of approximately $566,000 and the acquisition of AISS for $995,000
in promissory notes and $255,000 in cash.
 
     Net cash provided by financing activities was zero for the year ended
December 31, 1997, approximately $16,000 for the year ended December 31, 1998
and approximately $42,000 for the year ended December 31, 1999. Net cash
provided by financing activities was approximately $198,000 for the six months
ended June 30, 2000, primarily due to the exercise of stock options.
 
     We currently have a revolving credit commitment that provides for up to
$3.0 million in borrowings through August 31, 2000. The credit commitment is
divided into the following components: a $2.5 million Foreign Asset Based Line
of Credit Commitment and a $500,000 Domestic Asset Based Line of Credit
Commitment for which advances are limited, respectively, to 90% of foreign and
75% of domestic accounts receivable, as defined. Outstanding borrowings bear
interest at prime (9.5% at June 30, 2000) plus 0.75%. Borrowings under these
arrangements are secured by all of our personal property. In addition, these
 
                                       26

<PAGE>   29
 
agreements require us to comply with certain financial covenants. As of June 30,
2000, there were no borrowings outstanding under the agreements.
 
     In connection with our acquisition of AISS, we issued $995,000 in
promissory notes on April 27, 2000. The principal amount, plus interest at 7%
per annum, is payable April 27, 2001.
 
     We currently anticipate capital expenditures for additional fixed assets of
$1.5 million for the year ended December 31, 2000. As of June 30, 2000 we did
not have any material commitments for capital expenditures. From time to time,
we may also consider acquisitions of complementary products, technologies or
businesses. Any acquisition or investment of this type may require additional
capital.
 
     We expect to experience significant growth in our operating expenses,
particularly for research and development and additions to our workforce in
order to execute our business plan. As a result, we anticipate that our
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund potential acquisitions of complementary products, technologies or
businesses. We believe that the net proceeds from this offering together with
our existing cash resources, available bank financing and anticipated funds from
operations, will satisfy our cash requirements for at least the next twelve
months. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
 
EURO-CURRENCY
 
     The Single European Currency, or Euro, was introduced on January 1, 1999,
with complete transition to this new currency required by January 2002. In
connection with our acquisition of AISS, we are currently assessing the issues
raised by the introduction of the Euro, but we do not expect that required
changes, if any, will have a material effect on our business.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
will require us to record derivatives on our balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for our fiscal year ending December 31, 2001. We have not yet
determined the impact that the adoption of SFAS 133 will have on our earnings or
financial position.
 
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. Actual results could vary materially as a result of a number of
factors.
 
     Interest Rate Risk. As of June 30, 2000 and including the net proceeds of
$5.0 million from the issuance of Series B preferred stock on August 4, 2000, we
had cash and equivalents of $6.4 million, consisting of cash and highly liquid
money market instruments with maturities of less than 90 days. Because of the
short maturities of these 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. As
of June 30, 2000, we had outstanding notes payable of $995,000 which bear
interest at a fixed rate of 7%. The fair value of these notes approximated the
recorded value at June 30, 2000. Changes in market interest rates will affect
the fair market value of these notes. A hypothetical increase in market interest
rates of 10% from the market rates in effect at June 30, 2000 would cause the
fair value of these investments and notes payable to decrease and increase,
respectively, by an immaterial amount and would
 
                                       27

<PAGE>   30
 
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 AISS since the date of
its acquisition, have 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, and may use financial instruments to limit this exposure.
There can be no assurance that exchange rate fluctuations will not have a
materially negative impact on our business.
 
                                       28

<PAGE>   31
 

 
                                   BUSINESS
 
OVERVIEW
 
     We provide comprehensive infrastructure technologies and services that
improve yield and optimize performance of integrated circuits. We believe that
our solutions significantly improve a semiconductor company's time to market,
yield ramp and product profitability. Our design-to-silicon yield solutions
combine proprietary manufacturing process simulation, yield and performance
modeling software, comprehensive test chips, proven yield and performance
enhancement methodologies, and professional services. The result of implementing
our solutions is the creation of value that can be measured based on
improvements to our customers' actual yield. We receive recurring revenue based
on this value through a unique approach that we call gain share. To date, we
have sold our technologies and services to, and we have established ongoing
relationships with, key integrated device manufacturers such as Toshiba
Corporation, Sony Corporation, Conexant Systems, Inc., Philips Semiconductor and
Texas Instruments Incorporated.
 
INDUSTRY BACKGROUND
 
     Integrated circuits, or ICs, are critical components used in an
increasingly wide variety of applications, such as computer systems; Internet
and communications infrastructure equipment, including wireless and network
devices; and consumer products including cellular phones, pagers, personal
digital assistants, game consoles and network appliances. As IC performance has
increased and size and cost have decreased, the use of ICs in these applications
has grown significantly. According to an October 1999 report by the
Semiconductor Industry Association, the worldwide semiconductor market is
expected to grow from $144 billion in 1999 to $233 billion in 2003. A large part
of this growth is expected to occur in deep submicron ICs having circuit
component feature sizes, or geometries, that measure less than 0.20 microns, or
millionths of a meter. ICs are manufactured onto silicon disks, commonly
referred to as wafers. According to an August 2000 report by VLSI Research, the
demand for these deep submicron silicon wafers is estimated to grow at a
compound annual rate in excess of 55% from 1999 to 2005. Rapid technological
innovation has shortened product life cycles, which fuels the economic growth of
the semiconductor industry.
 
     ICs are becoming increasingly complex and geometries are rapidly shrinking
to meet market requirements for new applications and greater functionality at a
lower cost. Therefore, IC companies are adopting new designs, process
technologies and materials at an unparalleled rate. For example, silicon
germanium processes will be integrated with standard logic processes to provide
better performance for radio-frequency components in communication ICs. The
integration of diverse new technologies and the introduction of novel
manufacturing processes has resulted in increasingly complex manufacturing
challenges.
 
     In addition, the IC industry faces compression in product lifecycles.
Previously, companies could afford to take months, or years in some cases, to
integrate their new design and manufacturing processes. With traditional product
life cycles, IC companies ramped production slowly, produced at high volume once
the product hit its prime, and slowly reduced production volume when the price
and the demand started to decrease near the end of its life cycle. More
recently, demand -- largely driven by consumers in search of the next, more
powerful, smaller device -- has dramatically reduced the time that semiconductor
companies have to successfully bring a product to market in high volumes.
Companies now need to sell the most volume when a product is first introduced
and has a performance and pricing advantage over its competition, or they will
lose the market opportunity and the related high revenue.
 
     Increased IC complexity and compressed product lifecycles create
significant challenges to achieving competitive yields and optimizing high
performance. Yield is the percentage of ICs produced that meet customers'
specifications. For example, it is not uncommon for an initial manufacturing run
to yield only 20%, meaning 80% of those wafers were wasted. Yield improvement
and performance optimization are critical drivers of IC companies' financial
results because they typically lead to cost reduction and revenue
 
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<PAGE>   32
 
generation concurrently, causing a leveraged effect on profitability.
Historically, yield loss resulted primarily from contamination in the IC
manufacturing process. With deep submicron ICs, the dominant factor of yield
loss has shifted from contamination to (1) systematic yield loss, or
non-functioning ICs resulting from the lack of compatibility between the design
and manufacturing processes, and (2) performance yield loss, or functioning ICs
that do not meet customer speed requirements. Manufacturers have historically
addressed systematic and performance yield loss reactively and almost
exclusively by inefficient and time consuming trial-and-error adjustments to the
manufacturing process.
 
     Disaggregation of the semiconductor industry has further complicated IC
companies' ability to maximize yield. Historically, leading semiconductor
companies designed, manufactured and tested their ICs internally, thus retaining
design-manufacturing integration know-how. Today, the industry is comprised of
organizations and separate companies that specialize in a particular phase of
designing and manufacturing ICs. This has resulted in a fragmentation of the
knowledge related to the integration of IC design and manufacturing.
 
     The combination of increasingly complex ICs and design and manufacturing
processes, reduced time to produce new products in high volumes and the loss of
information due to disaggregation has left a void. This void, or what we call
the design-to-silicon yield gap, creates a number of significant problems for
semiconductor companies, including:
 
     - Slow Yield Ramp. Increased process and design complexity extends the time
       needed to arrive at acceptable yields and increases the time it takes for
       a semiconductor company to begin producing at high volumes, directly and
       negatively impacting a company's potential market share and potential
       revenue.
 
     - Longer Time to Market and Increased Up-front Costs. Yield problems in the
       initial manufacturing phase result in numerous design and process
       iterations that delay product introductions and appreciably increase
       up-front costs, such as non-recurring engineering, mask-set redesigns and
       excessive sample wafers.
 
     - High Cost of Goods Sold. Processed wafer costs are typically the largest
       component of an IC company's cost of goods sold and, therefore, yield
       loss significantly increases costs.
 
     - Difficulties Producing High-Performance ICs. High-performance ICs are
       particularly sensitive to the lack of compatibility between design and
       manufacturing. In addition, semiconductor companies typically experience
       a trade-off between yield and IC performance because it is generally more
       difficult to produce ICs with more stringent specifications.
       Semiconductor companies may target high-performance ICs because they
       typically have higher margins.
 
     Delivering complex ICs quickly and in high volumes requires unique silicon
infrastructure solutions to tightly integrate the IC design and manufacturing
processes -- thus bridging this design-to-silicon yield gap.
 
THE PDF SOLUTION
 
     We provide comprehensive silicon infrastructure technologies and services
to address the design-to-silicon yield gap. Our solution combines proprietary
manufacturing process simulation software, yield and performance modeling
software, comprehensive test chips, proven yield and performance enhancement
methodologies and professional services to increase yield, accelerate yield ramp
and improve IC performance. We create a prioritized analysis of yield loss
mechanisms to identify, quantify and correct the issues that cause yield loss,
often before an IC design is complete. This drives IC design and manufacturing
improvements that enable our customers to achieve and exceed targeted IC yield
and performance earlier in product life cycles. Our solution is designed to
increase the initial yield when a design first enters a manufacturing line,
increase the rate at which that yield improves, and allow subsequent product
designs to be added to manufacturing lines more quickly and easily. Because our
design-to-silicon yield solutions dramatically and quickly improve a
semiconductor company's time to market and yield ramp -- and ultimately product
profitability -- we tie our revenue to these improvements
 
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<PAGE>   33
 
through a unique approach that we call gain share. Gain share is the percentage
we receive of our customers' incremental cost savings associated with improved
yields and accelerated ramp. We believe our unique gain share model helps us to
form highly collaborative and long term relationships with our customers.
 
     The following graphically depicts the integration of IC design with
manufacturing processes using our design-to-silicon yield solutions.
 
[Diagram]
 
     [The diagram depicts two boxes on opposite sides of the page. The left box
is labeled "IC design." The right box is labeled "manufacturing processes." The
two boxes are connected by a bi-directional arrow which is labeled "Integrate,
Design and Manufacturing Process." Underneath is a long box labeled
"Design-to-silicon yield solutions." Two arrows extend upward from this box to
the bi-directional arrow. The left arrow is labeled "Simulate, design, yield and
performance." The right arrow is labeled "Characterize, model and optimize
manufacturing processes."]
 
     The key benefits of our solution to our customers are:
 
     Faster Time to Market. Our design-to-silicon yield solutions are designed
to significantly accelerate our customers' time to market and increase product
profitability. Our solutions, which predict and improve product yield even
before IC product design is complete, change the traditional design-to-silicon
sequence to primarily a concurrent process, and decrease our customers' time to
market. Systematically incorporating knowledge of the integration of the design
and manufacturing processes into software modules, enables faster introduction
of additional products with consistently high initial yields. Our design-
to-silicon yield solutions decrease design and process iterations, reduce our
customers' up-front costs and speed time to market, thus providing our customers
with early-mover advantages such as increased market share and higher selling
prices.
 
     Faster Time to Volume. After achieving higher initial yields and faster
time to market, our design-to-silicon yield solutions are designed to enable our
customers to isolate and eliminate remaining systematic yield issues to achieve
cost efficient volume. Once a manufacturing process has been modeled using our
solutions, our customers are able to diagnose problems and simulate potential
corrections more quickly than using traditional methods. In addition, if process
changes are required, improvements can be verified more quickly using our
technology than using traditional methods. Our design-to-silicon yield solutions
enable our customers to quickly reach cost efficient volume, so that they are
able to increase revenue, improve their competitive position, and capture higher
market share.
 
     Increased Manufacturing Efficiencies. After using our design-to-silicon
yield solutions for product introduction and yield ramp, our solutions are
designed to allow our customers to achieve a higher final yield and therefore a
lower cost of goods sold. In addition, our design-to-silicon yield solutions are
designed to provide our customers with the ability to proactively monitor
process health to avoid potential yield problems. By paying us gain share as our
customers recognize cost savings from these manufacturing efficiencies, they
also benefit from better matching their costs to their revenue.
 
     Increased Semiconductor Performance. Our design-to-silicon yield solutions
are designed to enable our customers to achieve over-all higher level
semiconductor performance by modeling the factors that affect speed and
simulating possible improvements. Typically, the changes necessary to achieve
higher performance result in an overall reduction in yield. Because our
design-to-silicon yield solutions also model the factors that affect yield at
the same time, our customers can often achieve both higher IC performance and
higher yield, thereby generating higher margin revenues.
 
                                       31

<PAGE>   34
 
OUR STRATEGY
 
     Our objective is to provide the industry standard in design-to-silicon
yield solutions. Key elements of our strategy include:
 
     Leverage Our Unique Gain Share Business Model. We intend to expand the gain
share component of our customer contracts. We believe this unique approach helps
us to form highly collaborative and longer-term relationships. Working closely
with our customers on their core technologies with a common focus on their
business results provides direct and real-time feedback, which we will continue
to use to rapidly generate market-driven improvements that add value to our
solutions. We also believe that gain share allows us to increase penetration of
our customer accounts because adding new semiconductor products to existing
lines is increasingly easy and economical for our customers once our
design-to-silicon yield solutions are implemented. As our gain share customers
succeed in improving their yield and performance while reducing costs, we
believe that we will generate new customer accounts based on these successes.
 
     Focus on Key IC Product Segments. We intend to focus our solution on key IC
product segments such as system-on-a-chip, communications networking, graphics
and high-performance central processing units. These are high-volume,
high-growth segments and are fueled by the growth of Internet and wireless
infrastructure and consumer applications. As a result, we will expand our
solution for key technology drivers such as low-k dielectrics, copper, embedded
DRAM and silicon germanium. We believe that these product segments are
particularly attractive because they include complex IC design and manufacturing
processes where processed silicon is costly and yield is critical.
 
     Expand Strategic Relationships with Industry Leaders. We intend to extend
and enhance our relationships with leading companies at key stages of the
design-to-silicon process, such as manufacturing equipment vendors, silicon
intellectual property vendors, semiconductor foundries, and test and assembly
equipment providers. We believe that strategic relationships with industry
leaders will increase our insight into future industry needs, thus allowing us
to further accelerate our learning and enhance the value of our solutions. We
expect these relationships to also serve as sales channels for our
design-to-silicon yield solutions and to increase industry awareness of our
solutions.
 
     Extend Our Technology Leadership Position. We intend to continue expanding
our research and development efforts by leveraging our experienced engineering
staff and codifying the knowledge that we continually acquire in our solution
implementations. In addition, we intend to selectively acquire complementary
businesses and technologies to increase the scope of our solutions. We will
continue to make significant investments in the development of proprietary
manufacturing process simulation software, yield and performance modeling
software, other technologies, and yield and performance enhancement
methodologies to accommodate our customers' increasingly complex semiconductor
needs.
 
     Expand Worldwide Presence. We intend to establish engineering design and
product development centers in key international locations around the world. To
date, we have focused on regions specific to our design efforts -- the United
States, Japan and Europe. We intend to expand geographically to gain access to
international engineering talent and to maintain proximity to our expanding
customer base. In addition, we believe that these efforts will have collateral
sales and marketing benefits as a result of local presence.
 
TECHNOLOGY
 
     Our design-to-silicon yield solutions combine proprietary manufacturing
process simulation, yield and performance modeling software, comprehensive test
chips and proven yield and performance enhancement methodologies. We have
designed a proprietary process that uses each of these technologies to (1)
identify yield-relevant layout pattern elements by using the knowledge base
embedded in our technologies, (2) categorize IC layout components into these
elements, (3) quantify the yield of each of the elements, and (4) model the
frequency of yield-relevant elements and their yield-loss probabilities to
calculate the likely yield of an IC design. We continually enhance our
technologies through the codification of knowledge that we gain in our solution
implementations.
 
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<PAGE>   35
 
     Our software incorporates the following elements:
 
     - efficient modeling algorithms of the interaction between design layout
       and manufacturing processes, which creates layout pattern-dependent
       systematic yield models that encompass process technologies such as
       lithography, etch, interlayer dielectric chemical-mechanical polishing
       (ILD CMP), copper CMP and shallow trench isolation CMP (STI CMP);
 
     - pattern recognition algorithms, which allow us to categorize the
       yield-relevant elements of a design as a function of their layout,
       including the effects of their proximity to other elements;
 
     - a hierarchical representation of the layout, which encompasses layout
       manufacturing process proximity effects and minimizes the time necessary
       for computation of systematic yield prediction;
 
     - algorithms that compute an overall yield impact matrix for design as a
       function of layout elements and manufacturing yield models;
 
     - statistical simulation of circuit performance as a function of
       manufacturing process variations, including their impact on transistor
       performance; and
 
     - statistical process and device simulation.
 
     Our software that is used to predict yields of designs is also used to
generate test chips, or characterization vehicles. These characterization
vehicles, or CVs, are used to calibrate the yield models and to provide
manufacturers with early prediction of product yields, often before the IC
design is completed. Early prediction generated by the CVs is the basis of the
yield improvement methodologies for the manufacturing line. Information
generated by the CVs is also used to improve the IC design.
 
     Our methodologies are a series of guidelines that our implementation teams
use to drive our customers' adoption of our software and CVs to quantify the
yield impact of each module of the process and design block, simulate the impact
of changes to the design and manufacturing process, and analyze the outcome of
executing such changes.
 
PRODUCTS AND SERVICES
 
     Our design-to-silicon yield solutions consist of integration engineering
services, proprietary software and other technologies. Our proprietary software
and other technologies include proprietary manufacturing process simulation
software, yield and performance modeling software, and comprehensive test chips.
 
     We tailor our solution to our customers' specific business issues by
offering one of the following design-to-silicon yield solutions:
 
     - Integration and Ramp. This solution enables our customers to ramp the
       yield of new products when the manufacturing process or fabrication
       facility is new. Our solution is used to improve the process capability
       and manufacturability of designs targeted for that process.
 
     - Yield and Performance Ramp. This solution enables our customers to ramp
       the yield and performance of new products when the manufacturing process
       is assumed to be mostly correct and complete. In this case, we focus on
       design oriented issues.
 
     Our design-to-silicon yield solutions can incorporate various software and
other technologies, typically including the following:
 
     - Characterization Vehicles and Characterization Vehicle software. Our
       integration engineers develop a design of experiments, or DOE, to
       determine how IC design building blocks interact with the manufacturing
       process. Our software utilizes the DOE, as well as a library of these
       building blocks that we know have potential yield and performance impact,
       to generate comprehensive test chips that we call Characterization
       Vehicles, or CVs. These CVs are run through the manufacturing process
       with intentional modifications to explore the effects of natural
       manufacturing process variations. Our CV analysis software is then used
       to analyze the electrical test results generated by
 
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<PAGE>   36
 
       the test chips to model the yield and performance effects of process
       variations on these design building blocks.
 
     - pdEx. pdEx analyzes an IC design to compute its systematic and
       contamination yield loss. pdEx takes as input, a layout that is typically
       in industry standard format, yield models generated by running our CVs,
       other test chip data and other in-line inspection systems. pdEx is
       designed to estimate the yield loss due to optical proximity effects,
       etch micro loading, dishing in chemical-mechanical polishing and
       contamination, as well as a number of other basic process issues.
 
     - Circuit Surfer. Circuit Surfer estimates the performance yield and
       manufacturability of small blocks in a design, such as analog subsystems
       or critical paths of digital blocks. Using Circuit Surfer, a design
       engineer is able to estimate how manufacturing process variations will
       impact circuit performance.
 
     - pdFab. pdFab provides a framework for statistical manufacturing process
       and transistor simulation that enables our integration engineers to
       understand the effects of expected or measured manufacturing process
       variations on transistor performance. pdFab is used to optimize the
       transistor architecture and associated manufacturing process, and is
       primarily targeted to provide higher IC performance, although yield
       improvements may also be generated.
 
     - Optissimo. Optissimo is used to optimize the layout of a design to
       minimize the impact of wafer printing variations due to optical proximity
       effects. Optissimo can be used for model based optical proximity
       correction technologies.
 
     While the primary distribution method for our software and technologies is
through our design-to-silicon yield solutions, we have in the past and may in
the future separately license these and other technologies.
 
CUSTOMERS AND CASE STUDIES
 
Customers
 
     Our customers are primarily large integrated device manufacturers, or IDMs.
We have established ongoing relationships with key IDMs such as Toshiba
Corporation, Sony Corporation, Conexant Systems, Inc., Philips Semiconductor and
Texas Instruments Incorporated. Our customers' targeted product segments vary
significantly, including microprocessors, graphics, memory, and communications.
We believe that the adoption of our solutions by such diverse and
technologically advanced companies validates the application of our
design-to-silicon yield solutions to the broader market.
 
                                       34

<PAGE>   37
 
Case Studies
 
     TOSHIBA CORPORATION -- one of the world's leading semiconductor
manufacturers with IC and end product revenue over $50 billion.
 

<TABLE>
    <S>          <C>
    Challenge:   To meet the anticipated large market demand for a new
                 consumer product, Toshiba sought to ramp production of a
                 very large, complex system-on-a-chip, or SoC. A chip of this
                 size and complexity had not previously been manufactured at
                 the projected high volumes.
    Solution:    Toshiba utilized our design-to-silicon yield solution to
                 identify and quantify potential yield loss components and
                 their root causes, and to monitor continuing manufacturing
                 process health. Our CVs and analyses continuously identified
                 yield issues and prioritized the causes by yield impact,
                 which Toshiba used to drive proactive improvements to ensure
                 that SoC yields would be on target. Toshiba made numerous
                 design and manufacturing changes, so that the design and
                 manufacturing process were already co-optimized to yield
                 well by the time the SoC was inserted into mass production.
                 In addition, our solution was used to improve the transistor
                 architecture for significantly better transistor
                 performance, which resulted in higher IC performance yield.
    Impact:      The SoC yield ramp rate greatly exceeded the industry
                 benchmark ramp rates, and increased the capacity of the
                 fabrication facility and enabled Toshiba to meet the market
                 demand. We continue to work very closely with Toshiba on the
                 next generation of this process and SoC.
</TABLE>

 
     CONEXANT SYSTEMS, INC. -- one of the world's leading pure-play
communications IC producers with IC revenue in excess of $2 billion.
 

<TABLE>
    <S>          <C>
    Challenge:   Conexant sought to achieve consistently high yields of a
                 specific product across existing internal and external
                 manufacturing processes. This was exacerbated by the added
                 complexities of disparate design rules in each of the
                 facilities.
    Solution:    We worked with Conexant to identify, quantify and prioritize
                 yield loss components and their root causes to drive yield
                 improvements for an archetypal product. These improvements
                 were also expected to apply to other Conexant products. Our
                 proprietary technology allowed our team to uncover the two
                 major systematic causes of low yield for this product -- the
                 first was an inconsistency in the design rules that
                 specified how layers of metals were connected to each other,
                 or borderless contacts, and the second was a problem in the
                 transistor to transistor interconnect. We worked with
                 Conexant to identify layout changes to compensate for
                 process differences across the manufacturing facilities. Our
                 team used our software simulation capability to predict the
                 yield improvement and ensure that proposed changes were
                 optimal.
    Impact:      In three months, we increased yields dramatically for the
                 archetypal product. In addition, the corrections implemented
                 for the archetypal product were applied to many products in
                 the 0.25 micron technology. We continue to work closely with
                 Conexant on the next generation of its processes and
                 products.
</TABLE>

 
SALES AND MARKETING
 
     Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and strategic alliances. To date, we have targeted
leading IDMs to validate our solutions in leading technology and manufacturing
environments and to establish credibility to support future sales and marketing
efforts. We expect to extend these efforts to other IDMs and fabless
semiconductor companies. For sales in the United States, we rely on our direct
sales team, which primarily operates out of our San Jose, California
headquarters. In Japan we rely on our direct sales team as well as Innotech, a
large semiconductor sales and distribution company located in Japan. Innotech
has been instrumental in providing introductions to key executives with some of
our targeted customers, which has allowed us to establish direct relationships
 
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<PAGE>   38
 
with these key executives. We expect to continue establishing strategic
alliances with vendors in the electronic design automation software, capital
equipment for IC production, silicon intellectual property and mask-making
software segments to create and take advantage of co-marketing opportunities. We
believe that these relationship will also serve as sales channels for our
design-to-silicon yield solutions and to increase industry awareness of our
solutions.
 
     We strive to provide compelling value in our initial engagement to
establish ourselves as a key vendor to our customers and solidify relationships
at the executive level. Early in the solution implementation, our engineers
establish relationships across the organization and gain a solid understanding
of our customers' business issues. Our direct sales and solution implementation
teams combine their efforts to deepen our customer relationships by expanding
our penetration across the customer's products, processes and technologies. This
close working relationship with the customer has the added benefit of helping us
identify new product areas and technologies in which we should next focus our
research and development efforts. We believe that our sales and marketing
efforts will facilitate the adoption of our design-to-silicon yield solutions as
the industry standard.
 
RESEARCH AND DEVELOPMENT
 
     Our research and development focuses on rapidly developing and introducing
new proprietary technologies, software products and enhancements to our existing
design-to-silicon yield solutions. We use a rapid-prototyping paradigm in the
context of the customer engagement to achieve these goals. In addition, we have
a highly-qualified technical advisory board comprised of professors from,
Harvard University's Business School, the Massachusetts Institute of Technology,
Carnegie Mellon University and the University of California, Berkeley to help us
develop and guide our strategic development roadmap.
 
     We have made and expect to continue to make substantial investments in
research and development. The complexity of our design-to-silicon yield
technologies requires expertise in physical IC design and layout, transistor
design and semiconductor physics, semiconductor process integration, numerical
algorithms, statistics, and software development. We believe that the
multidisciplinary expertise of our team of scientists and engineers will
continue to advance our market and technological leadership. We conduct
extensive in-house training for our engineers in the technical areas, as well
focusing on ways to enhance their client service skills. At any given time,
about one quarter of our research and development engineers are operating in the
field, partnered with solution implementation engineers in a deliberate strategy
to provide direct feedback between technology development and client needs. Our
research and development expenses were approximately $1.0 million in 1997, $1.9
million in 1998, $3.1 million in 1999 and $2.2 million in the first six months
of 2000.
 
COMPETITION
 
     The semiconductor industry is highly competitive and characterized by
rapidly changing design and process technologies, evolving standards, short
product life cycles and decreasing prices. While the market for silicon
infrastructure is in its infancy, it is rapidly evolving and we expect
competition to develop and continue to increase. We believe a comprehensive
solution to effectively close the design-to-silicon yield gap requires
integration of design and manufacturing processes. We face the most direct
competition from our customers' and potential customers' in-house teams who face
the challenge of integrating these elements across internal organizational
boundaries. Other potential sources of competition include: yield-management
software vendors who could expand their offerings to include or increase design
and process capabilities; electronic design automation vendors, who could expand
their offerings to include process and manufacturing; and semiconductor process
equipment vendors, who could expand their offerings to include design and other
elements of process and manufacturing beyond their own equipment.
 
     We believe that the principal factors affecting competition in our market
are demonstrated results and reputation, strength of core technology, ability to
implement solutions for new technology and product generations, time to market,
and strategic relationships. Although we believe that our solutions compete
favorably with respect to these factors, our market is relatively new and is
evolving rapidly. We may not be
 
                                       36

<PAGE>   39
 
able to maintain our competitive position against current and potential
competitors, especially those with significantly greater resources.
 
INTELLECTUAL PROPERTY
 
     Our future success and competitive position are dependent upon our
continued ability to develop and protect proprietary software and other
technologies. We rely primarily on a combination of contractual provisions,
confidentiality procedures, trade secrets, and patent, copyright and trademark
laws to protect our proprietary technologies and prevent competitors from using
our technologies in their products. We have been issued one German patent and
have five patent applications currently pending in the United States. We intend
to prepare additional patent applications for submission to the United States
Patent and Trademark Office. In the future, we may seek additional patent
protection when we feel it is necessary.
 
     We license our products and technologies pursuant to non-exclusive license
agreements which impose restrictions on customer use. In addition, we seek to
avoid disclosure of our trade secrets, including, requiring employees, customers
and others with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We also seek to
protect our software, documentation and other written materials under trade
secret and copyright laws. Despite this protection, unauthorized parties may
copy aspects of our current or future software and other technologies or obtain
and use information that we regard as proprietary.
 
     The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. It is also possible that third parties will claim that we have
infringed their patents and current or future products. Any claims, with or
without merit, could be time-consuming, result in costly litigation, cause
delays, or require us to enter into royalty or licensing agreements, any of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. In the event an infringement claim
against us was successful and we could not obtain a license on acceptable terms
or license a substitute technology or redesign to avoid infringement, our
business would be harmed.
 
EMPLOYEES
 
     As of June 30, 2000, we had 108 employees, including 43 in client service
teams, 42 in products and methods, 6 in sales and marketing and 17 in general
and administrative functions. Seventy-three of these employees are located in
San Jose, California, 14 are located in Texas and Virginia, 18 are located in
Germany and 3 employees are located in Japan. Of our 108 total employees, 80 are
engineers, 70 of which have advanced degrees including 40 with Ph.Ds.
 
     None of our employees is represented by a labor union or is subject to a
collective bargaining agreement. We believe our relationship with our employees
is good.
 
LEGAL PROCEEDINGS
 
     We are not currently party to any material legal proceedings.
 
FACILITIES
 
     Our principal executive offices are located in San Jose, California where
we lease approximately 18,000 square feet under a lease that expires in October
2004. We lease 3,750 square feet in Dallas, Texas under a lease that expires in
July 2002. In addition, we lease 4,200 square feet in Munich, Germany and 1,600
square feet in Tokyo, Japan under leases that expire in June 2002 and April
2002. We believe that our current facilities in San Jose are adequate to meet
our needs through the end of fiscal 2000, at which time we will need to obtain
additional space in the San Jose area, which we expect to be able to obtain when
necessary. We are also currently in the process of seeking additional space in
Dallas.
 
                                       37

<PAGE>   40
 

                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The names and ages of our executive officers and directors as of June 30,
2000 are as follows:
 

<TABLE>
<CAPTION>
                   NAME                     AGE                   POSITION(S)
                   ----                     ---                   -----------
<S>                                         <C>    <C>
John K. Kibarian, Ph.D. ..................  36     Chief Executive Officer, President and
                                                   Director
Thomas F. Cobourn, Ph.D. .................  39     Vice President, Yield Analysis
David A. Joseph...........................  46     Vice President, Products and Methods
P. Steven Melman..........................  45     Chief Financial Officer and Vice
                                                   President, Finance and Administration
Kimon Michaels, Ph.D. ....................  34     Vice President, Integration Practice and
                                                   Director
P.K. Mozumder, Ph.D. .....................  38     Vice President, Integration Practice
W. Steven Rowe............................  50     Vice President, Human Resources
David Tarpley.............................  54     Vice President, Worldwide Sales
B.J. Cassin...............................  66     Director
Donald L. Lucas...........................  70     Director
Lucio L. Lanza............................  56     Director
</TABLE>

 
     John K. Kibarian, Ph.D., one of our founders, has served as President since
November 1991 and has served as our Chief Executive Officer since July 2000. Mr.
Kibarian has served as a director since December 1992. Mr. Kibarian received a
B.S. E.C.E., M.S. E.C.E. and Ph.D. E.C.E. from Carnegie Mellon University.
 
     Thomas F. Cobourn, Ph.D., one of our founders, has served in Vice
Presidential capacities since June 1992 including currently as Vice President,
Yield Analysis. Mr. Cobourn received a B.S., Computer Science and Engineering
from the University of Pennsylvania and a M.S. E.C.E. and Ph.D. E.C.E. from
Carnegie Mellon University.
 
     David A. Joseph has served as Vice President, Products and Methods since
July 1999. He served as Vice President, Business Development from November 1998
through June 1999. From February 1978 to October 1998, Mr. Joseph served
KLA/Tencor, a semiconductor manufacturing company, in various positions,
including as Japan Business Manager, VP Customer Satisfaction and GM Yield
Analysis Software. Mr. Joseph received a B.S. in Mathematical Science from
Stanford University.
 
     P. Steven Melman has served as Chief Financial Officer and Vice President,
Finance and Administration since July 1998. From April 1997 to June 1998, Mr.
Melman served as Vice President Finance and Administration with Animation
Science Corporation, an animation company. From April 1995 to April 1997, he
served as Vice President, Finance and Chief Financial Officer with Business
Resource Group, a facilities management and commercial furnishings company. Mr.
Melman received a B.S. in Business Administration from Boston University. Mr.
Melman is a Certified Public Accountant.
 
     Kimon Michaels, Ph.D., one of our founders, has served in Vice Presidential
capacities since March 1993 including currently as Vice President, Integration
Practice, and as a director since November 1995. He also served as Chief
Financial Officer from November 1995 to July 1998. Mr. Michaels received a B.S.
in Electrical Engineering, a M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie Mellon
University.
 
     P.K. Mozumder, Ph.D. has served as Vice President, Integration Practice
since May 1998. From June 1994 to May 1998, Mr. Mozumder served as a Branch
Manager with Texas Instruments, Inc., a consumer electronics and semiconductor
company. Mr. Mozumder received a B. Tech in Electrical Engineering from the
Indian Institute of Technology in Bombay, India, and a M.S. E.C.E. and a Ph.D.
E.C.E. from Carnegie Mellon University.
 
     W. Steven Rowe has served as Vice President, Human Resources since February
2000. From June 1995 to February 2000, Mr. Rowe served as Vice President, Human
Resources at Trident Microsystems, a
 
                                       38

<PAGE>   41
 
multimedia semiconductor company. From May 1994 to June 1995, he served as Vice
President, Human Resources at OPTi Inc., an semiconductor company. Mr. Rowe
received a M.A. in Education Administration from San Jose State University, a
M.A. in Speech Pathology from Chico State University and a J.D. from Lincoln
University.
 
     David Tarpley has served as Vice President, Worldwide Sales since November
1996. From           1993 to November 1996, Mr. Tarpley served as Vice
President, Worldwide Sales with HLD, Inc., an electronic design automation
company. Mr. Tarpley received a B.S. in Business Administration from University
of California at Berkeley and a M.B.A. from California State University
Fullerton.
 
     B.J. Cassin has served as a director since November 1995. Mr. Cassin has
been a private venture capital investor since 1979. Previously, he co-founded
Xidex Corporation, a manufacturer of data storage media in 1969. Mr. Cassin is
chairman of the board of directors of Cerus Corporation, a medical device
company and a director of Symphonix Devices, Inc., a medical device company. Mr.
Cassin holds an A.B. in Economics from Holy Cross College.
 
     Donald L. Lucas has served as a director since May 1999. He has been a
venture capitalist since 1960. He also serves as a director of Cadence Design
Systems, Inc., an electronic design automation company, Coulter Pharmaceutical,
Inc., a pharmaceutical company, Macromedia, Inc., a software company, Oracle
Corporation, an information management software company, Preview Systems, Inc.,
a infrastructure software company, Transcend Services, Inc., a medical services
company, and Tricord Systems, Inc., a storage system management software
company. Mr. Lucas holds a B.A. in Economics and a Masters in Business
Administration from Stanford University.
 
     Lucio L. Lanza has served as a director since November 1995. Mr. Lanza
joined U.S. Venture Partners, a venture capital firm, in 1990 and has served as
a general partner since 1996. Mr. Lanza serves as chairman of the board of
Artisan Components, Inc., a semiconductor IP company.
 
BOARD COMPOSITION
 
     Our bylaws currently provide for a board of directors consisting of five
members. Commencing upon completion of this offering, the board of directors
will be divided into three classes, each serving staggered three-year terms:
 
     - Class I directors will include Mr. Lucas and Mr. Cassin, and their terms
       will expire at the first annual meeting of stockholders following the
       date of this prospectus;
 
     - Class II directors will include Mr. Lanza and Mr. Michaels, and their
       terms will expire at the second annual meeting of stockholders following
       the date of this prospectus; and
 
     - Class III directors will include Mr. Kibarian, whose term will expire at
       the third annual meeting of stockholders following the date of this
       prospectus.
 
As a result, only one class of directors will be elected at each annual meeting
of our stockholders, with the other classes continuing for the remainder of
their respective terms.
 
     Each officer is elected by the board of directors and serves at its
discretion. Each of our officers and directors, other than nonemployee
directors, devotes his or her full time to our affairs. Our nonemployee
directors devote the amount of time to our affairs as is necessary to discharge
their duties. There are no family relationships among any of our directors or
officers.
 
BOARD COMMITTEES
 
     We have established an audit committee and a compensation committee.
 
Audit Committee
 
     The audit committee reviews our internal accounting procedures and
considers and reports to the board of directors with respect to other auditing
and accounting matters, including the selection of our
 
                                       39

<PAGE>   42
 
independent auditors, the scope of annual audits, fees to be paid to our
independent auditors and the performance of our independent auditors. The audit
committee currently consists of Mr. Lucas, Mr. Lanza and Mr. Cassin.
 
Compensation Committee
 
     The compensation committee reviews and recommends to the board of directors
the salaries, benefits and stock option grants of all employees, consultants,
directors and other individuals compensated by us. The compensation committee
also administers our stock option and other employee benefits plans. The
compensation committee currently consists of Mr. Cassin and Mr. Lanza.
 
DIRECTOR COMPENSATION
 
     Our directors do not currently receive any compensation for serving on the
board of directors, although they are reimbursed for reasonable travel expenses
incurred in connection with attending board of directors and committee meetings.
In May 2000, we issued options to purchase 75,000 shares of common stock to Mr.
Lucas, at an exercise purchase price of $1.00 per share, one-quarter of the
shares vest on the 12 month anniversary of the vesting commencement date and
1/48 of the total number of shares subject to the option vest each month
thereafter, provided that Mr. Lucas remains one of our directors. After the
completion of this offering, any new directors will receive an initial option to
purchase 30,000 shares of common stock and all our directors will receive on an
annual basis options to purchase 7,500 shares of common stock. Please see
"Management -- Benefit Plans -- 2000 Stock Plan."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The compensation committee makes all compensation decisions. Our
compensation committee currently consists of Mr. Cassin and Mr. Lanza, neither
of whom has ever been one of our officers or employees. Prior to the formation
of the compensation committee in 1995, our board of directors made decisions
relating to compensation of our executive officers. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more of its executive officers serving as a member
of our board of directors or compensation committee.
 

EXECUTIVE COMPENSATION
 
     The following table sets forth information regarding the compensation that
we paid during the fiscal year ended December 31, 1999 to our Chief Executive
Officer and our four other most highly compensated officers who earned more than
$100,000 during that fiscal year. All option grants were made under our 1997
stock plan. Amounts listed under "Other Annual Compensation" represent the
dollar value of commissions earned. The amounts listed under "All Other
Compensation" represent the dollar value of
 
                                       40

<PAGE>   43
 
term life insurance paid by us on behalf of the named executive officer during
the fiscal year ended December 31, 1999. There is no cash surrender value under
the life insurance policy.
 
                           SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                                              LONG-TERM
                                                                             COMPENSATION
                                                                                AWARDS
                                                ANNUAL COMPENSATION          ------------
                                         ---------------------------------    SECURITIES
                                                              OTHER ANNUAL    UNDERLYING     ALL OTHER
      NAME AND PRINCIPAL POSITION         SALARY     BONUS    COMPENSATION     OPTIONS      COMPENSATION
      ---------------------------        --------   -------   ------------   ------------   ------------
<S>                                      <C>        <C>       <C>            <C>            <C>
John K. Kibarian.......................  $120,000   $15,000           --            --          $321
  Chief Executive Officer and President
David Tarpley..........................   100,240        --     $104,851        80,000           327
  Vice President, Worldwide Sales
David A. Joseph........................   160,240     1,450           --        50,000           327
  Vice President, Products and Methods
P.K. Mozumder..........................   150,240     6,200           --            --           327
  Vice President, Integration Practice
P. Steven Melman.......................   150,240     4,600           --            --           327
  Chief Financial Officer and Vice
     President, Finance and
     Administration
</TABLE>

 
Option Grants in 1999
 
     The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four most highly compensated
executive officers during the year ended December 31, 1999.
 

<TABLE>
<CAPTION>
                                                INDIVIDUAL GRANTS                         POTENTIAL REALIZABLE
                           -----------------------------------------------------------      VALUE AT ASSUMED
                                               PERCENT OF                                 ANNUAL RATES OF STOCK
                              NUMBER OF      TOTAL OPTIONS                               PRICE APPRECIATION FOR
                             SECURITIES        GRANTED TO     EXERCISE OR                      OPTION TERM
                             UNDERLYING       EMPLOYEES IN    BASE PRICE    EXPIRATION   -----------------------
          NAME             OPTIONS GRANTED    FISCAL YEAR     (PER SHARE)      DATE          5%          10%
          ----             ---------------   --------------   -----------   ----------   ----------   ----------
<S>                        <C>               <C>              <C>           <C>          <C>          <C>
John K. Kibarian.........          --               --              --            --           --           --
David Tarpley............      80,000             10.7%          $0.25       1/27/09      $12,578      $31,875
David A. Joseph..........      50,000              6.7            0.25       5/20/09        7,861       19,922
P.K. Mozumder............          --               --              --            --           --           --
P. Steven Melman.........          --               --              --            --           --           --
</TABLE>

 
     We have never granted any stock appreciation rights. All option grants were
made under our 1997 stock plan. The exercise price per share was equal to the
fair market value of the common stock on the date of grant as determined by the
board of directors. Percentage of total options is based on an aggregate of
746,500 shares of common stock granted under the 1997 stock plan in the year
ended December 31, 1999. The potential realizable value is calculated based on
the term of the ten-year option and assumed rates of stock appreciation of 5%
and 10%, compounded annually. These assumed rates comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock. The options shown in this table
vest at a rate of 1/4 of the common stock subject to the option on the first
anniversary of the date of grant and thereafter 1/48 of the total number of the
option shares vest monthly as long as the optionee remains an employee,
consultant or director. The options granted to Mr. Tarpley were fully vested on
the date of grant.
 
                                       41

<PAGE>   44
 
1999 Fiscal Year-End Option Values
 
     The following table provides summary information with respect to our chief
executive officer and our four other most highly compensated executive officers
concerning:
 
     - the shares of common stock acquired in 1999;
 
     - the value realized upon exercise of stock options in 1999; and
 
     - the number and value of unexercised options as of December 31, 1999.
 
The value was calculated by determining the difference between the fair market
value of underlying securities and the exercise price. The fair market value of
our common stock on December 31, 1999 was $0.35 per share as determined by our
Board of Directors. There was no public market for the common stock on December
31, 1999.
 

<TABLE>
<CAPTION>
                                                             NUMBER OF SECURITIES
                                                            UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                                  OPTIONS AT              IN-THE-MONEY OPTIONS AT
                                   SHARES                      DECEMBER 31, 1999             DECEMBER 31, 1999
                                 ACQUIRED ON    VALUE     ---------------------------   ---------------------------
             NAME                 EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
             ----                -----------   --------   -----------   -------------   -----------   -------------
<S>                              <C>           <C>        <C>           <C>             <C>           <C>
John K. Kibarian...............        --        --             --           --               --           --
David Tarpley..................    80,000         $0            --           --               --           --
David Joseph...................    50,000         0             --           --               --           --
P.K. Mozumder..................        --        --             --           --               --           --
P. Steven Melman...............        --        --             --           --               --           --
</TABLE>

 
BENEFIT PLANS
 
1996 Stock Option Plan
 
     Our 1996 Stock Option Plan, or the 1996 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or the Code, and for the granting to
employees, directors and consultants of nonstatutory stock options. The 1996
Plan was approved by the board of directors in January of 1996 and by our
stockholders in February of 1996. The board of directors approved an amendment
to the 1996 Plan in August 1996 to allow grants to consultants, which amendment
did not require stockholder approval. Unless terminated sooner, the 1996 Plan
will terminate automatically in 2006. As of June 30, 2000, a total of 1,097,551
shares of common stock were reserved for issuance pursuant to the 1996 Plan of
which options to purchase 28,126 were outstanding and none were available for
grant.
 
     The 1996 Plan may be administered by the board of directors or a committee
of the board of directors, which committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares, the exercisability thereof, and the form of consideration
payable upon exercise. In March 2000, the administrator amended the 1996 Plan
exercise practices to allow for the early exercise of unvested shares by all
optionees. The board of directors has the authority to amend, suspend or
terminate the 1996 Plan, provided that the action may not adversely affect any
share of common stock previously issued and sold or any option previously
granted under the 1996 Plan.
 
     Options granted under the 1996 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the 1996 Plan generally must be
exercised within three months of the optionee's separation of service from PDF,
or within twelve months of the optionee's termination by death or disability,
but in no event later than the expiration of the option's ten year term. The
exercise price of all incentive stock options granted under the 1996 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of
 
                                       42

<PAGE>   45
 
our outstanding capital stock, the exercise price of any incentive or
nonstatutory stock option granted must equal at least 110% of the fair market
value on the date of grant and the term of any incentive stock option must not
exceed five years. The exercise price of a nonstatutory option granted to any
other individual must equal at least 85% of the fair market value on the date of
grant. The term of all other options granted under the 1996 Plan may not exceed
ten years.
 
     The 1996 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation unless the administrator decides that the optionees shall have the
right to exercise some or all of the unvested shares. If each outstanding option
is made exercisable in lieu of substitution or assumption as described in the
preceding sentence, the administrator shall notify the optionees that each
option shall be exercisable for a period of thirty days from the date of such
notice and that the option shall otherwise terminate upon the expiration of such
period.
 
     Following adoption of the 1997 Stock Plan in September 1997 by the board of
directors, the 1996 Plan was effectively terminated and no additional grants
could be issued under the 1996 Plan.
 
1997 Stock Plan
 
     Our 1997 Stock Plan, or the 1997 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, directors
and consultants of nonstatutory stock options and stock purchase rights. The
1997 Plan was approved by the board of directors and stockholders in September
1997. The board of directors approved an amendment to the 1997 Plan in December
1999, and the stockholders approved this amendment in January of 2000. Unless
terminated sooner, the 1997 Plan will terminate automatically in 2007. As of
June 30, 2000, a total of 8,402,449 shares of common stock were reserved for
issuance pursuant to the 1997 Plan of which options to purchase 477,128 shares
were outstanding and 2,740,572 were available for grant.
 
     The 1997 Plan may be administered by the board of directors or a committee
of the board of directors, which committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares, the exercisability thereof, and the form of consideration
payable upon exercise. In March 2000, the Administrator amended the 1997 Plan
exercise practices to allow for the early exercise of unvested shares by all
optionees. The board of directors has the authority to amend, suspend or
terminate the 1997 Plan, provided that the action may not adversely affect any
share of common stock previously issued and sold or any option previously
granted under the 1997 Plan. On June 30, 2000, the board of directors form a
Special Option Committee to serve as Administrator under the 1997 Plan for the
purposes of granting options to purchase up to 35,000 shares of common stock to
any new, non-executive employees. The Special Option Committee consists of Mr.
Kibarian and Mr. Melman.
 
     Options and stock purchase rights granted under the 1997 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 1997 Plan must generally be exercised within three months of
the optionee's separation of service from us, or within twelve months of the
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. Options granted under the 1997 Plan
generally may be exercised immediately after the grant date, but to the extent
the shares subject to the options are not vested as of the date of exercise, we
retain a right to repurchase any shares that remain unvested at the time of the
optionee's termination of employment by paying an amount equal to the exercise
price times the number of unvested shares. Options granted under the 1997 Plan
generally vest at the rate of 1/4 of the total number of shares subject to the
options on the twelve month anniversary of the date of grant and 1/48 of the
total number of shares subject to the options vest each month thereafter. In the
case of stock purchase rights, unless the administrator determines otherwise,
the
 
                                       43

<PAGE>   46
 
Restricted Stock Purchase Agreement shall grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service for any reason, including death or disability. The purchase price for
Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
determined by the administrator, which is generally equal to 25% per year. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the common stock on the
date of grant, and any nonstatutory option must have an exercise price at least
equal to 85% of the fair market value of the common stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive or nonstatutory stock option or stock purchase rights granted
must equal at least 110% of the fair market value on the date of grant for
options and 100% of the fair market value on the date of grant in the case of
stock purchase rights and the term of any incentive stock option must not exceed
five years. The term of all other options granted under the 1997 Plan may not
exceed ten years.
 
     The 1997 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If each outstanding option is not assumed or substituted as
described in the preceding sentence, the administrator shall notify the
optionees that each option shall terminate upon the consummation of the merger
or sale of assets.
 
     Effective as of the date of this prospectus, no new grants will be made
from the 1997 Plan.
 
2000 Stock Plan
 
     Our 2000 Stock Plan, or the 2000 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, directors
and consultants of nonstatutory stock options and stock purchase rights. The
2000 Plan was approved by the board of directors in August of 2000 and by the
stockholders in September of 2000. A total of 3,000,000 shares of common stock
has been reserved for issuance under the 2000 Plan, none of which have been
issued as of the date of this offering. The number of shares reserved for
issuance under the Purchase Plan will be increased on the first day of each of
our fiscal years by the lesser of:
 
     - 3,000,000 shares;
 
     - 5% of our outstanding common stock on the last day of the immediately
       preceding fiscal year; or
 
     - the number of shares determined by the board of directors.
 
     The 2000 Plan may be administered by the board of directors or a committee
of the board of directors, which committee shall, in the case of options
intended to qualify as the "performance-based compensation" within the meaning
of Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares, the exercisability thereof, and the form of consideration
payable upon exercise. The board of directors has the authority to amend,
suspend or terminate the 2000 Plan, provided that the action may not adversely
affect any share of common stock previously issued and sold or any option
previously granted under the 2000 Plan.
 
     Options and stock purchase rights granted under the 2000 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 2000 Plan must generally be exercised within three months of
the optionee's separation of service, or within twelve months of the optionee's
termination by death or disability, but in no event later than the expiration of
the option's ten year term. Options granted under the 2000 Plan generally may be
exercised immediately after the grant date, but to the extent the shares
 
                                       44

<PAGE>   47
 
subject to the options are not vested as of the date of exercise, we retain a
right to repurchase any shares that remain unvested at the time of the
optionee's termination of employment by paying an amount equal to the exercise
price times the number of unvested shares. Options granted under the 2000 Plan
generally vest at the rate of 1/4 of the total number of shares subject to the
options on the twelve month anniversary of the date of grant and 1/48 of the
total number of shares subject to the options vest each month thereafter. In the
case of Stock purchase rights, unless the administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service for any reason, including death or disability. The purchase price for
Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
determined by the administrator which is generally equal to 25% per year. The
exercise price of all incentive stock options granted under the 2000 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. The exercise price of nonstatutory stock options granted under the 2000
Plan is determined by the administrator. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option or
must equal at least 110% of the fair market value on the date of grant for
options and the term of any incentive stock option must not exceed five years.
The term of all other options granted under the 2000 Plan may not exceed ten
years. For options granted on or after the effective date of registration of any
class of equity security of PDF and prior to six months after the termination of
such registration, the exercise price will be no less than the fair market value
of the common stock on the date of grant.
 
     The 2000 Plan provides for the automatic grant of nonstatutory stock
options to nonemployee directors. The director option component will not become
effective until completion of this offering. Each nonemployee director who first
becomes a board member after the date of this prospectus will be granted options
for 30,000 shares. In addition, each nonemployee director will be granted
options for 7,500 shares annually. These automatic grants shall vest in
accordance with the vesting schedule set forth above, however, in the event of a
change in control, the options shall become 100% vested.
 
     The 2000 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation, unless the administrator decides in its sole discretion that
optionees have the right to exercise some or all of the stock in lieu of
substitution or assumption. If each outstanding option is not assumed or
substituted as described in the preceding sentence, the administrator shall
provide notify the optionees that each option shall be exercisable for a period
of fifteen days from the date of such notice and the option will terminate upon
expiration of such period.
 
2000 Employee Stock Purchase Plan
 
     The 2000 Employee Stock Purchase Plan, or Purchase Plan, was adopted by the
board of directors in August 2000 and approved by the stockholders in September
2000. A total of 300,000 shares of common stock has been reserved for issuance
under the Purchase Plan, none of which have been issued as of the date of this
offering. The number of shares reserved for issuance under the Purchase Plan
will be increased on the first day of each of our fiscal years by the lesser of:
 
     - 675,000 shares;
 
     - 2% of our outstanding common stock on the last day of the immediately
       preceding fiscal year; or
 
     - the number of shares determined by the board of directors.
 
     The Purchase Plan becomes effective on the date of this prospectus. Unless
terminated earlier by the board of directors, the Purchase Plan shall terminate
in December 31, 2010.
 
     The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods, other than the first offering
period, commencing on January 1 and July 1 of each year. Each offering period
will consist of
 
                                       45

<PAGE>   48
 
four consecutive purchase periods of six months' duration, and at the end of
each six month period an automatic purchase will be made for participants. The
initial offering period is expected to commence on the date of this offering and
end on December 31, 2000; the initial purchase period is expected to begin on
the date of this offering. The Purchase Plan will be administered by the board
of directors or by a committee appointed by the board. Our employees (including
officers and employee directors), or of any of our majority-owned subsidiaries
designated by the board, are eligible to participate in the Purchase Plan if we
or our subsidiary employs them for at least 20 hours per week and more than five
months per year. Under the Purchase Plan, eligible employees may purchase common
stock through payroll deductions, which in any event may not exceed 10% of an
employee's compensation, at a price equal to the lower of 85% of the fair market
value of the common stock at the beginning of each offering period or at the end
of each purchase period. Employees may end their participation in the Purchase
Plan at any time during an offering period and participation ends automatically
on termination of employment.
 
     Under the Purchase Plan no employee shall be granted an option if
immediately after the grant the employee would own stock and/or hold outstanding
options to purchase stock equaling 5% or more of the total voting power or value
of all classes of our stock or its subsidiaries. In addition, no employee shall
be granted an option under the Purchase Plan if the option would permit the
employee to purchase stock under all our employee stock purchase plans and our
subsidiaries in an amount that exceeds $25,000 of fair market value for each
calendar year in which the option is outstanding at any time. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in the Purchase Plan
shall automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new twenty-four month offering period
beginning on the first business day following the purchase date.
 
     The Purchase Plan provides that in the event of our merger or consolidation
with or into another corporation or a sale of all or substantially all of our
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right will be substituted by the successor corporation unless the
board of directors shortens any ongoing offering period so that employees'
rights to purchase stock under the Purchase Plan are exercised prior to
consummation of the transaction. The board of directors has the power to amend
or terminate the Purchase Plan and to change or terminate offering periods as
long as any action does not adversely affect any outstanding rights to purchase
stock under the Purchase Plan, however the board may amend or terminate the
Purchase Plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
We have not issued any shares under the Purchase Plan to date.
 
401(k) PLAN
 
     We sponsor a 401(k) plan in which eligible employees may participate. The
401(k) plan is intended to qualify under Sections 401(a) and 401(k) of the Code.
Contributions to the 401(k) plan and income earned on such contributions are not
taxable to employees until withdrawn from the 401(k) plan. Subject to
restrictions imposed by the Code on highly compensated employees, employees
generally may defer up to 15% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,500 for the 2000 calendar year, and to
have the amount of such reduction contributed to the 401(k) plan. The 401(k)
plan permits, but does not require, additional matching contributions from us to
the 401(k) plan. Participants' salary reduction contributions are fully vested
at all times. Each participant's interest in their employer discretionary
contributions and matching contributions generally vest in accordance with a
four-year graduated vesting schedule. Participants may receive loans and
hardship distributions while in service and are eligible for a distribution from
the 401(k) plan upon separation from service with us. All contributions are tax
deductible by us. The trustee under the 401(k) plan, at the direction of
participants, invests the assets of the 401(k) plan in any of seven designated
investment options. To date, we have not made any matching contributions to the
401(k) plan. The 401(k) plan may be amended or terminated by us at any time, and
in our sole discretion.
 
                                       46

<PAGE>   49
 
CHANGE OF CONTROL ARRANGEMENTS
 
     On July 9, 2000, we entered into a letter agreement with Mr. Melman to act
as our Vice President, Finance and Administration and Chief Financial Officer.
This letter agreement provides that in the event Mr. Melman is terminated
without cause any time after his one-year anniversary with us and there is no
change of control, Mr. Melman will receive six months accelerated vesting of
shares purchased pursuant to an option or restricted stock purchase agreement.
In the event of a change of control, Mr. Melman will receive 24 months
accelerated vesting, regardless of whether his employment is terminated. Change
of control is defined as an event whereby a party or group of parties, different
from those in control of PDF at the time of Mr. Melman's offer, attains a
majority voting right in PDF. Other than as described above, in general, our
employees are not subject to written employment agreements.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
     As permitted by the Delaware general corporation law, we have included a
provision in our certificate of incorporation to eliminate the personal
liability of our officers and directors for monetary damages for breach or
alleged breach of their fiduciary duties as officers or directors, other than in
cases of fraud or other willful misconduct.
 
     In addition, our bylaws provide that we are required to indemnify our
officers and directors even when indemnification would otherwise be
discretionary, and we are required to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which they
may be indemnified. We have entered into indemnification agreements with our
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware general
corporation law. The indemnification agreements require us to indemnify our
officers and directors against liabilities that may arise by reason of their
status or service as officers and directors other than for liabilities arising
from willful misconduct of a culpable nature, to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified, and to obtain our directors' and officers' insurance if available
on reasonable terms. We expect to obtain directors' and officers' liability
insurance effective upon completion of this offering.
 
     At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We believe that our
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
 
                                       47

<PAGE>   50
 
                           RELATED-PARTY TRANSACTIONS
 
SALES OF PREFERRED STOCK SECURITIES
 
     On December 4, 1995, we sold 8,750,000 shares of Series A preferred stock
at a price of $0.40 per share to a group of private investors that included the
directors, officers and 5% stockholders listed below. On August 4, 2000, we sold
526,315 shares of Series B preferred stock at a price of $9.50 per share to a
group of private investors that included the directors, officers and 5%
stockholders listed below. Upon completion of this offering, each outstanding
share of Series A and Series B preferred stock will automatically convert into
one share of common stock. Listed below are the directors, executive officers,
and stockholders who beneficially own 5% or more of our securities who
participated in these financings.
 

<TABLE>
<CAPTION>
                                                          SERIES A     SERIES B     AGGREGATE CASH
                                                          PREFERRED    PREFERRED    CONSIDERATION
                                                          ---------    ---------    --------------
<S>                                                       <C>          <C>          <C>
Entities associated with U.S. Venture Partners..........  3,750,000     131,579       $2,750,000
Telos Venture Partners, L.P.............................  3,750,000          --        1,500,000
B.J. Cassin.............................................    812,500          --          325,000
Donald L. Lucas.........................................    187,500      47,368          524,996
</TABLE>

 
     U.S. Venture Partners IV, L.P., U.S.V.P. Entrepreneur Partners II, L.P.,
Second Ventures II, L.P. and 2180 Associates Fund are affiliated entities and
together are considered a greater than 5% stockholder. Lucio L. Lanza, one of
our directors, is a partner of U.S. Venture Partners. Mr. Lanza disclaims any
beneficial ownership of the securities held by those entities, except to the
extent of his proportional interest in the entities. This table also includes
62,500 shares that are held in the name of Cassin Family Partners, A California
Limited Partnership of which Mr. Cassin is a General Partner and 750,000 shares
held in the name of The Cassin Family Trust U/D/T dtd 1/31/96. Mr. Lucas is the
trustee of the Richard M. Lucas Foundation which holds 187,500 shares of Series
A preferred stock. Mr. Lucas disclaims beneficial ownership of these shares
except for 36,000 shares which the foundation has agreed to assign to him. This
table also includes 31,579 shares of Series B preferred stock held in the name
of Donald L. Lucas Profit Sharing Trust and 15,789 shares held in the name of
Teton Capital Company, which are beneficially owned by Mr. Lucas.
 
LOANS TO, AND OTHER ARRANGEMENTS WITH, OFFICERS AND DIRECTORS
 
     We have an early exercise provision under our 1996 Stock Option Plan and
1997 Stock Plan which allows our optionholders and holders of stock purchase
rights to purchase shares of stock underlying unvested options, subject to our
own repurchase right. In addition, we have an employee loan program which allows
employees to borrow the full exercise price of their options or stock purchase
rights from us by signing a full recourse promissory note bearing interest at
the applicable federal rate in the month of purchase. The following officers
have participated in the loan program:
 
     - In connection with his purchase of 1,896,145 shares of common stock on
       December 1, 1995, we loaned approximately $15,000 to Thomas Cobourn under
       a four year, 5.83% promissory note. The term of this note was extended
       for two years in 1999 at a rate of 5.62%. In connection with his purchase
       of 40,000 shares of common stock on July 14, 2000, we loaned $80,000 to
       Mr. Cobourn under a four year, 6.62% promissory note. These notes were
       secured by pledges of the shares of common stock purchased. At July 31,
       2000 his indebtedness plus accrued interest totaled approximately
       $100,000.
 
     - In connection with his purchase of 2,472,775 shares of common stock on
       December 1, 1995, we loaned approximately $20,000 to Kimon Michaels under
       a four year, 5.83% promissory note. The term of this note was extended
       for two years in 1999 at a rate of 5.93%. In connection with his purchase
       of 60,000 shares of common stock on July 14, 2000, we loaned $120,000 to
       Mr. Michaels under a four year, 6.62% promissory note. These notes were
       secured by pledges of the shares of common stock purchased. At July 31,
       2000 his indebtedness plus accrued interest totaled approximately
       $146,000.
 
                                       48

<PAGE>   51
 
     - In connection with his purchase of 300,000 shares of common stock on
       August 25, 1998, we loaned approximately $30,000 to P. Steven Melman
       under a four year, 5.47% promissory note. In connection with his purchase
       of 50,000 shares of common stock on July 14, 2000, we loaned $100,000 to
       Mr. Melman under a four year, 6.62% promissory note. These notes were
       secured by pledges of the shares of common stock purchased. At July 31,
       2000 his indebtedness plus accrued interest totaled approximately
       $134,000.
 
     - In connection with his purchase of 250,000 shares of common stock on
       October 5, 1998, we loaned $25,000 to P.K. Mozumder under a four year,
       5.47% promissory note. In connection with his purchase of 60,000 shares
       of common stock on July 13, 2000, we loaned $120,000 to Mr. Mozumder
       under a four year, 6.62% promissory note. These notes were secured by
       pledges of the shares of common stock purchased. At July 31, 2000 his
       indebtedness plus accrued interest totaled approximately $148,000.
 
     - In connection with his purchase of 300,000 shares of common stock on
       December 4, 1998 we loaned $75,000 to David A. Joseph under a four year,
       4.46% promissory note. In connection with his purchase of 50,000 shares
       on September 20, 1999 we loaned $12,500 to David Joseph under a four
       year, 4.46% promissory note and in connection with his purchase of 80,000
       shares of common stock on July 14, 2000, we loaned $160,000 to Mr. Joseph
       under a four year, 6.62% promissory note. These notes were secured by
       pledges of the shares of common stock purchased. At July 31, 2000 his
       indebtedness plus accrued interest totaled approximately $254,000.
 
     - In connection with his purchase of 175,000 shares of common stock on
       February 24, 2000, we loaned approximately $61,000 to W. Steven Rowe
       under a four year, 6.69% promissory note. This note was secured by a
       pledge of the shares of common stock purchased. At July 31, 2000 his
       indebtedness plus accrued interest totaled approximately $63,000.
 
     - In connection with his purchase of 300,000 shares of common stock on July
       14, 2000, we loaned $600,000 to John K. Kibarian under a four year, 6.62%
       promissory note. These notes were secured by pledges of the shares of
       common stock purchased. At July 31, 2000 his indebtedness plus accrued
       interest totaled approximately $602,000.
 
     - In connection with his purchase of 40,000 shares of common stock on July
       13, 2000, we loaned $80,000 to David Tarpley under a four year, 6.62%
       promissory note. This note was secured by a pledge of the shares of
       common stock purchased. As of July 31, 2000 his indebtedness plus accrued
       interest totaled approximately $80,000.
 
OTHER TRANSACTIONS
 
     We have granted options to some of our officers and directors. Please see
"Management -- Executive Compensation," "Management -- Director Compensation"
and "Principal Stockholders."
 
     We have entered into indemnification agreements with each of our executive
officers and directors. Please see "Management -- Limitation of Liability and
Indemnification Matters."
 
     Holders of preferred stock are entitled to registration rights with respect
to common stock issued or issuable upon conversion of the preferred stock.
Please see "Description of Capital Stock -- Registration Rights."
 
     We believe that all related-party transactions described above were made on
terms no less favorable to us than could have been otherwise obtained from
unaffiliated third parties.
 
                                       49

<PAGE>   52
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth information known to us regarding beneficial
ownership of our common stock as of August 4, 2000 by:
 
     - each person known by us to beneficially own more than 5% of the
       outstanding common stock;
 
     - each of our executive officers listed on the Summary Compensation Table
       under "Management;"
 
     - each of our directors; and
 
     - all of our executive officers and directors as a group.
 
     Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to securities. All shares of common stock subject to options exercisable
within 60 days following June 30, 2000 are deemed to be outstanding and
beneficially owned by the persons holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding and
beneficially owned for the purpose of computing the percentage ownership of any
other person. Except as otherwise indicated the address for each person listed
as a director or officer is c/o PDF Solutions, Inc., 333 West San Carlos Street,
Suite 700, San Jose, CA 95110. Unless otherwise indicated in the footnotes, each
person or entity has sole voting and investment power, or shares such powers
with his or her spouse, with respect to the shares shown as beneficially owned.
 
     Percentage of beneficial ownership prior to this offering is based on
25,070,714 common stock outstanding as of August 4, 2000, after giving effect to
the conversion of the outstanding preferred stock. Percentage of beneficial
ownership after this offering is based on           shares of common stock to be
outstanding after completion of this offering, assuming no exercise of the
underwriters' over-allotment option.
 
                                       50

<PAGE>   53
 

<TABLE>
<CAPTION>
                                                                              PERCENTAGE OF SHARES
                                                                                   OUTSTANDING
                                                               NUMBER OF      ---------------------
                                                                 SHARES       PRIOR TO      AFTER
                                                              BENEFICIALLY      THIS        THIS
                      BENEFICIAL OWNER                           OWNED        OFFERING    OFFERING
                      ----------------                        ------------    --------    ---------
<S>                                                           <C>             <C>         <C>
5% STOCKHOLDERS:
Funds affiliated with U.S. Venture Partners(1)..............    3,881,579       15.4%
  2180 Sand Hill Road
  Suite 300
  Menlo Park, CA 94025
Telos Venture Partners, L.P.................................    3,750,000       14.9
  2350 Mission College Boulevard
  Suite 1070
  Santa Clara, CA 95054
EXECUTIVE OFFICERS AND DIRECTORS:
John K. Kibarian(2).........................................    4,173,635       16.5
Lucio L. Lanza(3)...........................................    3,881,579       15.4
  3000 Sand Hill Road
  Building 3, Suite 210
  Menlo Park, CA 94025
Kimon Michaels(4)...........................................    2,532,775       10.1
Thomas Cobourn(5)...........................................    1,936,145        7.7
B.J. Cassin(6)..............................................      812,500        3.4
  2180 Sand Hill Road, Suite 300
  Menlo Park, CA 94025
David A. Joseph(7)..........................................      430,000        1.7
David Tarpley(8)............................................      370,000        1.5
P. Steven Melman(9).........................................      350,000        1.4
P.K. Mozumder(10)...........................................      310,000        1.2
Donald L. Lucas(11).........................................      309,868        1.2
  3000 Sand Hill Road
  Building 3, Suite 210
  Menlo Park, CA 94025
W. Steven Rowe(12)..........................................      175,000          *
All executive officers and directors as a group (11            15,281,502       59.5
  persons)..................................................
</TABLE>

 
---------------
  *  Less than 1%
 
 (1) U.S. Venture Partners IV, L.P., U.S.V.P. Entrepreneur Partners II, L.P.,
     Second Ventures II, L.P. and 2180 Associates Fund are affiliated entities
     and together are considered a greater than 5% stockholder. Lucio L. Lanza,
     one of our directors, is a partner of U.S. Venture Partners. Mr. Lanza
     disclaims any beneficial ownership of the securities held by those
     entities, except to the extent of his proportional interest in the
     entities.
 
 (2) Includes 5,000 shares each issued in the names of Johanna Aznif
     Chilingarian, as custodian for Ani Maritsa Chilingarian under the
     Massachusetts Uniform Transfers to Minors Act and Johanna Aznif
     Chilingarian, as custodian for Berj Krikor Chilingarian under the
     Massachusetts Uniform Transfers to Minors Act, each of whom are family
     members of Mr. Kibarian. Mr. Kibarian disclaims beneficial ownership of
     these shares. Includes 293,751 unvested shares subject to our right to
     repurchase upon termination of employment.
 
 (3) Includes 3,738,750 shares of Series A preferred stock held by U.S. Venture
     Partners IV, L.P., U.S.V.P. Entrepreneur Partners II, L.P. , Second
     Ventures II, L.P. and 2180 Associates Fund are all affiliates of U.S.
     Venture Partners, of which Mr. Lanza is a partner. Mr. Lanza disclaims any
 
                                       51

<PAGE>   54
 
     beneficial ownership of the securities held by those entities, except to
     the extent of his proportional interest in the entities.
 
 (4) Includes 57,501 unvested shares subject to our right to repurchase upon
     termination of employment.
 
 (5) Includes 38,334 unvested shares subject to our right to repurchase upon
     termination of employment.
 
 (6) Includes 62,500 shares held in the name of Cassin Family Partners, A
     California Limited Partnership and 750,000 shares held in the name of The
     Cassin Family Trust U/D/T dtd 1/31/96.
 
 (7) Includes 290,418 unvested shares subject to our right to repurchase upon
     termination of employment.
 
 (8) Includes 8,000 shares each issued in the names of Scott David Tarpley,
     Andrew Neil Tarpley and Jeffrey John Tarpley, each of whom is an adult
     child of Mr. Tarpley. Mr. Tarpley disclaims beneficial ownership of these
     shares. Includes 55,268 unvested shares subject to our right to repurchase
     upon termination of employment.
 
 (9) Includes 200,002 unvested shares subject to our right to repurchase upon
     termination of employment.
 
(10) Includes 174,585 unvested shares subject to our right to repurchase upon
     termination of employment.
 
(11) Includes 187,500 shares held by the Richard M. Lucas Foundation of which
     Mr. Lucas is a trustee. Mr. Lucas disclaims beneficial ownership of these
     shares except as to 36,000 shares which the foundation has agreed to assign
     to him. Also includes 31,579 shares held in the name of the Donald L. Lucas
     Profit Sharing Trust and 15,789 shares held in the name of Teton Capital
     Company. Also includes 75,000 unvested shares subject to our right to
     repurchase upon termination of service.
 
(12) Includes 175,000 unvested shares subject to our right to repurchase upon
     termination of employment.
 
                                       52

<PAGE>   55
 

                          DESCRIPTION OF CAPITAL STOCK
 
     Upon the completion of this offering, we will be authorized to issue
75,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000
shares of undesignated preferred stock, $0.0001 par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
 
COMMON STOCK
 
     As of June 30, 2000, there were 24,348,194 shares of common stock
outstanding, as adjusted to give effect to issuance of 526,315 shares of Series
B preferred stock on August 4, 2000 and the automatic conversion of all
outstanding shares of preferred stock upon completion of this offering, held of
record by approximately 132 stockholders. Options and rights to purchase
1,236,744 shares of common stock were also outstanding. There will be
shares of common stock outstanding, assuming no exercise of the underwriter's
overallotment option or exercise of outstanding options under our stock option
plans after June 30, 2000, after giving effect to the sale of the shares in this
offering.
 
     The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior distribution rights
of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
 
PREFERRED STOCK
 
     Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 9,276,315 common stock and automatically retired.
Thereafter, the board of directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock,
$0.0001 par value, in one or more series. The board of directors will also have
the authority to designate the rights, preferences, privileges and restrictions
of each such series, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series.
 
     The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of us without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
some circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.
 
WARRANTS
 
     At June 30, 2000, there were no warrants outstanding to purchase our common
or preferred stock.
 
REGISTRATION RIGHTS
 
     The holders of 18,009,314 shares of common stock (assuming the conversion
of all outstanding preferred stock upon completion of this offering) or their
transferees are entitled to rights with respect to the registration of such
shares under the Securities Act. These rights are provided under the terms of an
agreement between us and the holders of these securities. Subject to limitations
in the agreement, the holders of at least 50% of these securities then
outstanding may require, on two occasions beginning six months after the date of
this prospectus, that we use our best efforts to register these securities for
public
 
                                       53

<PAGE>   56
 
resale if Form S-3 is not available. If we register any of our common stock
either for our own account or for the account of other security holders, the
holders of registrable securities are entitled to include their shares of common
stock in that registration. A holder's right to include shares in an
underwritten registration is subject to the ability of the underwriters to limit
the number of shares included in this and other offerings, and in the case of
our initial public offering, the underwriters may preclude any participation by
holders of registrable securities. The holders of at least 50% of these
securities then outstanding may also require us, not more than once in any
twelve-month period, to register all or a portion of these securities on Form
S-3 when the use of that form becomes available to us, provided, among other
limitations, that the proposed aggregate selling price, net of any underwriters'
discounts or commissions, is at least $1.0 million. We will be responsible for
paying all registration expenses, and the holders selling their shares will be
responsible for paying all selling expenses.
 
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
 
     Provisions of Delaware law and our charter documents could make our
acquisition and the removal of incumbent officers and directors more difficult.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of us to negotiate with us first. We believe that the benefits
of increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweighs
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
 
     We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of us
without further action by the stockholders.
 
     Our Amended and Restated Certificate of Incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws provide that
special meetings of stockholders can be called only by the board of directors,
the chairman of the board, if any, the president and holders of 50% of the votes
entitled to be cast at a meeting. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the board of directors, the chairman of the board,
if any, the president or any such 50% holder. The bylaws set forth an advance
notice procedure with regard to the nomination, other than by or at the
direction of the board of directors, of candidates for election as directors and
with regard to business to be brought before a meeting of stockholders.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the common stock is Boston EquiServe.
The transfer agent's address is c/o Shareholder Services, 150 Royale Street,
Canton, MA 02021.
 
                                       54

<PAGE>   57
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
 
     Upon completion of the offering, we will have outstanding           shares
of common stock. Of these shares, the           shares sold in the offering
(plus any shares issued upon exercise of the underwriters' overallotment option)
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act, which generally includes officers, directors or 10%
stockholders.
 
     The remaining           shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of these shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
 
     Our stockholders have entered into lock-up agreements generally providing
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
swap, hedge or other arrangement that transfers, in whole or part, any of the
economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until such agreements expire or are waived. Taking into
account the lock-up agreements, and assuming Credit Suisse First Boston
Corporation does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:
 
     - Beginning on the effective date of this prospectus, only the shares sold
       in the offering will be immediately available for sale in the public
       market.
 
     - Beginning 180 days after the effective date, approximately
       shares will be eligible for sale pursuant to Rule 701 and approximately
                 additional shares will be eligible for sale pursuant to Rule
       144, of which all but           shares are held by affiliates.
 
     - An additional                shares will be eligible for sale pursuant to
       Rule 144 by                     , 2000. Shares eligible to be sold by
       affiliates pursuant to Rule 144 are subject to volume restrictions as
       described below.
 
     In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, or 180 days after the date of this
prospectus, of a person who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of: (1) one percent of the number of
shares of common stock then outstanding, which will equal approximately
               shares immediately after the offering; or (2) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
sale. Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
 
                                       55

<PAGE>   58
 
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
 
     The holders of approximately 9,276,315 shares of our common stock or their
transferees are also entitled to rights with respect to registration of their
shares of common stock for offer or sale to the public. If the holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, the sales could have a material
adverse effect on the market price for our common stock.
 
     As a result of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise until 180 days
after the effective date. Beginning 180 days after the effective date, any of
our employees, officers or directors or consultants who purchased shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
such shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
 
     In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options
exercised under any of our benefit plans after the effectiveness of such
registration statement will also be freely tradable in the public market, except
that shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resalable under Rule 701. As of June 30, 2000, there were outstanding
stock purchase rights and options for the purchase of 1,236,744 shares, of which
1,221,035 shares were exercisable. No shares have been issued to date under our
2000 Employee Stock Purchase Plan and 2000 Stock Plan. See "Shares Eligible for
Future Sale," "Management -- Benefit Plans" and "Description of Capital Stock --
Registration Rights."
 
                                       56

<PAGE>   59
 

                                  UNDERWRITING
 
     Under the terms and subject to the conditions contained in an underwriting
agreement dated                     , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Lehman Brothers Inc. and Dain Rauscher Incorporated are acting as
representatives, the following respective numbers of shares of common stock:
 

<TABLE>
<CAPTION>
                                                              NUMBER OF
                                                                SHARES
                        UNDERWRITER                           ----------
<S>                                                           <C>
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc. .......................................
Dain Rauscher Incorporated..................................
 
                                                              ----------
  Total.....................................................
                                                              ==========
</TABLE>

 
     The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
 
     We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to           additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
 
     The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $     per share. The
underwriters and selling group members may allow a discount of $     per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
 
     The following table summarizes the compensation and estimated expenses we
will pay.
 

<TABLE>
<CAPTION>
                                                     PER SHARE                           TOTAL
                                          -------------------------------   -------------------------------
                                             WITHOUT            WITH           WITHOUT            WITH
                                          OVER-ALLOTMENT   OVER-ALLOTMENT   OVER-ALLOTMENT   OVER-ALLOTMENT
                                          --------------   --------------   --------------   --------------
<S>                                       <C>              <C>              <C>              <C>
Underwriting discounts and commissions
  paid by us............................     $                $                $                $
Expenses payable by us..................     $                $                $                $
</TABLE>

 
     The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
 
     We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with a SEC a registration
statement under the Securities Act relating to, any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
our common stock, or publicly disclose the intention to make any such offer,
sale, pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
 
     Our officers, directors and some of our other stockholders have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
into or exchangeable or exercisable for any shares of our common stock, enter
into a transaction which would have the same effect, or enter into swap, hedge
or other arrangement that transfers, in whole or part, any of the economic
consequences of ownership of our common stock, whether
 
                                       57

<PAGE>   60
 
any such aforementioned transaction is to be settled by delivery of our common
stock or such other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or to enter into
any such transaction, swap, hedge or other arrangement, without, in each case,
the prior written consent of Credit Suisse First Boston Corporation for a period
of 180 days after the date of this prospectus.
 
     The underwriters have reserved for sale, at the initial public offering
price, up to        shares of common stock for employees, directors and some
other persons associated with us, who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
 
     We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
 
     We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "PDFS."
 
     Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters and will not necessarily reflect the market
price of the common stock following the offering. The principal factors that
will be considered in determining the public offering price will include:
 
     - the information in this prospectus and otherwise available to the
       underwriters;
 
     - market conditions for initial public offerings;
 
     - the history and the prospects for the industry in which we will compete;
 
     - the ability of our management;
 
     - the prospects for our future earnings;
 
     - the present state of our development and our current financial condition;
 
     - the recent market prices of, and the demand for, publicly traded common
       stock of generally comparable companies; and
 
     - the general condition of the securities markets at the time of this
       offering.
 
     We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
 
     In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act").
 
     - Stabilizing transactions permit bids to purchase the underlying security
       so long as the stabilizing bids do not exceed a specified maximum.
 
     - Over-allotment involves sales by the underwriters of shares in excess of
       the number of shares the underwriters are obligated to purchase, which
       creates a syndicate short position. The short position may be either a
       covered short position or a naked short position. In a covered short
       position, the number of shares over-allotted by the underwriters is not
       greater than the number of shares that they may purchase in the
       over-allotment option. In a naked short position, the number of shares
       involved is greater than the number of shares in the over-allotment
       option. The underwriters may close out any short position by either
       exercising their over-allotment option and/or purchasing shares in the
       open market.
 
                                       58

<PAGE>   61
 
     - Syndicate covering transactions involve purchases of the common stock in
       the open market after the distribution has been completed in order to
       cover syndicate short positions. In determining the source of shares to
       close out the short position, the underwriters will consider, among other
       things, the price of shares available for purchase in the open market as
       compared to the price at which they may purchase shares through the
       over-allotment option. If the underwriters sell more shares than could be
       covered by the over-allotment option -- a naked short position -- that
       position can only be closed out by buying shares in the open market. A
       naked short position is more likely to be created if the underwriters are
       concerned that there may be downward pressure on the price of the shares
       in the open market after pricing that could adversely affect investors
       who purchase in the offering.
 
     - Penalty bids permit the representatives to reclaim a selling concession
       from a syndicate member when the common stock originally sold by the
       syndicate member is purchased in a stabilizing or syndicate covering
       transaction to cover syndicate short positions.
 
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result, the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
 
                                       59

<PAGE>   62
 
                          NOTICE TO CANADIAN RESIDENTS
 
RESALE RESTRICTIONS
 
     The distribution of the common stock (the "Shares") in Canada is being made
only on a private placement basis exempt from the requirement that we prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Shares are made. Any resale of the Shares in Canada
must be made under applicable securities laws, which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the Shares.
 
REPRESENTATIONS OF PURCHASERS
 
     By purchasing Shares in Canada and accepting a purchase confirmation, a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
 
     - the purchaser is entitled under applicable provincial securities laws to
       purchase the Shares without the benefit of a prospectus qualified under
       those securities laws,
 
     - where required by law, that the purchaser is purchasing as principal and
       not as agent, and
 
     - the purchaser has reviewed the text above under Resale Restrictions.
 
RIGHTS OF ACTION--ONTARIO PURCHASERS
 
     The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
 
ENFORCEMENT OF LEGAL RIGHTS
 
     All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
 
NOTICE TO BRITISH COLUMBIA RESIDENTS
 
     A purchaser of Shares to whom the Securities Act (British Columbia) applies
is advised that the purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Shares
acquired by the purchaser in this offering. The report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from us. Only one report must be filed for Shares
acquired on the same date and under the same prospectus exemption.
 
TAXATION AND ELIGIBILITY FOR INVESTMENT
 
     Canadian purchasers of Shares should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Shares in
their particular circumstances and about the eligibility of the Shares for
investment by the purchaser under relevant Canadian legislation.
 
                                       60

<PAGE>   63
 
TAXATION AND ELIGIBILITY FOR INVESTMENT
 
     Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
 

                                 LEGAL MATTERS
 
     The validity of the common stock offered hereby will be passed upon for us
by Orrick, Herrington & Sutcliffe LLP, Menlo Park, California. Peter Cohn, a
partner of Orrick, Herrington & Sutcliffe LLP, is our Secretary. The
underwriters are represented by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California. As of the completion of this offering, Orrick, Herrington &
Sutcliffe LLP and partners in that firm beneficially own an aggregate of 18,026
shares of our common stock.
 

                                    EXPERTS
 
     The Consolidated Financial Statements of PDF Solutions, Inc. as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in this prospectus and the related financial statement
schedule included elsewhere in the registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
 
     The financial statements of Applied Integrated Systems and Software
Entwicklungs-, Produktions-und Vertriebs GmbH ("AISS") as of December 31, 1999
and for the year ended December 31, 1999, included in this prospectus have been
audited by Deloitte & Touche GmbH Wirtschaftsprufungsgesellschaft, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
 
                      WHERE TO FIND ADDITIONAL INFORMATION
 
     We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules. For further
information with respect to us and the common stock offered hereby, reference is
made to the Registration Statement and to the exhibits and schedules. Statements
made in this prospectus concerning the contents of any document referred to
herein are not necessarily complete. With respect to each such document filed as
an exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved. The Registration Statement and
the exhibits and schedules may be inspected without charge at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, NY 10048, and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of the Registration Statement may be obtained from the
SEC's offices upon payment of fees prescribed by the SEC. The SEC maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the site is http://www.sec.gov.
 
                                       61

<PAGE>   64
 
                              PDF SOLUTIONS, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PDF SOLUTIONS, INC.:
  Independent Auditors' Report..............................   F-2
  Consolidated Balance Sheets as of December 31, 1998 and
     1999 and June 30, 2000 (Unaudited).....................   F-3
  Consolidated Statements of Operations for each of the
     Three Years in the Period Ended December 31, 1999 and
     for the Six Months Ended June 30, 1999 and 2000
     (Unaudited)............................................   F-4
  Consolidated Statements of Shareholders' Deficiency for
     each of the Three Years in the Period Ended December
     31, 1999 and for the Six Months Ended June 30, 2000
     (Unaudited)............................................   F-5
  Consolidated Statements of Cash Flows for the each of the
     Three Years in the Period Ended December 31, 1999 and
     for the Six Months Ended June 30, 1999 and 2000
     (Unaudited)............................................   F-6
  Notes to Consolidated Financial Statements................   F-7
 
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GmbH:
  Independent Auditors' Report..............................  F-21
  Balance Sheets as of December 31, 1999 and March 31, 2000
     (Unaudited)............................................  F-22
  Income Statements for the Year Ended December 31, 1999 and
     for the Three Months Ended March 31, 1999 and 2000
     (Unaudited)............................................  F-23
  Statements of Shareholders' Equity (Deficiency) for the
     Year Ended December 31, 1999 and for the Three Months
     Ended March 31, 2000 (Unaudited).......................  F-24
  Statements of Cash Flows for the Year Ended December 31,
     1999 and for the Three Months Ended March 31, 1999 and
     2000 (Unaudited).......................................  F-25
  Notes to Financial Statements.............................  F-26
 
PRO FORMA:
  Unaudited Pro Forma Consolidated Statements of
     Operations.............................................  F-32
  Unaudited Pro Forma Consolidated Statements of Operations
     for the Year Ended December 31, 1999...................  F-33
  Unaudited Pro Forma Consolidated Statements of Operations
     for the Six Months Ended June 30, 2000.................  F-34
  Notes to Unaudited Pro Forma Consolidated Statements of
     Operations.............................................  F-35
</TABLE>

 
                                       F-1

<PAGE>   65
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholders
of PDF Solutions, Inc.
 
     We have audited the accompanying consolidated balance sheets of PDF
Solutions, Inc. and subsidiaries (collectively, the "Company") as of December
31, 1998 and 1999, and the related consolidated statements of operations,
shareholders' deficiency, and cash flows for each of the three years in the
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
     In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1998 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
April 3, 2000

(April 27, 2000 as to the first paragraph of Note 2)
 
                                       F-2

<PAGE>   66
 
                              PDF SOLUTIONS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                             DECEMBER 31,                         PRO FORMA
                                                        -----------------------     JUNE 30,       JUNE 30,
                                                           1998         1999          2000           2000
                                                        ----------   ----------   ------------   ------------
                                                                                          (UNAUDITED)
                                                                                                   (NOTE 1)
<S>                                                     <C>          <C>          <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents...........................  $2,155,384   $1,932,923   $  1,443,241
  Accounts receivable, net of allowances of $93,000 in
     1998,
     $144,000 in 1999, $153,000 in 2000...............   2,050,160    2,749,174      3,996,932
  Prepaid expenses and other current assets...........     116,059       58,714        266,368
                                                        ----------   ----------   ------------
     Total current assets.............................   4,321,603    4,740,811      5,706,541
Property and equipment, net...........................     497,713      822,026      1,231,648
Intangible assets, net................................          --           --      2,014,053
Other assets..........................................      17,448       81,498        141,155
                                                        ----------   ----------   ------------
     Total assets.....................................  $4,836,764   $5,644,335   $  9,093,397
                                                        ==========   ==========   ============
LIABILITIES AND SHAREHOLDERS' EQUITY
  (DEFICIENCY)
Current liabilities:
  Accounts payable....................................  $  739,495   $  730,232   $  1,594,438
  Accrued compensation and related benefits...........     375,882    1,152,956        997,570
  Other accrued liabilities...........................     107,300      213,690        742,869
  Taxes payable.......................................     117,325      130,000        118,580
  Deferred revenues...................................     480,647      345,992        810,441
  Notes payable.......................................          --           --        995,000
  Current portion of capital lease obligations........          --       15,379         13,726
                                                        ----------   ----------   ------------
     Total current liabilities........................   1,820,649    2,588,249      5,272,624
                                                        ----------   ----------   ------------
Long-term portion of capital lease obligations........          --       71,616         54,293
Deferred tax liability................................          --           --        689,273
Series A convertible preferred stock, $0.0001 par
  value, shares authorized, issued and outstanding:
  8,750,000 in 1998, 1999 and 2000; none pro forma
  (liquidation preference of $3,500,000)..............   3,496,558    3,496,558      3,496,558             --
Commitments (Note 4)
Shareholders' equity (deficiency):
  Common stock, $0.0001 par value, 50,000,000 shares
     authorized; shares issued and outstanding
     10,650,957 in 1998, 10,989,811 in 1999,
     15,071,879 in 2000; 23,821,879 pro forma.........       1,065        1,099          1,507   $      2,382
  Additional paid-in capital..........................     468,200      537,199     19,010,946     22,506,629
  Deferred stock-based compensation...................     (74,974)     (43,406)   (14,511,751)   (14,511,751)
  Notes receivable from shareholders..................    (237,761)    (225,261)    (2,321,007)    (2,321,007)
  Accumulated deficit.................................    (636,973)    (781,719)    (2,602,393)    (2,602,393)
  Cumulative other comprehensive income...............          --           --          3,347          3,347
                                                        ----------   ----------   ------------   ------------
     Total shareholders' equity (deficiency)..........    (480,443)    (512,088)      (419,351)  $  3,077,207
                                                        ==========   ==========   ============   ============
     Total liabilities and shareholders' equity
       (deficiency)...................................  $4,836,764   $5,644,335   $  9,093,397
                                                        ==========   ==========   ============
</TABLE>

 
See notes to consolidated financial statements.
 
                                       F-3

<PAGE>   67
 
                              PDF SOLUTIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                                                                  SIX MONTHS ENDED
                                            YEARS ENDED DECEMBER 31,                  JUNE 30,
                                      -------------------------------------   ------------------------
                                         1997         1998         1999          1999         2000
                                      ----------   ----------   -----------   ----------   -----------
                                                                                    (UNAUDITED)
<S>                                   <C>          <C>          <C>           <C>          <C>
Revenue:
  Design-to-silicon yield
     solutions......................  $2,620,694   $6,035,249   $10,566,597   $5,334,218   $ 5,967,816
  Gain share........................          --      192,000     1,257,000           --     2,308,000
                                      ----------   ----------   -----------   ----------   -----------
     Total revenue..................   2,620,694    6,227,249    11,823,597    5,334,218     8,275,816
                                      ----------   ----------   -----------   ----------   -----------
Costs and expenses:
  Cost of design-to-silicon yield
     solutions......................     595,329    1,532,620     4,090,649    1,822,353     2,904,980
  Research and development..........   1,005,405    1,863,808     3,086,825    1,243,686     2,242,114
  Selling, general and
     administrative.................   1,404,133    2,959,504     4,294,521    2,201,669     3,024,722
  Stock-based compensation
     amortization*..................      13,677       61,317        68,282           --     1,692,971
                                      ----------   ----------   -----------   ----------   -----------
     Total costs and expenses.......   3,018,544    6,417,249    11,540,277    5,267,708     9,864,787
                                      ----------   ----------   -----------   ----------   -----------
Income (loss) from operations.......    (397,850)    (190,000)      283,320       66,510    (1,588,971)
Interest income and other...........     138,692      127,598       105,021       51,397        41,321
                                      ----------   ----------   -----------   ----------   -----------
Income (loss) before taxes..........    (259,158)     (62,402)      388,341      117,907    (1,547,650)
Tax provision.......................       8,999      341,492       533,087      300,800       273,024
                                      ----------   ----------   -----------   ----------   -----------
Net loss............................  $ (268,157)  $ (403,894)  $  (144,746)  $ (182,893)  $(1,820,674)
                                      ==========   ==========   ===========   ==========   ===========
Net loss per share -- basic and
  diluted...........................  $    (0.04)  $    (0.05)  $     (0.02)  $    (0.02)  $     (0.17)
                                      ==========   ==========   ===========   ==========   ===========
Shares used in computing basic and
  diluted net loss per share (Note
  1)................................   6,152,344    7,415,859     9,128,344    8,576,236    10,474,269
                                      ==========   ==========   ===========   ==========   ===========
Pro forma net loss per share --basic
  and diluted (Note 1)..............                            $     (0.01)               $     (0.09)
                                                                ===========                ===========
Shares used in computing pro forma
  basic and diluted net loss per
  share (Note 1)....................                             17,878,344                 19,224,269
                                                                ===========                ===========
*Stock-based compensation
  amortization:
  Cost of design-to-silicon yield
     solutions......................  $    4,103   $   18,395   $    20,485   $       --   $   295,404
  Research and development..........       9,574       42,922        47,797           --     1,189,562
  Selling, general and
     administrative.................          --           --            --           --       208,005
                                      ----------   ----------   -----------   ----------   -----------
                                      $   13,677   $   61,317   $    68,282   $       --   $ 1,692,971
                                      ==========   ==========   ===========   ==========   ===========
</TABLE>

 
See notes to consolidated financial statements.
 
                                       F-4

<PAGE>   68
 
                              PDF SOLUTIONS, INC.
 
              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY

<TABLE>
<CAPTION>
                                                                                         NOTES                      CUMULATIVE

                                      COMMON STOCK       ADDITIONAL      DEFERRED      RECEIVABLE    ACCUMULATED       OTHER
                                   -------------------     PAID-IN        STOCK           FROM        EARNINGS     COMPREHENSIVE
                                     SHARES     AMOUNT     CAPITAL     COMPENSATION   SHAREHOLDERS    (DEFICIT)       INCOME
                                   ----------   ------   -----------   ------------   ------------   -----------   -------------
<S>                                <C>          <C>      <C>           <C>            <C>            <C>           <C>
Balances, January 1, 1997........   8,750,000   $ 875    $   116,430   $    (13,281)  $   (39,011)   $    35,078      $   --
Compensatory stock
  arrangements...................                             37,003        (37,003)
Amortization of stock-based
  compensation...................                                            13,667
Net loss.........................                                                                       (268,157)
                                   ----------   ------   -----------   ------------   -----------    -----------      ------
Balances, December 31, 1997......   8,750,000     875        153,433        (36,617)      (39,011)      (233,079)         --
Issuance of common stock.........   1,543,749     154        199,221                     (198,750)
Exercise of options..............     357,208      36         15,872
Compensatory stock
  arrangements...................                             99,674        (99,674)
Amortization of stock-based
  compensation...................                                            61,317
Net loss.........................                                                                       (403,894)
                                   ----------   ------   -----------   ------------   -----------    -----------      ------
Balances, December 31, 1998......  10,650,957   1,065        468,200        (74,974)     (237,761)      (636,973)         --
Issuance of common stock.........      50,000       5         12,495                      (12,500)
Repayment of notes receivable
  from shareholders..............                                                           6,772
Repurchase of common stock
  through cancellation of note
  receivable.....................    (182,292)    (18)       (18,210)                      18,228
Exercise of options..............     471,146      47         38,000
Compensatory stock
  arrangements...................                             36,714        (36,714)
Amortization of stock-based
  compensation...................                                            68,282
Net loss.........................                                                                       (144,746)
                                   ----------   ------   -----------   ------------   -----------    -----------      ------
Balances, December 31, 1999......  10,989,811   1,099        537,199        (43,406)     (225,261)      (781,719)         --
Repayment of notes receivable
  from shareholders*.............                                                           1,624
Exercise of options*.............   4,082,068     408      2,312,431                   (2,097,370)
Compensatory stock
  arrangements*..................                         16,161,316    (16,161,316)
Amortization of stock-based
  compensation*..................                                         1,692,971
Net loss*........................                                                                     (1,820,674)
Cumulative translation
  adjustment*....................                                                                                      3,347
Comprehensive loss*..............
                                   ----------   ------   -----------   ------------   -----------    -----------      ------
Balances, June 30, 2000*.........  15,071,879   $1,507   $19,010,946   $(14,511,751)  $(2,321,007)   $(2,602,393)     $3,347
                                   ==========   ======   ===========   ============   ===========    ===========      ======
 
<CAPTION>
 
                                      TOTAL
                                   -----------
<S>                                <C>
Balances, January 1, 1997........  $   100,091
Compensatory stock
  arrangements...................           --
Amortization of stock-based
  compensation...................       13,667
Net loss.........................     (268,157)
                                   -----------
Balances, December 31, 1997......     (154,399)
Issuance of common stock.........          625
Exercise of options..............       15,908
Compensatory stock
  arrangements...................           --
Amortization of stock-based
  compensation...................       61,317
Net loss.........................     (403,894)
                                   -----------
Balances, December 31, 1998......     (480,443)
Issuance of common stock.........           --
Repayment of notes receivable
  from shareholders..............        6,772
Repurchase of common stock
  through cancellation of note
  receivable.....................           --
Exercise of options..............       38,047
Compensatory stock
  arrangements...................           --
Amortization of stock-based
  compensation...................       68,282
Net loss.........................     (144,746)
                                   -----------
Balances, December 31, 1999......     (512,088)
Repayment of notes receivable
  from shareholders*.............        1,624
Exercise of options*.............      215,469
Compensatory stock
  arrangements*..................           --
Amortization of stock-based
  compensation*..................    1,692,971
Net loss*........................
Cumulative translation
  adjustment*....................
Comprehensive loss*..............   (1,817,327)
                                   -----------
Balances, June 30, 2000*.........  $  (419,351)
                                   ===========
</TABLE>

 
---------------
* Unaudited
 
See notes to consolidated financial statements.
 
                                       F-5

<PAGE>   69
 
                              PDF SOLUTIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                            YEARS ENDED                    SIX MONTHS ENDED
                                                           DECEMBER 31,                        JUNE 30,
                                               -------------------------------------   ------------------------
                                                  1997          1998         1999         1999         2000
                                               -----------   ----------   ----------   ----------   -----------
                                                                                             (UNAUDITED)
<S>                                            <C>           <C>          <C>          <C>          <C>
Operating activities:
  Net loss...................................  $  (268,157)  $ (403,894)  $ (144,746)  $ (182,893)  $(1,820,674)
  Adjustments to reconcile net loss to net
     cash provided by operating activities:
     Depreciation and amortization...........      151,834      240,953      303,546      122,333       290,290
     Stock-based compensation amortization...       13,667       61,317       68,282           --     1,692,971
     Common stock issued for services........           --          625           --           --            --
     Gain (loss) on the sale of property and
       equipment.............................           --       16,902       (1,157)          --            --
     Changes in assets and liabilities, net
       of effect of acquisition:
       Accounts receivable...................   (2,510,952)     578,254     (699,014)    (505,913)   (1,034,515)
       Prepaid expenses and other assets.....      (22,997)     (93,295)      (6,705)      14,698       (68,687)
       Accounts payable......................      220,611      502,020       (9,263)      67,181       824,236
       Accrued compensation and related
          benefits...........................      263,760       70,121      777,074      253,040      (155,386)
       Other accrued liabilities and taxes
          payable............................           --      224,625      119,065     (150,202)      (82,662)
       Deferred revenues.....................    1,324,168     (985,372)    (134,655)     673,175       454,605
                                               -----------   ----------   ----------   ----------   -----------
          Net cash provided by (used in)
            operating activities.............     (828,066)     212,256      272,427      291,419       100,178
                                               -----------   ----------   ----------   ----------   -----------
Investing activities:
  Purchases of property and equipment........     (324,215)    (280,758)    (549,615)    (149,287)     (565,994)
  Proceeds from sale of equipment............        3,689           --       12,926           --            --
  Acquisition of AISS, net of cash
     acquired................................           --           --           --           --      (225,330)
                                               -----------   ----------   ----------   ----------   -----------
          Net cash used in investing
            activities.......................     (320,526)    (280,758)    (536,689)    (149,287)     (791,324)
                                               -----------   ----------   ----------   ----------   -----------
Financing activities:
  Exercise of stock options..................           --       15,908       38,047       78,928       215,469
  Collection of notes receivable from
     shareholders............................           --           --        6,772           --         1,624
  Principal payments on capital lease
     obligations.............................           --           --       (3,018)          --       (18,976)
                                               -----------   ----------   ----------   ----------   -----------
          Net cash provided by financing
            activities.......................           --       15,908       41,801       78,928       198,117
                                               -----------   ----------   ----------   ----------   -----------
Effect of exchange rate changes on cash......           --           --           --           --         3,347
                                               -----------   ----------   ----------   ----------   -----------
Net increase (decrease) in cash and cash
  equivalents................................   (1,148,592)     (52,594)    (222,461)     221,060      (489,682)
Cash and cash equivalents, beginning of
  period.....................................    3,356,570    2,207,978    2,155,384    2,155,384     1,932,923
                                               -----------   ----------   ----------   ----------   -----------
Cash and cash equivalents, end of period.....  $ 2,207,978   $2,155,384   $1,932,923   $2,376,444   $ 1,443,241
                                               ===========   ==========   ==========   ==========   ===========
Noncash investing and financing activities:
  Common stock issued for notes receivable...  $        --   $  198,750   $   12,500   $       --   $ 2,097,370
                                               ===========   ==========   ==========   ==========   ===========
  Property acquired under capital lease......  $        --   $       --   $   90,013   $       --   $        --
                                               ===========   ==========   ==========   ==========   ===========
  Acquisition of AISS........................  $        --   $       --   $       --   $       --   $   995,000
                                               ===========   ==========   ==========   ==========   ===========
Supplemental disclosure of cash flow
  information --
  Cash paid during the year for:
     Taxes...................................  $     8,999   $  341,492   $  403,087   $  300,800   $   215,708
                                               ===========   ==========   ==========   ==========   ===========
     Interest................................  $        --   $       --   $      677   $       --   $     2,735
                                               ===========   ==========   ==========   ==========   ===========
</TABLE>

 
See notes to consolidated financial statements.
 
                                       F-6

<PAGE>   70
 
                              PDF SOLUTIONS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
     PDF Solutions, Inc. (the "Company"), a California corporation, was
incorporated in November 1992 and provides comprehensive infrastructure
technologies and services to improve yield and optimize performance of
integrated circuits. The Company's approach includes manufacturing simulation
and analysis, combined with yield improvement methodologies to increase product
yield and performance.
 
     Basis of Presentation -- 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.
 
     Significant Estimates -- 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 in regards to total costs
which may be incurred and revenues earned. Actual results could differ from
these estimates.
 
     Certain Significant Risks and Uncertainties -- The Company operates in the
dynamic semiconductor and software industry, and accordingly, can be affected by
a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a significant negative effect
on the Company in terms of its future financial position, results of operations
and cash flows: ability to obtain additional financing; regulatory changes;
fundamental changes in the technology underlying software technologies; market
acceptance of the Company's solutions; development of sales channels; litigation
or other claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of development efforts; and new
product introductions by competitors.
 
     Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of
accounts receivable. The Company primarily sells its products to companies in
Japan and North America. The Company does not require collateral or other
security to support accounts receivable. To reduce credit risk, management
performs ongoing credit evaluations of its customers' financial condition. The
Company maintains allowances for potential credit losses.
 
     Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.
 
     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 $190,000, $0 and $541,000
at December 31, 1998, 1999 and June 30, 2000.
 
     Property and equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related asset. The estimated useful lives are as follows:
 

<TABLE>
<S>                                                <C>
Computer and equipment...........................      3 years
Software.........................................      3 years
Furniture and fixtures...........................  5 - 7 years
</TABLE>

 
     Intangible Assets -- Intangible assets are related to the business
acquisition discussed in Note 2. Amortization is recorded on a straight-line
basis over a period of four years.
 
                                       F-7

<PAGE>   71
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Impairment of Long-Lived Assets -- In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount an impairment loss would be measured based on the discounted
cash flows compared to the carrying amount. No impairment charge has been
recorded in any of the periods presented.
 
     Notes Receivable from Shareholders -- The notes receivable from
shareholders are full recourse notes issued in exchange for common stock. Notes
outstanding at December 31, 1999 bear interest at 4.46% to 5.83% per annum.
Notes outstanding at June 30, 2000 bear interest at 4.46% to 6.62% per annum.
The notes are generally payable in annual installments over three years.
 
     Revenue Recognition -- The Company derives revenue from two sources:
design-to-silicon yield solutions and gain share. The Company recognizes
revenues in accordance with the provisions of American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as amended, and SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
 
          Design-to-Silicon Yield Solutions -- Design-to-silicon yield solutions
     revenue is derived from solution implementations, software licenses and
     software support and maintenance. 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.
     License fees bundled with solution implementation services are recognized
     as a component of the overall solution implementation contract as vendor
     specific objective evidence of fair value does not exist for the service
     element. 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 revision become known and are
     estimable. License fees under contracts which are not bundled with solution
     implementation services are recognized when an agreement has been signed,
     the software has been delivered, the license fee is fixed or determinable
     and collection of the fee is probable and vendor-specific objective
     evidence of fair value exists to allocate a portion of the total fee to any
     undelivered elements of the arrangement, or over the license term. Support
     and maintenance revenue is recognized ratably over the term of the support
     and maintenance contract. If support and maintenance is included in an
     arrangement that includes a license agreement, amounts related to support
     and maintenance are allocated based on vendor specific objective evidence.
 
          Gain Share -- Gain share revenue represents profit sharing and
     performance incentives earned based upon its customer reaching certain
     defined operational levels. Upon achieving such operational levels, the
     Company receives either a fixed fee and/or royalties based on the units
     sold 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.
 
     In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, Software Revenue Recognition. This statement provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions and superceded SOP 91-1, Software Revenue
                                       F-8

<PAGE>   72
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
Recognition. SOP 97-2 was effective for transactions entered into in 1998. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations.
 
     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 the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
 
     Research and Development -- Research and development expenses are charged
to operations as incurred.
 
     Stock-Based Compensation -- The Company accounts for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"). 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 Emerging Issues Task Force No. 96-18
under the fair value based method.
 
     Net Loss per Share -- Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted net
loss per share was the same as basic net loss per share for all periods
presented since the effect of any potentially dilutive securities is excluded as
they are anti-dilutive because of the Company's net losses.
 
     Unaudited Pro Forma Net Loss per Share -- Pro forma basic and diluted net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase) and the weighted average number of common shares resulting from the
assumed conversion of outstanding shares of Series A convertible preferred stock
which will occur upon the closing of the planned initial public offering.
 
     Unaudited Pro Forma Information -- Upon the closing of the planned initial
public offering, each of the outstanding shares of Series A convertible
preferred stock will convert into one share of common stock. The pro forma
balance sheet presents the Company's balance sheet as if this had occurred at
June 30, 2000.
 
     Unaudited Interim Financial Information -- The interim financial
information as of June 30, 2000 and for the six months ended June 30, 1999 and
2000 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000.
 
     Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the local currency for the respective subsidiary. The
assets and liabilities are translated at the period-end exchange rate, and
statements of operations are translated at the average exchange rate during the
year.
 
                                       F-9

<PAGE>   73
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
Gains and losses resulting from foreign currency translations are included as a
component of other comprehensive income.
 
     Comprehensive Income -- Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. For 1997, 1998 and 1999 comprehensive loss was
equal to net loss. Comprehensive loss for the six months ended June 30, 2000 is
presented within the statement of shareholders' deficiency.
 
     Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the Company's
fiscal year ending December 31, 2001. Management has not yet determined the
impact that the adoption of SFAS 133 will have on its earnings or financial
position.
 
2. BUSINESS COMBINATION
 
     On April 27, 2000, the Company acquired all of the outstanding common stock
of AISS, a German company, for $1.25 million, consisting of $995,000 in notes
payable and $255,000 in cash. AISS develops software and provides yield
management services to the semiconductor industry. The note bears interest at 7%
per annum payable quarterly with principal due on April 27, 2001.
 
     The acquisition was accounted for using the purchase method and the
operating results of AISS have been included in the consolidated statements of
operations since the date of acquisition. The excess purchase price (including
costs of acquisition) over the fair value of the tangible assets and liabilities
assumed totaled $2,101,622 and represents acquired technology, employee
workforce and goodwill which is being amortized on a straight line basis over a
period of four years. Amortization expense totaled $87,569 for the six months
ended June 30, 2000.
 
     The fair value of the assets acquired and liabilities assumed were as
follows (in thousands):
 

<TABLE>
<S>                                                   <C>
Cash................................................  $   30
Accounts receivable.................................     386
Other assets........................................      27
Property and equipment..............................      46
Intangible assets...................................   2,102
Accrued acquisition cost............................    (113)
Less liabilities assumed............................    (509)
Deferred tax liability..............................    (719)
                                                      ------
                                                      $1,250
                                                      ======
</TABLE>

 
                                      F-10

<PAGE>   74
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Had the acquisition taken place at the beginning of fiscal 1999 and 2000
respectively, the unaudited pro forma results of operations would have been as
follows for the six months ended June 30, 1999 and 2000 (in thousands, except
per share data):
 

<TABLE>
<CAPTION>
                                           1999        2000
                                          ------    -----------
                                               (UNAUDITED)
<S>                                       <C>       <C>
Net revenues............................  $5,928      $ 8,598
Net loss................................    (285)      (1,887)
Net loss per share -- basic and
  diluted...............................    (.01)       (0.10)
</TABLE>

 
     The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill, interest charges
on the note issued in connection with the acquisition and the elimination of
sales between the Company and AISS. The pro forma net loss per share -- basic
and diluted reflects the effect of the conversion of the outstanding shares of
Series A convertible preferred stock into common stock, which will occur upon
the closing of the planned initial public offering.
 
     The pro forma amounts are based on certain assumptions and estimates and do
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of results
of future combined operations.
 
3. PROPERTY AND EQUIPMENT
 
     Property and equipment consist of:
 

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                 -----------------------     JUNE 30,
                                                   1998          1999          2000
                                                 ---------    ----------    -----------
                                                                            (UNAUDITED)
<S>                                              <C>          <C>           <C>
Computer equipment.............................  $ 621,459    $  884,276    $1,326,329
Software.......................................    236,934       355,687       452,652
Furniture, fixtures, and equipment.............    106,520       351,803       425,129
                                                 ---------    ----------    ----------
                                                   964,913     1,591,766     2,204,110
Accumulated depreciation.......................   (467,200)     (769,740)     (972,462)
                                                 ---------    ----------    ----------
                                                 $ 497,713    $  822,026    $1,231,648
                                                 =========    ==========    ==========
</TABLE>

 
4. LEASE COMMITMENTS
 
     Equipment with a net book value of $87,747 at December 31, 1999 (net of
accumulated amortization of $2,266) has been leased under capital leases which
expire in 2004. The Company leases administrative and sales offices and other
equipment under noncancelable operating leases which contain various renewal
options and require payment of common area costs, taxes and utilities, when
applicable. These operating leases expire from 2001 to 2004.
 
                                      F-11

<PAGE>   75
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Future minimum lease payments under capital and noncancelable operating
leases at December 31, 1999 are as follows:
 

<TABLE>
<CAPTION>
                        YEARS ENDING                          CAPITAL     OPERATING
                        DECEMBER 31,                           LEASES       LEASES
                        ------------                          --------    ----------
<S>                                                           <C>         <C>
   2000.....................................................  $ 21,744    $  710,054
   2001.....................................................    21,744       721,960
   2002.....................................................    21,744       742,822
   2003.....................................................    21,744       766,282
   2004.....................................................    18,048       654,860
                                                              --------    ----------
Total future minimum lease payments.........................   105,024    $3,595,978
                                                                          ==========
Less amount representing interest (ranging from 7.32% to
  9.25%)....................................................   (18,029)
                                                              --------
Present value of future minimum lease payments..............    86,995
Less current portion........................................   (15,379)
                                                              --------
                                                              $ 71,616
                                                              ========
</TABLE>

 
     Rent expense was approximately $98,222, $220,226 and $379,364 in 1997, 1998
and 1999, respectively.
 
5. BANK OBLIGATIONS
 
     At December 31, 1999, the Company had available term loan and revolving
credit commitments providing for borrowings of up to $3,500,000. The term loan
commitment provides financing of up to $500,000 for the purchase of equipment,
furniture and software, as defined, through June 30, 2000. Borrowings against
the term loan commitment bear interest at prime (8.25% at December 31, 1999)
plus 1% and are payable in monthly installments of 36 months, commencing January
1, 2000 for loans made through December 31, 1999, or 30 months, commencing July
1, 2000 for loans made during the six months ended June 30, 2000. The remaining
$3,000,000 is available as follows: $500,000 Domestic Asset Based Line of Credit
Commitment and $2,500,000 Foreign Asset Based Line of Credit Commitment for
which advances are limited, respectively, to 75% of domestic and 90% of foreign
accounts receivable, as defined. Outstanding borrowings bear interest at prime
(8.25% at December 31, 1999) plus 0.75%. Borrowings under these arrangements are
secured by all personal property of the Company. In addition, the agreements
require the Company to comply with certain financial covenants. At December 31,
1999 and June 30, 2000, there were no borrowings outstanding under the
agreements.
 
6. CONVERTIBLE PREFERRED STOCK
 
     Convertible Preferred Stock -- The Company had 8,750,000 shares of Series A
convertible preferred stock outstanding at December 31, 1998, 1999 and June 30,
2000. The significant terms of the Series A convertible preferred stock are as
follows:
 
     - Each share is convertible into one share of common stock (subject to
       adjustment for events of dilution).
 
     - Each share will automatically convert in the event of a public offering
       in which the Company receives proceeds equal to or greater than
       $7,500,000 and a price per share equal to or greater than $2.00.
 
                                      F-12

<PAGE>   76
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     - Each share of Series A convertible preferred stock has voting rights
       equivalent to the number of shares of common stock into which it is
       convertible.
 
     - In the event of liquidation or winding up of the Company, the holders of
       Series A convertible preferred stock shall receive $0.40 per share plus
       all accrued but unpaid dividends. A sale of substantially all of the
       Company's assets or a change in control is treated as a deemed
       liquidation.
 
     - In the event the Board of Directors declares dividends payable on the
       then outstanding common stock, the holders of Series A preferred stock
       shall receive $0.02 per share. The right to such dividends are not
       cumulative.
 
     - The Series A convertible preferred stock shareholders, voting separately
       as a class, shall elect two members of the Board of Directors.
       Additionally, the holders of common stock and Series A preferred stock
       voting collectively as a class shall elect one member of the Board of
       Directors.
 
7. SHAREHOLDERS' EQUITY
 
     Common Stock -- Common stock issued to the founders and certain other
employees are subject to repurchase agreements whereby the Company has the
option to repurchase the unvested shares upon termination of employment at the
original issue price. The Company's repurchase right generally lapses over four
years. At December 31, 1999, 941,062 shares of common stock were subject to
repurchase by the Company.
 
     During 1998, the Company issued 6,250 shares of common stock to consultants
for services rendered. The fair value of the common stock of $625 was recognized
as general and administrative expense at the date of issuance.
 
     The Company has reserved shares of common stock for issuance as follows at
December 31, 1999:
 

<TABLE>
<S>                                                        <C>
Conversion of preferred stock............................   8,750,000
Issuance and exercise of options.........................   2,179,385
Exercise of warrants.....................................     300,000
                                                           ----------
                                                           11,229,385
                                                           ==========
</TABLE>

 
     Stock Plans -- At December 31, 1999, under the Company's 1996 and 1997
Stock Plans ("the Plans"), the Company may grant options to purchase up to
4,500,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at the date of grant for incentive
stock options and not less than 85% of fair market value for nonstatutory stock
options. These options generally expire ten years from the date of grant and
become exercisable ratably over a four-year period. Certain option grants
provide for the immediate exercise by the optionee with the resulting shares
issued subject to a right of repurchase by the Company which lapses based on the
original vesting provisions. At December 31, 1999, 78,330 shares were available
for future grant under the Plans.
 
     In January 2000, the shareholders approved that the number of shares of the
Company's common stock reserved for issuance under the Plans be increased by
2,500,000 shares to an aggregate number of shares of the Company's common stock
reserved for issuance under the Plans of 7,000,000 shares.
 
     At December 31, 1998 and 1999 and June 30, 2000, the Company's outstanding
options include 101,490, 101,490 and 731,490 shares, respectively, which had
been granted outside of the Plans.
 
                                      F-13

<PAGE>   77
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Additional information with respect to options under the Plans, including
options granted outside the Plans, is as follows:
 

<TABLE>
<CAPTION>
                                                                              WEIGHTED
                                                                              AVERAGE
                                                              NUMBER OF     OPTION PRICE
                                                               OPTIONS       PER SHARE
                                                              ----------    ------------
<S>                                                           <C>           <C>
Outstanding, January 1, 1997 (63,435 shares vested and
  exercisable at a weighted exercise price of $0.02 per
  share)....................................................   1,054,235       $0.04
Granted (weighted average fair value of $0.01 per share)....     783,750        0.04
Exercised...................................................          --          --
Canceled....................................................    (300,000)       0.04
                                                              ----------
Outstanding, December 31, 1997 (399,736 shares vested and
  exercisable at a weighted exercise price of $0.04 per
  share)....................................................   1,537,985        0.04
Granted (weighted average fair value of $0.03 per share)....   2,498,450        0.13
Exercised...................................................  (1,900,958)       0.11
Canceled....................................................     (97,792)       0.04
                                                              ----------
Outstanding, December 31, 1998 (613,022 shares vested and
  exercisable at a weighted average exercise price of $0.04
  per share)................................................   2,037,685        0.08
Granted (weighted average fair value of $0.07 per share)....     746,500        0.25
Exercised...................................................    (521,147)       0.10
Canceled....................................................    (161,983)       0.11
                                                              ----------
Outstanding, December 31, 1999 (782,187 shares vested and
  exercisable at a weighted average exercise price of $0.09
  per share)................................................   2,101,055        0.14
Granted (weighted average fair value of $5.34 per share)....   3,300,590        1.21
Exercised...................................................  (3,832,069)       0.60
Canceled....................................................    (332,832)       0.21
                                                              ----------
Outstanding, June 30, 2000 (128,552 shares vested and
  exercisable at a weighted average exercise price of $0.07
  per share)................................................   1,236,744       $1.53
                                                              ==========
</TABLE>

 
     Additional information regarding options outstanding as of December 31,
1999 is as follows:
 

<TABLE>
<CAPTION>
                    OPTIONS OUTSTANDING         OPTIONS
                 --------------------------   EXERCISABLE
                                 WEIGHTED     -----------
                                 AVERAGE        NUMBER
                                REMAINING       VESTED
    EXERCISE       NUMBER      CONTRACTUAL        AND
     PRICES      OUTSTANDING   LIFE (YEARS)   EXERCISABLE
    --------     -----------   ------------   -----------
  <S>            <C>           <C>            <C>
     $0.04          712,355         6.6         469,014
      0.10          596,500         8.3         255,832
      0.25          789,700         8.3          56,841
      0.35            2,500        10.0             500
                  ---------                     -------
  $0.04 - 0.35    2,101,055         7.8         782,187
                  =========                     =======
</TABLE>

 
                                      F-14

<PAGE>   78
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires the disclosure of pro forma net
loss as if the Company had adopted the fair value method. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including expected time to
exercise, which affect the calculated values.
 
     The weighted average fair value of the Company's stock-based awards to
employees was estimated using the minimum value method and assuming no dividends
will be declared and the following additional assumptions:
 

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                              1997    1998    1999
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Estimated life (in years)...................................  5.5     5.5     5.5
Risk-free interest rate.....................................  6.0%    5.6%    6.0%
</TABLE>

 
     For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized using the straight-line method over
the options' vesting period. The Company's pro forma results are as follows (in
thousands):
 

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           --------------------------
                                                            1997      1998      1999
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Net loss:
  As reported............................................  $ (268)   $ (404)   $ (145)
  Pro forma..............................................    (281)     (448)     (198)
Basic and diluted net loss per share:
  As reported............................................  $(0.04)   $(0.05)   $(0.02)
  Pro forma..............................................   (0.05)    (0.06)    (0.02)
</TABLE>

 
Stock-Based Compensation
 
     As of December 31, 1999, the Company had granted an aggregate of 493,935
nonstatutory stock options to consultants and advisory board members (of which
7,500 and 37,000 were granted in 1998 and 1999, respectively) at a weighted
average exercise price of $0.05 per share. The options vest monthly over a
period of one to five years and 187,208 remained unvested at December 31, 1999.
The values attributable to the grants are determined at each vesting date using
the Black-Scholes pricing model and have been amortized over the service period.
The estimated fair value of deferred stock-based compensation related to the
unvested portion of these grants at December 31, 1999 is subject to adjustment
based upon the future value of the Company's common stock and was revalued using
the Black-Scholes pricing model with the following weighted average assumptions:
contractual life of 10 years; risk-free interest rate of 4.6%; volatility of 40%
and no dividends during the expected term.
 
     During the six months ended June 30, 2000, the Company issued 3,258,290
common stock options to employees at a weighted average exercise price of $1.21
per share. The weighted average exercise price was below the weighted average
deemed fair value of $6.03 per share. The cumulative deferred stock-based
compensation with respect to these grants totaled $15,692,098 and is being
amortized to expense on a graded vesting method over the four year vesting
period of the options through June 2004. During the six
 
                                      F-15

<PAGE>   79
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
months ended June 30, 2000 the Company granted fully vested options to purchase
42,300 shares of common stock to non-employees. These options, combined with the
vesting of 55,132 non-employee options outstanding at December 31, 1999, were
revalued using the Black-Scholes pricing model with the following weighted
average assumptions: contractual life of 10 years; risk-free interest rate of
6.7%; volatility of 70% and no dividends during the expected term. As a result,
the Company recorded additional stock-based compensation amortization of
$469,218 during the six months ended June 30, 2000.
 
     Amortization of employee and non-employee stock-based compensation totaled
$13,677, $61,317, $68,282 and $1,692,971 in 1997, 1998, 1999 and for the six
months ended June 30, 2000, respectively. The cumulative portion of stock based
compensation amortization through December 31, 1999 related to non-employee
awards was not material.
 
Common Stock Warrants
 
     During 1996, the Company issued warrants to purchase 300,000 shares of the
Company's common stock to consultants. As of December 31, 1999, 56,250 remained
unvested. The value attributed to the warrants is determined at the vesting date
using the Black-Scholes pricing model and has been amortized over the service
period of four years. The estimated value of deferred stock-based compensation
related to the unvested portion of these warrants at December 31, 1999 is
subject to adjustment based upon the future value of the Company's common stock
and was revalued using the Black-Scholes pricing model with weighted average
assumptions consistent with the non-employee options described above. At June
30, 2000, no warrants remained outstanding.
 
8. NET LOSS PER SHARE
 
     The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
 

<TABLE>
<CAPTION>
                                                                                           SIX MONTHS
                                                    YEARS ENDED DECEMBER 31,             ENDED JUNE 30,
                                                  -----------------------------    --------------------------
                                                   1997       1998       1999         1999           2000
                                                  -------    -------    -------    -----------    -----------
                                                                                          (UNAUDITED)
<S>                                               <C>        <C>        <C>        <C>            <C>
Net loss (numerator), basic and diluted.........  $  (268)   $  (404)   $  (145)     $  (183)       $(1,821)
                                                  =======    =======    =======      =======        =======
Shares (denominator):
  Weighted average common shares outstanding....    8,750      9,333     10,843       10,775         12,187
  Weighted average common shares outstanding
    subject to repurchase.......................   (2,598)    (1,917)    (1,715)      (2,199)        (1,713)
                                                  -------    -------    -------      -------        -------
Shares used in computation, basic and diluted...    6,152      7,416      9,128        8,576         10,474
                                                  =======    =======    =======      =======        =======
Net loss per share -- basic and diluted.........  $ (0.04)   $ (0.05)   $ (0.02)     $ (0.02)       $ (0.17)
                                                  =======    =======    =======      =======        =======
Shares used in computation -- basic and
  diluted.......................................                          9,128                      10,474
Weighted average Series A convertible preferred
  stock outstanding.............................                          8,750                       8,750
                                                                        -------                     -------
Shares used in computing pro forma per share
  amounts on an as converted basis -- basic and
  diluted.......................................                         17,878                      19,224
                                                                        =======                     =======
Pro forma net loss per share on an as converted
  basis -- basic and diluted....................                        $ (0.01)                    $ (0.09)
                                                                        =======                     =======
</TABLE>

 
                                      F-16

<PAGE>   80
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     Pro forma net loss per share assumes that the conversion of all shares of
Series A convertible preferred stock into common stock, which occurs upon the
consummation of an initial public offering.
 
     For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                                     SIX MONTHS
                                                      YEARS ENDED DECEMBER 31,     ENDED JUNE 30,
                                                     --------------------------    --------------
                                                      1997      1998      1999     1999     2000
                                                     ------    ------    ------    -----    -----
                                                                                    (UNAUDITED)
<S>                                                  <C>       <C>       <C>       <C>      <C>
Convertible preferred stock........................  8,750     8,750     8,750     8,750    8,750
Shares of common stock subject to repurchase.......  2,598     1,917     1,715     2,199    1,635
Outstanding options................................    400       613       782       643      129
Warrants...........................................     94       169       244       206       --
</TABLE>

 
9. TAX PROVISION
 
     The tax provision in 1997, 1998 and 1999 was $8,999, $341,492, $533,087,
respectively, and primarily represents withholding tax on revenues from foreign
customers. The tax provision for the six months ended June 30, 2000 of $273,024
includes withholding tax on revenues from foreign customers of $180,000, foreign
and U.S. income tax of $42,024 and $51,000, respectively.
 
     During fiscal 1997, 1998, and 1999 all income (loss) before taxes was
derived from U.S. operations. In the period ended June 30, 2000, income (loss)
before taxes was $(1,685,000) and $137,000 from U.S. and foreign operations,
respectively.
 
     Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards.
 
     The components of the net deferred tax liability is comprised of (in
thousands):
 

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                        -----------------------     JUNE 30,
                                                        1997     1998     1999        2000
                                                        -----    -----    -----    -----------
                                                                                   (UNAUDITED)
<S>                                                     <C>      <C>      <C>      <C>
Net operating loss carryforward.......................  $ 307    $ 172    $  38      $    --
Research and development credit carryforward..........     --       35       --           89
Foreign tax credit carryforward.......................     25      365      765        1,068
Accruals deductible in different periods..............   (275)    (152)    (129)         156
Valuation allowances..................................    (57)    (420)    (674)      (1,313)
Intangible assets.....................................     --       --       --         (689)
                                                        -----    -----    -----      -------
                                                        $  --    $  --    $  --      $  (689)
                                                        =====    =====    =====      =======
</TABLE>

 
     The Company has established a valuation allowance against certain deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Annually, management evaluates the recoverability of the deferred tax assets and
the level of the valuation allowance. At such time as it is determined that it
is more likely than not that deferred tax assets are realizable the valuation
allowance will be reduced.
 
                                      F-17

<PAGE>   81
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     The amount of income tax recorded differs from the amount using the
statutory federal income tax rate for the following reasons:
 

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           --------------------     JUNE 30,
                                                           1997    1998    1999       2000
                                                           ----    ----    ----    -----------
                                                                                   (UNAUDITED)
<S>                                                        <C>     <C>     <C>     <C>
Federal statutory tax benefit............................  $(90)   $(22)   $136       $(542)
State tax expense........................................     1       1       3           1
Stock compensation expense...............................    --      --      --         592
Meals and entertainment..................................     6       8       2           2
Tax credits..............................................    --     (35)     --        (274)
Foreign tax, net.........................................    --      --     130        (104)
Valuation allowances.....................................    85     363     254         639
Other....................................................     7      26       8         (41)
                                                           ----    ----    ----       -----
Total....................................................  $  9    $341    $533       $ 273
                                                           ====    ====    ====       =====
</TABLE>

 
     At December 31, 1999, the Company has net operating loss (NOL)
carryforwards of approximately $87,000 and $118,000 for federal and state income
tax purposes, respectively. The federal NOL carryforwards expire through 2012,
while the state NOL carryforwards expire through 2002.
 
     At December 31, 1999, the Company also has foreign tax credit carryforwards
of approximately $765,000 available to offset future federal income taxes,
respectively. The federal credit carryforward begins to expire in 2001.
 
     The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period as
provided in the Tax Reform Act of 1986 and the California Conformity Act of
1987.
 
10. CUSTOMER AND GEOGRAPHIC INFORMATION
 
     The Company operates in one segment. The Company had net revenues from
individual customers in excess of 10% of net revenues, as follows:
 

<TABLE>
<CAPTION>
                                                                             SIX MONTHS
                                                        YEARS ENDED            ENDED
                                                        DECEMBER 31,          JUNE 30,
                                                    --------------------    ------------
                    CUSTOMER                        1997    1998    1999    1999    2000
                    --------                        ----    ----    ----    ----    ----
                                                                            (UNAUDITED)
<S>                                                 <C>     <C>     <C>     <C>     <C>
A...............................................    70%      66%     53%     49%     34%
B...............................................    --       16%     19%     36%     --
C...............................................    --       --      15%     --      34%
D...............................................    --       --      --      --      15%
E...............................................    --       --      --      --      11%
F...............................................    20%      --      --      --      --
</TABLE>

 
                                      F-18

<PAGE>   82
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
     The Company had accounts receivable from individual customers in excess of
10% of gross accounts receivable as follows:
 

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                            ------------      JUNE 30,
                         CUSTOMER                           1998    1999        2000
                         --------                           ----    ----    ------------
                                                                            (UNAUDITED)
<S>                                                         <C>     <C>     <C>
A.........................................................   63%     47%         43%
C.........................................................   --      15%         20%
D.........................................................   --      23%         18%
E.........................................................   --      --          18%
F.........................................................   20%     --          --
G.........................................................   --      11%         --
</TABLE>

 
     Revenues from customers by geographic area are as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                  YEARS ENDED             SIX MONTHS
                                                  DECEMBER 31,          ENDED JUNE 30,
                                            ------------------------    --------------
                                            1997     1998      1999     1999     2000
                                            -----    -----    ------    -----    -----
                                                                         (UNAUDITED)
<S>                                         <C>      <C>      <C>       <C>      <C>
Japan.....................................  1,827    5,125    10,684    4,914    5,630
United States.............................    794    1,102     1,140      421    2,495
Europe....................................     --       --        --       --      151
</TABLE>

 
     The Company's long-lived assets were located primarily in North America as
of December 31, 1998 and 1999. As of June 30, 2000, long-lived assets related to
AISS totaling $2,014,053 (see Note 2), reside in Germany. The majority of the
Company's remaining long-lived assets reside in the United States.
 
11. EMPLOYEE BENEFIT PLAN
 
     During 1999, the Company established a 401(k) tax-deferred savings plan,
whereby eligible employees may contribute up to 15% of their eligible
compensation with a maximum amount subject to IRS guidelines in any calendar
year. Company contributions are discretionary; no such Company contributions
have been made since inception of this plan.
 
12. SUBSEQUENT EVENTS (UNAUDITED)
 
     In July 2000, the shareholders approved an amendment to its Stock Plans to
provide that the number of shares of the Company's common stock reserved for
issuance under the 1996 and 1997 Plans be increased to an aggregate of 1,097,551
shares and 8,402,449 shares, respectively.
 
     On August 4, 2000, the Company issued 526,315 shares of Series B
convertible preferred stock at $9.50 per share, resulting in net proceeds of
approximately $4,960,000. The terms of the Series B convertible preferred stock
provide for voting and conversion rights similar to the Series A convertible
preferred stock and will automatically convert to common stock in the event of a
public offering in which the Company receives proceeds equal to or greater than
$7.5 million and a price per share equal to or greater than $9.50. Upon closing
of the Series B convertible preferred stock financing, the Company will record a
charge to net loss attributable to common shareholders of approximately
$684,210, for the beneficial conversion feature inherent in the Series B
preferred stock. The beneficial conversion feature is equal to the difference
between the price of the Series B preferred stock and the estimated fair value
of common stock into which the Series B preferred stock is convertible. The
beneficial conversion feature is
 
                                      F-19

<PAGE>   83
                              PDF SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
                         SIX MONTHS ENDED JUNE 30, 2000
            (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
                   ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
 
similar to a dividend on preferred stock that increases net loss to arrive at
net loss attributable to common shareholders.
 
     Had the sale issuance and conversion (which will occur upon the closing of
the planned initial public offering) of the Series B preferred stock taken place
at the beginning of fiscal 1999 and 2000, respectively, basic and diluted pro
forma net loss per share for the year ended December 31, 1999 and the six months
ended June 30, 2000 would have been ($0.05) and ($0.13), respectively.
 
     On August 7, 2000, the Board of Directors approved, subject to shareholder
approval, the following actions to occur concurrently with the effectiveness of
the Company's planned initial public offering:
 
     - Reincorporation of the Company in the State of Delaware and the increase
       in the number of authorized shares of common stock and preferred stock
       ($0.0001 par value) to 75,000,000 and 5,000,000 respectively.
 
     - Termination of the 1996 and 1997 Stock Option Plans as to future option
grants.
 
     - Adoption of the 2000 Stock Plan -- 3,000,000 shares of common stock were
reserved for issuance under the 2000 Stock Plan. On January 1 of each year,
starting with the year 2001, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock that
are outstanding at that time.
 
     - Adoption of the 2000 Employee Stock Purchase Plan -- Under the purchase
plan, eligible employees are allowed to have salary withholdings of up to 10% of
their compensation to purchase shares of common stock at a price equal to 85% of
the lower of the market value of the stock on the first date immediately before
the first day of the applicable offering period or the fair market value on the
purchase date. The initial offering period commences upon the effective date for
the initial public offering of the Company's common stock. For the first
offering period, shares of common stock may be purchased at a price equal to 85%
of the lower of the price per share in the initial public offering or the market
value on the purchase date. The Company has initially reserved 300,000 shares of
common stock under this plan, plus an annual increase to be added each January
beginning with the year 2001 equal to the lesser of (i) 675,000 shares, or (ii)
2% of the shares of common stock outstanding at that time.
 
                                 *  *  *  *  *
 
                                      F-20

<PAGE>   84
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholders of
Applied Integrated Systems & Software Entwicklungs-, Produktions- und Vertriebs
GmbH:
 
     We have audited the accompanying balance sheet of Applied Integrated
Systems & Software Entwicklungs-, Produktions- und Vertriebs GmbH as of December
31, 1999, and the related statements of income, shareholders' equity, and cash
flows for the year ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
 
     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
     In our opinion, such financial statements present fairly, in all material
respects, the financial position of Applied Integrated Systems & Software
Entwicklungs-, Produktions- und Vertriebs GmbH as of December 31, 1999, and the
results of its operations and its cash flows for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America.
 
/s/ DELOITTE & TOUCHE GMBH
Wirtschaftsprufungsgesellschaft
 
Munich, Germany
July 26, 2000

 
                                      F-21

<PAGE>   85
 
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                                 BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                              DECEMBER 31,     MARCH 31,
                                                                  1999           2000
                                                              ------------    -----------
                                                                              (UNAUDITED)
<S>                                                           <C>             <C>
                           ASSETS
Current assets:
  Cash......................................................  DM  377,539     DM   11,858
  Accounts receivable.......................................      331,700         763,830
  Prepaid expenses..........................................        1,421              --
  Other assets..............................................       21,065          18,801
  Current deferred taxes....................................       72,129          74,729
                                                              -----------     -----------
     Total current assets...................................      803,854         869,218
Equipment, furniture, and fixtures, net.....................      102,389         106,280
Intangible assets, net......................................       14,053          12,391
Other assets................................................       18,144              --
                                                              -----------     -----------
     Total assets...........................................  DM  938,440     DM  987,889
                                                              ===========     ===========
 
      LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIENCY)
 
Current liabilities:
  Short term portion of long term borrowings................  DM   14,069     DM   14,294
  Bank overdraft............................................           --         415,741
  Accounts payable..........................................      118,654         111,726
  Accrued taxes.............................................        8,154          92,350
  Deferred revenue..........................................       10,000          12,000
  Accrued expenses and other liabilities....................      433,455         423,740
                                                              -----------     -----------
     Total current liabilities..............................      584,332       1,069,851
Long term borrowings........................................       33,620          29,961
Deferred tax liability......................................       31,154          21,432
Shareholders' equity (deficiency):
  Registered capital........................................       51,000          51,000
  Less: subscribed capital..................................      (25,500)        (25,500)
                                                              -----------     -----------
  Registered capital -- paid in.............................       25,500          25,500
  Retained earnings (distributions to shareholders in excess
     of earnings to date)...................................      263,834        (158,855)
                                                              -----------     -----------
     Total shareholders' equity (deficiency)................      289,334        (133,355)
                                                              -----------     -----------
     Total liabilities and shareholders' equity
       (deficiency).........................................  DM  938,440     DM  987,889
                                                              ===========     ===========
</TABLE>

 
See notes to financial statements.
 
                                      F-22

<PAGE>   86
 
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                               INCOME STATEMENTS
 

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED
                                                    YEAR ENDED            MARCH 31,
                                                   DECEMBER 31,    -----------------------
                                                       1999           1999         2000
                                                   ------------    ----------    ---------
                                                                         (UNAUDITED)
<S>                                                <C>             <C>           <C>
Revenues:
  Services.......................................  DM1,914,145     DM 378,322    DM461,922
  License........................................      837,962        440,424      125,815
                                                   -----------     ----------    ---------
                                                     2,752,107        818,746      587,737
                                                   -----------     ----------    ---------
Costs and expenses:
  Cost of revenues...............................    1,056,259        249,408      283,616
  Research and development expenses..............      510,768         66,659       35,155
  Sales and marketing expenses...................      325,487         78,458       45,087
  General and administrative expenses............      576,654        126,692      131,575
                                                   -----------     ----------    ---------
     Total costs and expenses....................    2,469,168        521,217      495,433
                                                   -----------     ----------    ---------
Operating income.................................      282,939        297,529       92,304
Other income.....................................          775             --        1,096
Interest income..................................        4,430            474        1,725
Interest expenses................................       (8,087)          (562)      (6,839)
                                                   -----------     ----------    ---------
Income before income taxes.......................      280,057        297,441       88,286
Provision for income taxes.......................      (97,877)      (161,902)     (42,395)
                                                   -----------     ----------    ---------
Net income.......................................  DM  182,180     DM 135,539    DM 45,891
                                                   ===========     ==========    =========
</TABLE>

 
See notes to financial statements.
 
                                      F-23

<PAGE>   87
 
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
 

<TABLE>
<CAPTION>
                                                                                RETAINED            TOTAL
                                     REGISTERED CAPITAL -     ADDITIONAL        EARNINGS        SHAREHOLDERS
                                           PAID IN          PAID IN CAPITAL   (DEFICIENCY)   EQUITY (DEFICIENCY)
                                     --------------------   ---------------   ------------   -------------------
<S>                                  <C>                    <C>               <C>            <C>
Balance, January 1, 1999...........        DM25,500            DM     --       DM 201,654        DM 227,154
Net income and total comprehensive
  income...........................                                               182,180           182,180
Distributions......................                                              (120,000)         (120,000)
                                           --------            ---------       ----------        ----------
Balance, December 31, 1999.........          25,500                   --          263,834           289,334
Net income and total comprehensive
  income*..........................                                                45,891            45,891
Additional paid in capital
  resulting from sale of PDF shares
  to shareholders*.................                               70,753                             70,753
Distributions*.....................                              (70,753)        (468,580)         (539,333)
                                           --------            ---------       ----------        ----------
Balance, March 31, 2000*...........        DM25,500            DM     --       DM(158,855)       DM(133,355)
                                           ========            =========       ==========        ==========
</TABLE>

 
---------------
 
* Unaudited
 
See notes to financial statements.
 
                                      F-24

<PAGE>   88
 
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                            STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                    YEAR ENDED            MARCH 31,
                                                   DECEMBER 31,    ------------------------
                                                       1999           1999          2000
                                                   ------------    ----------    ----------
                                                                         (UNAUDITED)
<S>                                                <C>             <C>           <C>
Operating activities:
  Net income.....................................   DM 182,180     DM 135,539    DM  45,891
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization...............      140,206         20,237        23,645
     Deferred income taxes.......................      (47,839)       (13,137)       (2,600)
     Changes in operating assets and liabilities:
       Accounts receivable.......................     (211,151)      (399,522)     (432,130)
       Prepaid expenses and other assets.........       25,798       (111,210)        3,685
       Accounts payable..........................       31,793         11,024        (6,929)
       Other accrued liabilities and income taxes
          payable................................      (48,606)        24,309        (2,504)
       Deferred revenues.........................        3,800          1,000         2,000
                                                    ----------     ----------    ----------
Net cash provided by (used in) operating
  activities.....................................       76,181       (331,760)     (368,942)
                                                    ----------     ----------    ----------
Investing activities:
  Equipment additions............................     (178,473)      (115,598)      (25,874)
  Payment to exercise warrants...................                                   (20,320)
                                                    ----------     ----------    ----------
Net cash used in investing activities............     (178,473)      (115,598)      (46,194)
                                                    ----------     ----------    ----------
Financing activities:
  Shareholder distributions......................     (120,000)                    (539,333)
  Proceeds from borrowings.......................       59,900         59,900
  Repayments of borrowings.......................      (12,211)        (2,233)       (3,434)
  Proceeds from sale of PDF stock to
     shareholders................................                                   176,481
  Bank overdraft.................................                        (270)      415,741
                                                    ----------     ----------    ----------
Net cash provided by (used in) investing
  activities.....................................      (72,311)        57,397        49,455
                                                    ----------     ----------    ----------
Net decrease in cash.............................     (174,603)      (389,961)     (365,681)
Cash at beginning of period......................      552,142        552,142       377,539
                                                    ----------     ----------    ----------
Cash at end of period............................   DM 377,539     DM 162,181    DM  11,858
                                                    ==========     ==========    ==========
Supplemental cash flow information:
  Cash payments for interest.....................   DM   8,086     DM     562    DM   6,839
  Cash payments for income taxes.................      148,954         27,590        37,238
</TABLE>

 
See notes to financial statements.
 
                                      F-25

<PAGE>   89
 
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                         NOTES TO FINANCIAL STATEMENTS
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

THE COMPANY
 
     Applied Integrated Systems and Software Entwicklungs-, Produktions- und
Vertriebs GmbH (the "Company" or "AISS") was founded on February 24, 1989 and
develops software tools for the semiconductor industry.
 
UNAUDITED INTERIM FINANCIAL INFORMATION
 
     The interim financial information as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited financial statements. In the opinion of management,
such unaudited financial information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
interim information. The operating results for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
full fiscal year.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("US GAAP")
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Despite
management's best effort to establish good faith estimates and assumptions,
actual results could differ from those estimates.
 
REVENUE RECOGNITION
 
     Software license revenue is recognized upon receipt of the product by the
customer, provided that the license fee is fixed and determinable, collection is
probable and all significant contractual obligations relating to this license
have been satisfied (as described in the provisions of Statement of Position No.
97-2 "Software Revenue Recognition"). Maintenance contracts generally call for
the Company to provide technical support and software updates and upgrades to
customers. Maintenance revenue is deferred and recognized ratably over the term
of the agreement, which is generally one year. Revenue from services, primarily
consulting and research and development, is recognized as the related services
are performed.
 
COST OF REVENUES
 
     Cost of license revenue consists primarily of media, product packaging,
documentation and other production costs, and third-party royalties. Cost of
professional services and maintenance consists primarily of salaries and
benefits, including cost of services provided by third party consultants engaged
by the Company.
 
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
 
     The Company operates in the software industry and can be affected by a
variety of factors. For example, management of the Company believes that changes
in any of the following areas could have a significant negative effect on the
Company in terms of its future financial position, results of operations and
cash flows: ability to obtain additional financing; regulatory changes;
fundamental changes in the
 
                                      F-26

<PAGE>   90
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
technology underlying software products; market acceptance of the Company's
products under development; development of sales channels; litigation or other
claims against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new product
introductions by competitors.
 
CONCENTRATION OF CREDIT RISK
 
     Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of account receivables. The
Company performs ongoing credit evaluations of its customers.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The carrying amount of cash, accounts receivable, accounts payable and
borrowings approximates fair value due to the short-term nature of these
instruments. The fair value of the warrants as of December 31, 1999 was
approximately DM170,000.
 
EQUIPMENT, FURNITURE AND FIXTURES
 
     Equipment, furniture and fixtures are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives (three to ten years) of the related assets.
 
OTHER ASSETS
 
     Long-term assets consist of warrants obtained from PDF Solutions, Inc. in
an agreement dated September 17, 1996. These warrants were issued to the Company
for the use of one of the Company's software products. The warrants are recorded
at their estimated fair value at the date of issuance.
 
RESEARCH AND DEVELOPMENT
 
     Research and development costs are expensed as incurred. The cost of
developing new software products and enhancements are expensed as research and
development costs as incurred because the Company believes that establishment of
technological feasibility occurs concurrently with the date of general release
of related products.
 
INTANGIBLE ASSETS
 
     Intangible assets represent internal use software and are recorded at cost
and are amortized over periods ranging from three to five years. Accumulated
amortization was approximately DM19,186 at December 31, 1999.
 
INCOME TAXES
 
     The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
 
                                      F-27

<PAGE>   91
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
EARNINGS PER SHARE
 
     The Company is organized as a GmbH and has no tradable shares. Earnings per
share has not been calculated.
 
COMPREHENSIVE INCOME
 
     SFAS No. 130, "Reporting Comprehensive Income," requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources. Comprehensive income was equal to net
income for all periods presented.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
     In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment charge has
been recorded in any of the periods presented.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 2000 and must be applied to instruments issued, acquired or substantively
modified after December 31, 1997. The Company does not expect the adoption of
the accounting pronouncement to have a material effect on its financial
position, results of operations or cash flows.
 
NOTE 2: EQUIPMENT, FURNITURE AND FIXTURES
 
     Equipment, furniture and fixtures at December 31 consist of:
 

<TABLE>
<S>                                                      <C>
Equipment, furniture and fixtures......................  DM 309,065
Accumulated depreciation...............................    (206,676)
                                                         ----------
                                                         DM 102,389
                                                         ==========
</TABLE>

 
NOTE 3: BORROWINGS
 
     The Company has a DM 150,000, secured line of credit with a bank.
Borrowings under the line of credit are for working capital requirements and
other general corporate purposes and bear an interest rate of 9.5 percent. The
credit agreement is secured by the shareholders of the Company. At December 31,
1999, the Company did not have any amounts outstanding under the agreement.
 
                                      F-28

<PAGE>   92
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
     The Company borrowed DM 59,900 at approximately 6.4 percent in January 1999
to finance the acquisition of an automobile. The term of the financing was for a
term of approximately four years. The required reductions in principle in the
next three years are as follows:
 

<TABLE>
<S>                                                <C>
2000.............................................  DM14,069
2001.............................................    14,994
2002.............................................    18,626
                                                   --------
                                                   DM47,689
                                                   ========
</TABLE>

 
NOTE 4: ACCRUED EXPENSES AND OTHER LIABILITIES
 
     Accrued expenses and other liabilities at December 31, 1999 consisted of
the following:
 

<TABLE>
<S>                                                       <C>
Accrued compensation and related benefits...............  DM362,428
Warranty................................................     50,400
Other...................................................     20,627
                                                          ---------
                                                          DM433,455
                                                          =========
</TABLE>

 
NOTE 5: SHAREHOLDERS' EQUITY (DEFICIENCY)
 
     The registered capital of the Company amounted to DM 51,000 as of December
31, 1999, of which DM 25,500 has been paid in by the company's shareholders.
 
     On January 4, 2000, the Company exercised the warrants for shares in PDF
Solutions Inc. that were issued on September 17, 1996. At the date the warrants
were exercised, the Company paid DM 20,320 for the 249,999 shares. The
shareholders of the Company then purchased these warrants from the Company for
DM 176,408. The after tax gain related to this related party transaction was
recorded as a contribution to additional paid in capital. The additional paid in
capital was repaid to the shareholders in March 2000.
 
NOTE 6: INCOME TAXES
 
     Federal corporation income tax is levied at 40 percent and a solidarity
surcharge is levied on the federal corporate tax rate. The solidarity tax rate
was 5.50 percent in 1999. Upon distribution of retained earnings to
shareholders, the corporation tax rate on the distributed earnings is reduced to
30 percent.
 
     German trade income tax is levied at a rate of approximately 19.7 percent.
This tax can be deducted from the corporation tax.
 
                                      F-29

<PAGE>   93
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
     The significant components of the net deferred tax asset at December 31,
1999 which reflect the tax effects of the Company's temporary differences are as
follows:
 

<TABLE>
<S>                                                           <C>
NET DEFERRED TAX ASSETS -- CURRENT:
Vacation accrual............................................  DM38,102
Warranty accrual............................................    27,004
Deferred revenue............................................     5,358
Other.......................................................     1,665
                                                              --------
                                                                72,129
                                                              --------
NET DEFERRED TAX LIABILITY -- NON-CURRENT:
Capital expenditures reserve................................    21,432
Warrants....................................................     9,722
                                                              --------
                                                                31,154
                                                              --------
Net deferred tax asset......................................  DM40,975
                                                              ========
</TABLE>

 
     The provision for income taxes consists of the following:
 

<TABLE>
<S>                                               <C>
Current.........................................  DM145,716
Deferred........................................    (47,839)
                                                  ---------
                                                  DM 97,877
                                                  =========
</TABLE>

 
     The provision for income taxes differs from the amounts computed by
applying the Federal corporation income tax rate to income before income taxes,
as follows:
 

<TABLE>
<S>                                                        <C>         <C>
Amounts computed by applying Federal statutory rate......  DM112,023    40.0%
Trade tax, net of Federal income taxes...................     31,870    11.4%
Solidarity tax...........................................      3,733     1.3%
Credit for dividend distribution.........................    (49,792)  (17.8)%
Other....................................................         43      --
                                                           ---------   -----
                                                           DM 97,877    34.9%
                                                           =========   =====
</TABLE>

 
NOTE 7: OPERATING LEASES
 
     The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Rent expense is reflected on a straight-line basis
over the term of the lease. Future minimum rental payments at December 31, 1999
under these leases, which expire in the first quarter of 2002, are as follows:
 

<TABLE>
<S>                                               <C>
2000............................................  DM112,000
2001............................................    112,000
2002............................................     10,000
                                                  ---------
          Total.................................  DM234,000
                                                  =========
</TABLE>

 
     Total rent expense under all operating leases was approximately DM 91,560
for the year ended December 31, 1999.
 
                                      F-30

<PAGE>   94
                  APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
                 ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
       YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
                     (INFORMATION AS OF MARCH 31, 2000 AND
        FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
 
NOTE 8: BUSINESS SEGMENT
 
     The Company operates in one industry segment consisting of developing,
distribution, and maintenance for software, computer hardware and technical
supply. The company's operations are primarily in Germany.
 
     The following customers, a German electronics company and PDF Solutions,
Inc., accounted for 53% and 33% of the net revenues of the Company in 1999,
respectively.
 
NOTE 9: SUBSEQUENT EVENT
 
     On April 27, 2000, the Company was acquired by PDF Solutions Inc., a U.S.
company, for approximately DM 2,647,375 (US$1,250,000). PDF Solutions provides
comprehensive infrastructure technologies and services to improve yield and
optimize performance of integrated circuits.
 
                                      F-31

<PAGE>   95
 
                              PDF SOLUTIONS, INC.
 
           UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
     On April 27, 2000, the Company acquired all of the outstanding common stock
of Applied Integrated Systems and Software GmbH ("AISS"), a German company, for
$1.25 million, consisting of $995,000 in notes payable and $255,000 in cash.
AISS develops software and provides yield management services to the
semiconductor industry. The acquisition is accounted for using the purchase
method and the Company's consolidated financial statements reflect the results
of operations of AISS from the date of acquisition. The aggregate purchase price
was allocated to the assets and liabilities acquired based on their fair value
at date of acquisition. The total consideration (including costs of acquisition)
exceeds the fair value of the net liabilities assumed by $2.1 million, which was
allocated to acquired technology, employee workforce and goodwill being
amortized over a period of four years.
 
     The accompanying unaudited pro forma consolidated financial statements are
presented in accordance with Article 11 of Regulation S-X.
 
     The accompanying unaudited pro forma consolidated statements of operations
give effect to the acquisition of AISS as if it had occurred on January 1, 1999,
by consolidating the results of operations of AISS with PDF for the year ended
December 31, 1999 and the six months ended June 30, 2000.
 
     The unaudited pro forma consolidated information is presented for
illustrative purposes only, and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.
 
     The pro forma earnings per share disclosed in the unaudited pro forma
consolidated statements of operations have assumed the conversion of the
8,750,000 shares of Series A convertible preferred stock into common stock since
these shares will automatically convert upon the effectiveness of the Company's
planned initial public offering.
 
     The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of the Company and AISS.
 
                                      F-32

<PAGE>   96
 
                              PDF SOLUTIONS, INC.
 
           UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1999
 

<TABLE>
<CAPTION>
                                                                PRO FORMA
                                      PDF         AISS(1)      ADJUSTMENTS    NOTES     PRO FORMA
                                  -----------    ----------    -----------    -----    -----------
<S>                               <C>            <C>           <C>            <C>      <C>
Revenue:
  Design-to-silicon yield
     solutions..................  $10,566,597    $1,498,993    $ (486,097)    (2)      $11,579,493
  Gain share....................    1,257,000            --            --                1,257,000
                                  -----------    ----------    ----------              -----------
     Total revenue..............   11,823,597     1,498,993      (486,097)              12,836,493
                                  -----------    ----------    ----------              -----------
Costs and expenses:
  Cost of design-to-silicon
     yield solutions............    4,090,649       575,314            --                4,665,963
  Research and development......    3,086,825       278,201      (486,097)    (2)        2,878,929
  Selling, general and
     administrative.............    4,294,521       491,370       525,406     (3)        5,311,297
  Stock-based compensation
     amortization...............       68,282            --            --                   68,282
                                  -----------    ----------    ----------              -----------
     Total costs and expenses...   11,540,277     1,344,885        39,309               12,924,471
                                  -----------    ----------    ----------              -----------
Income (loss) from operations...      283,320       154,108      (525,406)                 (87,978)
Interest income and other.......      105,021        (1,570)      (69,650)    (4)           33,801
                                  -----------    ----------    ----------              -----------
Income (loss) before taxes......      388,341       152,538      (595,056)                 (54,177)
Tax provision (benefit).........      533,087        53,311      (179,812)    (5)          406,586
                                  -----------    ----------    ----------              -----------
Net income (loss)...............  $  (144,746)   $   99,227    $ (415,244)             $  (460,763)
                                  ===========    ==========    ==========              ===========
Pro forma net loss per
  share -- basic and diluted....  $     (0.02)                                         $     (0.03)
                                  ===========                                          ===========
Shares used in computing pro
  forma basic diluted net loss
  per share.....................    9,128,344                   8,750,000     (6)       17,878,344
                                  ===========                  ==========              ===========
</TABLE>

 
See notes to unaudited pro forma consolidated statements of operations.
 
                                      F-33

<PAGE>   97
 
                              PDF SOLUTIONS, INC.
 
           UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
                         SIX MONTHS ENDED JUNE 30, 2000
 

<TABLE>
<CAPTION>
                                           PDF               AISS(1)
                                     SIX MONTHS ENDED    JANUARY 1, 2000     PRO FORMA             PRO FORMA
                                      JUNE 30, 2000     TO APRIL 27, 2000   ADJUSTMENTS   NOTES   ADJUSTMENT
                                     ----------------   -----------------   -----------   -----   -----------
<S>                                  <C>                <C>                 <C>           <C>     <C>
Revenue:
  Design-to-silicon yield
     solutions.....................    $ 5,967,816          $481,508        $ (159,465)    (2)    $ 6,289,859
  Gain share.......................      2,308,000                --                --              2,308,000
                                       -----------          --------        ----------            -----------
     Total revenue.................      8,275,816           481,508          (159,465)             8,597,859
                                       -----------          --------        ----------            -----------
Costs and expenses:
  Cost of design-to-silicon yield
     solutions.....................      2,904,980           205,930                --              3,110,910
  Research and development.........      2,242,114            44,457          (159,465)    (2)      2,127,106
  Selling, general and
     administrative................      3,024,722           128,288           175,135     (3)      3,328,145
  Stock-based compensation
     amortization..................      1,692,971                --                --              1,692,971
                                       -----------          --------        ----------            -----------
     Total costs and expenses......      9,864,787           378,675            15,670             10,259,132
                                       -----------          --------        ----------            -----------
Income (loss) from operations......     (1,588,971)          102,833          (175,135)            (1,661,273)
Interest income and other..........         41,321              (331)          (23,216)    (4)         17,774
                                       -----------          --------        ----------            -----------
Income (loss) before taxes.........     (1,547,650)          102,502          (198,351)            (1,643,499)
Tax provision (benefit)............        273,024            29,969           (59,936)    (5)        243,057
                                       -----------          --------        ----------            -----------
Net income (loss)..................    $(1,820,674)         $ 72,533        $ (138,415)           $(1,886,556)
                                       ===========          ========        ==========            ===========
Pro forma net loss per
  share -- basic and diluted.......    $     (0.17)                                               $     (0.10)
                                       ===========                                                ===========
Shares used in computing pro forma
  basic and diluted loss per
  share............................     10,474,269                           8,750,000     (6)     19,224,269
                                       ===========                          ==========            ===========
</TABLE>

 
See notes to unaudited pro forma consolidated statements of operations.
 
                                      F-34

<PAGE>   98
 
                              PDF SOLUTIONS, INC.
 
       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
     The following pro forma adjustments have been made to the unaudited pro
forma consolidated statements of operations:
 
     1. Amount translated from DM to US dollars using average annual exchange
        rates of DM1.836/$ and DM1.998/$ for the year ended December 31, 1999
        and the six months ended June 30, 2000, respectively.
 
     2. Reflects the elimination of sales by AISS to the Company.
 
     3. Reflects the amortization of intangible assets totaling $2.1 million
        resulting from the acquisition on a straight line basis over four years.
 
     4. Reflects interest charges on the notes payable issued in connection with
        the acquisition at the stated interest rate of 7%.
 
     5. Reflects the reduction of the deferred tax liability recorded in
        connection with the acquisition of AISS.
 
     6. Reflects the conversion of all Series A convertible preferred stock
        outstanding at June 30, 2000 into 8,750,000 shares of common stock which
        will occur automatically upon the closing of the planned initial public
        offering.
 
                                   *  *  *  *
 
                                      F-35

<PAGE>   99
 
                           [PDF Solutions, Inc. Logo]

<PAGE>   100
 

 
                                   PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee and the Nasdaq National Market listing
fee.
 

<TABLE>
<CAPTION>
                                                                AMOUNT
                                                              TO BE PAID
                                                              ----------
<S>                                                           <C>
SEC registration fee........................................   $19,800
NASD filing fee.............................................     8,000
Nasdaq National Market listing fee..........................     *
Printing and engraving expenses.............................     *
Legal fees and expenses.....................................     *
Accounting fees and expenses................................     *
Blue Sky qualification fees and expenses....................     *
Transfer Agent and Registrar fees...........................     *
Miscellaneous fees and expenses.............................     *
                                                               -------
  Total.....................................................     *
                                                               =======
</TABLE>

 
---------------
* to be filed by amendment
 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IV of our Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of our Bylaws (Exhibit 3.3
hereto) provide for indemnification of our directors, officers, employees and
other agents to the maximum extent permitted by Delaware Law. In addition, we
have entered into Indemnification Agreements (Exhibit 10.1 hereto) with our
officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides
for cross-indemnification among us and the Underwriters with respect to certain
matters, including matters arising under the Securities Act.
 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Since November, 1995 we have sold and issued the following securities:
 
     1. On December 4, 1995, we issued 8,750,000 shares of Series A preferred
stock to investors for an aggregate cash consideration of $0.40 per share or
$3,500,000.
 
     2. On August 4, 2000, we issued 526,315 shares of Series B preferred stock
to investors for an aggregate cash consideration of $9.50 per share or
$5,000,000.
 
     3. From inception through June 30, 2000, we have issued warrants to
purchase 249,999 shares of common stock at a price of $0.04 per share. These
warrants have been exercised and no warrants remain outstanding.
 
     4. From our inception through June 30, 2000, we have issued 8,383,525
options and rights to purchase common stock of PDF with a weighted average
exercise price of $0.55 per share to a number of our employees, and directors
and consultants.
 
                                      II-1

<PAGE>   101
 
     The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D, or other applicable exemption of such Securities Act as transactions by an
issuer not involving any public offering. In addition, certain issuances
described in Item 2 were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
 

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     See exhibits listed on the Exhibit Index following the signature page of
this Form S-1, which is incorporated herein by reference.
 

ITEM 17. UNDERTAKINGS
 
     The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     The undersigned registrant hereby undertakes that:
 
     (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
 
     (2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
 
                                      II-2

<PAGE>   102
 

                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Jose, State of
California on August 7, 2000
 
                                          PDF SOLUTIONS, INC.
 
                                          By: /s/ JOHN K. KIBARIAN
                                            ------------------------------------
                                              John K. Kibarian
                                              President and Chief Executive
                                              Officer
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, John K.
Kibarian and P. Steven Melman, and each of them, as his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this Registration Statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
 

<TABLE>
<CAPTION>
                  SIGNATURE                                   TITLE                         DATE
                  ---------                                   -----                         ----
<S>                                            <C>                                     <C>
 
            /s/ JOHN K. KIBARIAN                  Director, President and Chief        August 7, 2000
---------------------------------------------      Executive Officer (Principal
              John K. Kibarian                          Executive Officer)
 
            /s/ P. STEVEN MELMAN                 Chief Financial Officer and Vice      August 7, 2000
---------------------------------------------  President Finance and Administration
              P. Steven Melman                 (Principal Financial and Accounting
                                                             Officer)
 
               /s/ B.J. CASSIN                               Director                  August 7, 2000
---------------------------------------------
                 B.J. Cassin
 
             /s/ LUCIO L. LANZA                              Director                  August 7, 2000
---------------------------------------------
               Lucio L. Lanza
 
             /s/ DONALD L. LUCAS                             Director                  August 7, 2000
---------------------------------------------
               Donald L. Lucas
 
             /s/ KIMON MICHAELS                              Director                  August 7, 2000
---------------------------------------------
               Kimon Michaels
</TABLE>

 
                                      II-3

<PAGE>   103
 

                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <S>       <C>
     1.1      Form of Underwriting Agreement (subject to negotiation).*
     3.1      Amended and Restated Certificate of Incorporation of PDF
              Solutions, Inc.
     3.2      Second Amended and Restated Certificate of Incorporation of
              PDF Solutions, Inc. (proposed).
     3.3      Amended and Restated Bylaws of PDF Solutions, Inc.
     3.4      Amended and Restated Bylaws of PDF Solutions, Inc.
              (proposed).
     4.1      Specimen Stock Certificate.*
     4.2      First Amended and Restated Rights Agreement dated August 4,
              2000.
     5.1      Opinion of Orrick Herrington & Sutcliffe LLP regarding the
              legality of the common stock being registered.*
    10.1      Integration Technology Agreement between PDF Solutions, Inc.
              and Philips Semiconductor.+
    10.2      Integration Technology Agreement between PDF Solutions, Inc.
              and Conexant Systems, Inc.+
    10.3      Yield Improvement Consulting Agreement between PDF
              Solutions, Inc. and Toshiba Corporation.+
    10.4      Yield Improvement Consulting Agreement between PDF
              Solutions, Inc. and Philips Semiconductor.+
    10.5      Yield Improvement Agreement between PDF Solutions, Inc. and
              SONY Corporation.+
    10.6      Technology Cooperation Agreement between PDF Solutions, Inc.
              and Toshiba Corporation.+
    10.7      Form of Indemnification Agreement between PDF Solutions,
              Inc. and each of its Officers and Directors.
    10.8      1996 Stock Option Plan and related agreements.
    10.9      1997 Stock Plan and related agreements.
    10.10     2000 Stock Plan and related agreements.
    10.11     2000 Employee Stock Purchase Plan.
    10.12     Lease Agreement between PDF Solutions, Inc. and Metropolitan
              Life Insurance Company dated April 1, 1996.
    10.13     Credit Agreements between PDF Solutions, Inc. and Imperial
              Bank dated July 6, 1999 and August 12, 1999.
    10.14     Offer letter to P. Steven Melman dated July 10, 1998.
    21.1      List of Subsidiaries.
    23.1      Consent of Deloitte & Touche LLP
    23.2      Consent of Deloitte & Touche GmbH
    23.3      Consent of Orrick Herrington & Sutcliffe LLP (part of
              Exhibit 5.1)*
    24.1      Power of Attorney (see page II-3)
</TABLE>

 
---------------
* To be supplied by amendment.
 
+ Confidential treatment requested as to certain portions of this Exhibit.

<PAGE>   104
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
PDF Solutions, Inc.
 
     We have audited the consolidated financial statements of PDF Solutions,
Inc. and its subsidiaries (collectively, the "Company") as of December 31, 1998
and 1999, and for each of the three years in the period ended December 31, 1999,
and have issued our report thereon dated April 3, 2000 (April 27, 2000 as to the
first paragraph of Note 2); such consolidated financial statements and report
are included elsewhere in the Company's Registration Statement on Form S-1. Our
audits also included the consolidated financial statement schedule of PDF
Solutions, Inc, listed in Item 16(b). This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
April 3, 2000

<PAGE>   105
 
                                                                     SCHEDULE II
 
                              PDF SOLUTIONS, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 

<TABLE>
<CAPTION>
                                                BALANCE AT     CHARGED TO     DEDUCTIONS/     BALANCE AT
                                               BEGINNING OF    COSTS AND     WRITE-OFFS OF      END OF
                    DATE:                         PERIOD        EXPENSES       ACCOUNTS         PERIOD
                    -----                      ------------    ----------    -------------    ----------
<S>                                            <C>             <C>           <C>              <C>
Allowance for doubtful accounts
  June 30, 2000..............................    $144,000       $ 9,000           $--          $153,000
  December 31, 1999..........................    $ 93,000       $51,000           $--          $144,000
  December 31, 1998..........................    $ 53,000       $40,000           $--          $ 93,000
  December 31, 1997..........................    $  2,000       $51,000           $--          $ 53,000
</TABLE>






<PAGE>   1


                                                                     EXHIBIT 3.1


                              AMENDED AND RESTATED

                            ARTICLES OF INCORPORATION

                                       OF

                               PDF SOLUTIONS, INC.


        The undersigned, John K. Kibarian and Peter Cohn certify that:

        1. They are the duly elected President and Chief Executive Officer and
Secretary, respectively of PDF Solutions, Inc., a California corporation.

        2. The Articles of Incorporation of this corporation are amended and
restated to read in full as follows:

                                       "I

        The name of this corporation is: PDF Solutions, Inc.

                                       II

        The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.

                                       III

        (A) Classes of Stock. The corporation is authorized to issue two classes
of shares to be designated respectively "Preferred Stock" and "Common Stock" and
each class shall have a par value of $0.0001 per share. The total number of
shares of Preferred Stock authorized is 9,300,000 and the total number of shares
of Common Stock authorized is 50,000,000.

        (B) Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by these
 Amended and Restated Articles of
Incorporation may be issued from time to time in one or more series. The first
series of Preferred Stock shall be designated "Series A Preferred Stock" and
shall consist of 8,750,000 shares. The second series of Preferred Stock shall be
designated "Series B Preferred Stock" and shall consist of 550,000 shares. The
rights, preferences, privileges, and restrictions granted to and imposed on the
Preferred Stock are as follows:


                                      -1-

<PAGE>   2

        (1) Dividends.

                (aa) The holders of outstanding Preferred Stock shall, in pari
passu, be entitled to receive in any fiscal year, when, as and if declared by
the Board of Directors, out of any assets at the time legally available
therefor, dividends in cash at the rate of $0.02 per share of Series A Preferred
Stock per annum and at the rate of $0.76 per share of Series B Preferred Stock
per annum, before any cash dividend is paid on Common Stock. Such dividend or
distribution may be payable annually or otherwise as the Board of Directors may
from time to time determine. Dividends or distributions (other than dividends
payable solely in shares of Common Stock) may be declared and paid upon shares
of Common Stock in any fiscal year of the corporation only if dividends shall
have been paid on or declared and set apart upon all shares of Preferred Stock
at such annual rate; and no further dividends shall be paid to holders of shares
of Preferred Stock in excess of such annual rate in any fiscal year unless at
the same time equivalent dividends are paid to holders of shares of Common
Stock. The right to such dividends on shares of Preferred Stock shall not be
cumulative and no right shall accrue to holders of shares of Preferred Stock by
reason of the fact that dividends on said shares are not declared in any prior
year, nor shall any undeclared or unpaid dividend bear or accrue interest.

                (bb) In the event this corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by this
corporation or other persons, assets (excluding cash dividends) or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of the Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the
Preferred Stock were the holders of the number of shares of Common Stock of the
corporation into which their respective shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive such distribution.

        (2) Voting Rights.

                (aa) In General. Subject to subsection (bb) hereof and except as
otherwise required by law, the holders of Preferred Stock and the holders of
Common Stock shall be entitled to notice of any shareholders' meeting and to
vote as a single class upon any matter submitted to the shareholders for a vote,
as follows: (i) each holder of Preferred Stock shall have one vote for each full
share of Common Stock into which its shares of Preferred Stock would be
convertible on the record date for the vote and (ii) the holders of Common Stock
shall have one vote per share of Common Stock.

                (bb) Voting for Board of Directors. The Board of Directors of
this corporation shall consist of six members. The holders of shares of
Preferred Stock, voting separately as a class, shall elect two members of the
Board of Directors of the corporation (the "PREFERRED DIRECTORS"). The holders
of shares of Common Stock, voting separately as a class, shall elect two members
of the Board of Directors of the corporation (the "COMMON DIRECTORS"). The
remaining two members of the Board of Directors (the "MUTUALLY AGREED UPON
DIRECTORS") shall be elected by the holders of the shares of Common Stock and
Preferred Stock, voting together as a class. If a vacancy on the Board of
Directors is to be filled by the Board of Directors, only a director or
directors elected by the same class of shareholders as those who would be
entitled to vote to fill such vacancy, if any, shall vote to fill such vacancy,
unless such vacancy is the position held by Mutually Agreed Upon Director, in
which case


                                      -2-

<PAGE>   3

such vacancy may be filled by the majority of the remaining directors. No action
by members of the Board of Directors filling a vacancy on the Board of Directors
shall be effective until 10 days after all Board members who do not have a right
to vote on such appointment have received notice thereof. A majority of the
Board members entitled to receive such notice may waive such notice requirement
on behalf of all such Board members. A director may be removed from the Board of
Directors with or without cause by the vote or consent of a majority of the
holders of the outstanding class or series with voting power to elect him or her
in accordance with the California General Corporation Law.

        (3) Conversion. The holders of the Preferred Stock shall have conversion
rights as follows (the "CONVERSION RIGHTS"):

                (aa) Right to Convert.

                        (i) Each share of Preferred Stock shall be convertible,
at the option of the holder thereof, at any time after the date of issuance of
such share at the office of this corporation or any transfer agent for the
Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing (A) $0.40 in the case of the Series A
Preferred Stock and (B) $9.50 in the case of the Series B Preferred Stock by the
Conversion Price at the time in effect for such share. The initial "CONVERSION
PRICE" for shares of Preferred Stock shall be $0.40 for share of Series A
Preferred Stock and $9.50 for shares of Series B Preferred Stock. Such initial
Conversion Price shall be subject, however, to the adjustments described below.
The number of shares into which each share of Preferred Stock shall be converted
shall be known as the "CONVERSION RATE." Any increase or decrease in the
Conversion Price shall be reflected in a decrease or increase in the Conversion
Rate as determined by reference to the first sentence of this section
III(B)(3)(aa)(i).

                        (ii) Each share of Preferred Stock shall automatically
be converted into shares of Common Stock at the then effective Conversion Rate
in the event of, and contingent upon, the consummation of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the corporation to the public at a price per
share of not less than $9.50 (as adjusted for stock splits, reverse stock splits
and the like) and an aggregate offering price of not less than $7,500,000. Each
share of Series A Preferred Stock shall automatically be converted into shares
of common stock upon the consent of the holders of not less than a majority in
voting interest of the then outstanding shares of Series A Preferred Stock. Each
share of Series B Preferred Stock shall automatically be converted into shares
of common stock upon the consent of the holders of not less than a majority in
voting interest of the then outstanding shares of Series B Preferred Stock.

                        (iii) No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock and any shares of Preferred Stock
surrendered for conversion which would otherwise result in a fractional share of
Common Stock shall be redeemed for the then fair market value thereof as
determined by the corporation's Board of Directors, payable as promptly as
possible whenever funds are legally available therefor. If more than one share
of Preferred Stock is surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock to be issued upon conversion
shall be computed on the basis of the aggregate number of shares of Preferred
Stock so surrendered.


                                      -3-

<PAGE>   4

                (bb) Mechanics of Conversion. Before any holder of Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the corporation or of any transfer agent for the Preferred
Stock, and shall give written notice to the corporation at such office that such
holder elects to convert the same and shall state therein the name or names in
which such holder wishes the certificate or certificates for the number of
shares of Common Stock to be issued. The corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, or to such holder's nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.

                (cc) Adjustment of Conversion Price For Combinations or
Consolidations of Common Stock. In the event the corporation, at any time or
from time to time after the effective date of a written agreement by the
corporation for the initial sale of Series B Preferred Stock (hereinafter
referred to as the "ORIGINAL ISSUE DATE"), effects a subdivision or combination
of its outstanding Common Stock into a greater or lesser number of shares
without a proportionate and corresponding subdivision or combination of its
outstanding Preferred Stock, then and in each such event the Conversion Price
for the Preferred Stock shall be decreased or increased proportionately.

                (dd) Adjustments for Reorganization, Reclassification, Exchange
and Substitution. If the Common Stock issuable upon conversion of the Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock or other securities or property, whether by
reorganization (unless such reorganization is deemed a liquidation under Section
III(B)(4)(bb) hereof), reclassification or otherwise (other than a subdivision
or combination of shares provided for above), the Conversion Rate then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock or other securities or property equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders upon conversion of the Preferred Stock immediately before such
event; and, in any such case, appropriate adjustment shall be made in the
application of the provisions herein set forth with respect to the rights and
interest thereafter of the holders of the Preferred Stock, to the end that the
provisions set forth herein (including provisions with respect to changes in and
other adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Preferred Stock.

                (ee) Adjustment of Conversion Price for Dividends, Distributions
and Common Stock Equivalents. In the event the corporation at any time or from
time to time after the Original Issue Date shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock


                                      -4-

<PAGE>   5

or other securities or rights (hereinafter referred to as "COMMON STOCK
EQUIVALENTS") convertible into or entitling the holder thereof to receive
additional shares of Common Stock without payment of any consideration by such
holder for such Common Stock Equivalents or the additional shares of Common
Stock, then and in each such event the maximum number of shares (as set forth in
the instrument relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) of Common Stock issuable in
payment of such dividend or distribution or upon conversion or exercise of such
Common Stock Equivalents shall be deemed to be issued and outstanding as of the
time of such issuance or, in the event such a record date shall have been fixed,
as of the close of business on such record date. In each such event, the
Conversion Price for the Preferred Stock shall be decreased as of the time of
such issuance or, in the event such a record date shall have been fixed, as of
the close of business on such record date, by dividing the Conversion Price for
such series by a fraction,

                        (i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance on the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution or upon conversion or exercise of
such Common Stock Equivalents, and

                        (ii) the denominator of which shall be the total number
of shares of Common Stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance on the close of
business on such record date provided, however, (A) if such record date shall
have been fixed and such dividend is not fully paid or if such distribution is
fully made on the date fixed therefor, the Conversion Price for such series
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price for such series shall be adjusted pursuant
to this paragraph III(B)(3)(ee) as of the time of actual payment of such
dividends or distribution; (B) if such Common Stock Equivalents provide, with
the passage of time or otherwise, for any decrease in the number of shares of
Common Stock issuable upon conversion or exercise thereof, the Conversion Price
for such series shall, upon any such decrease becoming effective, be recomputed
to reflect such decrease insofar as it affects the rights of conversion or
exercise of the Common Stock Equivalents then outstanding; and (C) upon the
expiration of any rights or conversion or exercise under any unexercised Common
Stock Equivalents, the Conversion Price for such series computed upon the
original issue thereof shall, upon such expiration, be recomputed as if the only
additional shares of Common Stock issued were the shares of such stock, if any,
actually issued upon the conversion or exercise of such Common Stock
Equivalents.

                (ff) Adjustment of Conversion Price for Subsequent Sales Below
Conversion Price. If the corporation shall issue, after the date upon which any
shares of Series B Preferred Stock were first issued (the "PURCHASE DATE"), any
Additional Stock (as defined below) without consideration or for a consideration
per share less than the Conversion Price in effect immediately prior to the
issuance of such Additional Stock, then such Conversion Price shall be adjusted
by multiplying such Conversion Price by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate
consideration received by the corporation for such issuance would purchase at
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock and the denominator of which shall be


                                      -5-

<PAGE>   6

the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of such Additional Stock so issued. For
purposes of this paragraph III(B)(3)(ff) and paragraph III(B)(3)(ee), the shares
of issued or issuable Common Stock that are excluded from the definition of
Additional Stock will be deemed outstanding.

                        (i) No adjustment of the Conversion Price for any series
of Preferred Stock shall be made in an amount less than one cent per share, and
any adjustments which are not required to be made by reason of this sentence
shall not be carried forward nor taken into account in any subsequent
adjustment. Except to the limited extent provided for in paragraphs
III(B)(3)(ff)(iv)(C) and III(B)(3)(ff)(iv)(D), no adjustment of such Conversion
Price pursuant to this paragraph III(B)(3)(ff)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.

                        (ii) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.

                        (iii) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.

                        (iv) In the case of the issuance, whether before, on or
after the Purchase Date of such series of Preferred Stock, of options to
purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities (which are
not excluded from the definition of Additional Stock), the following provisions
shall apply:

                (A) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided in paragraphs III(B)(3)(ff)(ii) and
III(B)(3)(ff)(iii)), if any, received by the corporation upon the issuance of
such options or rights plus the minimum purchase price provided in such options
or rights for the Common Stock covered thereby.

                (B) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the corporation upon the
conversion or exchange of such


                                      -6-

<PAGE>   7

securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in paragraphs
III(B)(3)(ff)(ii) and III(B)(3)(ff)(iii)).

                (C) In the event of any change in the number of shares of Common
Stock deliverable or any increase in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of any series of Preferred Stock obtained with respect to the
adjustment which was made upon the issuance of such options, rights or
securities, and any subsequent adjustments based thereon, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.

                (D) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of any series of Preferred Stock obtained with respect to the
adjustment which was made upon the issuance of such options, rights or
securities or options or rights related to such securities, and any subsequent
adjustments based thereon, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities. Upon the
expiration of any such options or rights, the termination of any such rights to
convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities shall continue to be deemed to be issued.

                (E) All Common Stock deemed issued pursuant to this paragraph
III(B)(3)(ff)(iv)(E) shall be considered issued only at the time of its deemed
issuance and any actual issuance of such stock shall not be an actual issuance
or a deemed issuance of the corporation's Common Stock under the provisions of
this paragraph III(B)(3).

        (gg) No Impairment. The corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this paragraph III(B)(3) and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Preferred Stock against impairment.

        (hh) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price for Preferred Stock pursuant
to this paragraph III(B)(3), the corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment


                                      -7-

<PAGE>   8

is based. The corporation shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of the property which at the time would be
received upon the conversion of such holder's shares of Preferred Stock.

        (ii) Notices of Record Date. In the event of the establishment by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any Common Stock
Equivalents or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the corporation shall mail to each holder of Preferred Stock,
at least twenty (20) days prior to the date specified therein, notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right.

        (jj) Reservation of Stock Issuable Upon Conversion. The corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all then outstanding
shares of the Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Preferred Stock, the corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.

        (kk) Notices. Any notices required by the provisions of this paragraph
III(B)(3) to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at such holder's address appearing on the
books of the corporation.

        (ll) Additional Stock. "ADDITIONAL STOCK" shall mean any shares of
Common Stock issued (or deemed to have been issued pursuant to paragraph
III(B)(3)(ff)(IV)) by this corporation on or after the Original Issue Date other
than:

                (i) shares issued or issuable pursuant to a transaction
described in paragraphs III(B)(3)(cc) through III(B)(3)(ff) hereof,

                (ii) Common Stock issued to officers, directors, employees and
consultants of this corporation directly (and approved by a majority of the
Preferred Directors) or pursuant to a stock option plan, restricted stock plan
or a combination restricted stock and stock option plan,

                (iii) options, warrants or stock (including stock issued upon
conversion of any such options or warrants) previously or in the future issued
or issuable in connection with borrowings from banks or other similar financial
institutions, capital equipment leases, technology


                                      -8-

<PAGE>   9

acquisitions or licenses, or other comparable transactions, provided the
foregoing are approved by a majority of the Preferred Directors; or

                (iv) shares issued or issuable upon conversion of any series of
Preferred Stock.

        (4) Liquidation Preference.

                (aa) In the event of any liquidation, dissolution or winding up
of the corporation, either voluntary or involuntary, the holders of the
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the corporation to the
holders of the Common Stock by reason of their ownership thereof, an amount per
share equal to: (i) $0.40 per share for each share of Series A Preferred Stock
then held by them and (ii) $9.50 per share for each share of Series B Preferred
Stock then held by them, and, in addition, an amount equal to all declared but
unpaid dividends on the Preferred Stock, if any. If, upon the occurrence of such
event, the assets and funds thus distributed among the holders of the Preferred
Stock shall be insufficient to permit the payment to such holders of the full
preferential amount, then the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders of the
Preferred Stock, in proportion to the preferential amount each such holder is
otherwise entitled to receive. After payment has been made to the holders of the
Preferred Stock of the full amounts to which they shall be entitled as
aforesaid, any remaining assets shall be distributed ratably to the holders of
the corporation's Common Stock.

                (bb) A merger of the corporation with or into any other
corporation or corporations, or the merger of any other corporation or
corporations into the corporation, in which consolidation or merger the
shareholders of the corporation receive distributions in cash or securities of
another corporation or corporations as a result of such consolidation or merger,
or a sale of all or substantially all of the assets of the corporation, shall be
treated as a liquidation, dissolution or winding up for purposes of this
paragraph III(B)(4), unless the shareholders of this corporation hold at least
50% of the outstanding voting equity securities of the surviving corporation;
provided that nothing contained in this paragraph (bb) shall limit the right of
a holder of Preferred Stock to convert such shares into Common Stock prior to
the effective date of any such transaction.

        (5) Protective Provisions. In addition to any other rights provided by
law, so long as 4,650,000 shares of Preferred Stock shall be outstanding, this
corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority in voting interest of such
outstanding shares of Preferred Stock, voting together as a single class:

                (aa) amend or repeal any provision of, or add any provision to,
this corporation's Articles of Incorporation or Bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Preferred Stock;

                (bb) authorize shares of any class of stock having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Preferred Stock, or authorize shares of
stock of any class or any bonds, debentures, notes or other obligations


                                      -9-

<PAGE>   10

convertible into or exchangeable for, or having option rights to purchase, any
shares of stock of this corporation having any preference or priority as to
dividends or assets superior to or on a parity with any such preference or
priority of the Preferred Stock;

                (cc) effect in any transaction or series of transactions a sale
or other conveyance of all or substantially all of the assets of the corporation
or any of its subsidiaries, or any consolidation or merger involving the
corporation or any of its subsidiaries where the corporation or such subsidiary
is not the surviving corporation, or any sale of more than 50% of the
corporation's capital stock; or

                (dd) increase the authorized number of shares of Preferred
Stock.

        (C) Common Stock.

                (1) Dividend Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.

                (2) Liquidation Rights. Upon the liquidation, dissolution or
winding up of the corporation, the assets of the corporation shall be
distributed as provided in paragraph III(B)(4) hereof.

                (3) Voting Rights. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.

                                       IV

        (A) Limitation of Directors' Liability. The liability of the directors
of this corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.

        (B) Indemnification of Directors and Officers. This corporation is
authorized to indemnify the directors and officers of the corporation to the
fullest extent permissible under California law.

        (C) Repeal or Modification. Any repeal or modification of the foregoing
provisions of this Article IV by the shareholders of the corporation shall not
adversely affect any right or protection of a director of the corporation
existing at the time of such repeal or modification."

                                    * * * * *

        3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the Board of Directors.


                                      -10-

<PAGE>   11

        4. The foregoing amendment and restatement of the Articles of
Incorporation have been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of the corporation is 14,986,879 shares of
Common Stock and 8,750,000 shares of Series A Preferred Stock. The number of
shares voting in favor of the amendment equaled or exceeded the vote required.
The percentage vote required was (a) more than 50% of the outstanding shares of
Common Stock, voting together as a single class, (b) more than 50% of the
outstanding shares of Series A Preferred Stock, and (c) more than 50% of the
outstanding shares of Common Stock and Series A Preferred Stock, voting together
as a single class. No shares of Series B Preferred Stock are outstanding.


                            [SIGNATURE PAGE FOLLOWS]


                                      -11-

<PAGE>   12

        We further declare under penalty of perjury under the laws of the State
of California that the matter set forth in this certificate are true and correct
of our own knowledge.

Dated: July 31, 2000



                                           /s/ John K. Kibarian                 
                                           -------------------------------------
                                           John K. Kibarian
                                           President and Chief Executive Officer



                                           /s/ Peter Cohn 
                                           -------------------------------------
                                           Peter Cohn
                                           Secretary


                                      -12-



<PAGE>   1


                                                                     EXHIBIT 3.2

                           SECOND AMENDED AND RESTATED

                          CERTIFICATE OF INCORPORATION
                                       OF
                               PDF SOLUTIONS, INC.

        The undersigned, John Kibarian and Peter Cohn, hereby certify that:

        1. They are the duly elected and acting President and Secretary,
respectively, of PDF Solutions, Inc., a Delaware corporation.

        2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on July 19, 2000 under the name of
PDF Solutions, Inc. and the First Amended and Restated Certificate of
Incorporation of this corporation was filed with the Secretary of State of
Delaware on August 4, 2000.

        3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:

                                   "ARTICLE I

        The name of this corporation is PDF Solutions, Inc. (the "Corporation").

                                   ARTICLE II

        The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.

                                   ARTICLE III

        The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.

                                   ARTICLE IV

        (A) The
 Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is 75,000,000 shares,
each with a par value of $0.0001 per share. 70,000,000 shares shall be Common
Stock and 5,000,000 shares shall be Preferred Stock.

        (B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the applicable law of the state of Delaware and within the
limitations and restrictions stated in this Certificate of Incorporation, to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares



<PAGE>   2


of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.

                                    ARTICLE V

        The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.

                                   ARTICLE VI

        On or prior to the date on which the Corporation first provides notice
of an annual meeting of the stockholders, the Board of Directors of the
Corporation shall divide the directors into three classes, as nearly equal in
number as reasonably possible, designated Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders or any special meeting in lieu thereof, the terms of the
Class I directors shall expire and Class I directors shall be elected for a full
term of three years. At the second annual meeting of stockholders or any special
meeting in lieu thereof, the terms of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the third
annual meeting of stockholders or any special meeting in lieu thereof, the terms
of the Class III directors shall expire and Class III directors shall be elected
for a full term of three years. At each succeeding annual meeting of
stockholders or special meeting in lieu thereof, directors elected to succeed
the directors of the class whose terms expire at such meeting shall be elected
for a full term of three years.

        Notwithstanding the foregoing provisions of this Article VI, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.

        Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the Corporation entitled to
vote generally in the election of directors (the "Voting Stock") voting together
as a single class; or (ii) by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Subject to the rights of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Any
director, or the entire Board of Directors, may be removed from office, with or
without cause, by the holders of a majority of the Voting Stock.


                                       2

<PAGE>   3

                                   ARTICLE VII

        In the election of directors, each holder of shares of any class or
series of capital stock of the Corporation shall be entitled to one vote for
each share held. No stockholder will be permitted to cumulate votes at any
election of directors.

                                  ARTICLE VIII

        No action shall be taken by the stockholders of the Corporation other
than at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Bylaws of the Corporation (the "Bylaws"),
and no action shall be taken by the stockholders by written consent.

                                   ARTICLE IX

        The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

                                    ARTICLE X

        (A) Except as otherwise provided in the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least 66
2/3% of the voting power of all of the then-outstanding shares of the voting
stock of the Corporation entitled to vote. The Board of Directors of the
Corporation is expressly authorized to adopt, amend or repeal Bylaws.

        (B) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.

        (C) Advance notice of stockholder nominations for the election of
directors or of business to be brought by the stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws.

                                   ARTICLE XI

        Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.

                                   ARTICLE XII

        The Corporation shall have perpetual existence.

                                  ARTICLE XIII

        (A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally


                                       3

<PAGE>   4

liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. If the General Corporation Law of Delaware is
hereafter amended to authorize, with the approval of a corporation's
stockholders, further reductions in the liability of a corporation's directors
for breach of fiduciary duty, then a director of the Corporation shall not be
liable for any such breach to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.

        (B) Any repeal or modification of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director of
the Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.

                                   ARTICLE XIV

        (A) To the fullest extent permitted by applicable law, the Corporation
is also authorized to provide indemnification of (and advancement of expenses
to) such agents (and any other persons to which Delaware law permits the
Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the General Corporation Law of Delaware,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to a corporation, its
stockholders, and others.

        (B) Any repeal or modification of any of the foregoing provisions of
this Article XIV shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification." 

                                     * * *

                                       4

<PAGE>   5

        The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.

        Executed at Menlo Park, on the ____ day of October, 2000.



                                            ------------------------------------
                                            John Kibarian, President


                                            ------------------------------------
                                            Peter Cohn, Secretary






                                       5



<PAGE>   1

                                                                     EXHIBIT 3.3

                                     BYLAWS

                                       OF

                               PDF SOLUTIONS, INC.



<PAGE>   2



                                     BYLAWS

                                       OF

                               PDF SOLUTIONS, INC.

                         [Effective September 23, 1997]

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                           Page
<S>                                                                         <C>
CORPORATE OFFICES............................................................1

        1.1    PRINCIPAL OFFICE..............................................1
        1.2    OTHER OFFICES.................................................1

MEETINGS OF SHAREHOLDERS.....................................................1

        2.1    PLACE OF MEETINGS.............................................1
        2.2    ANNUAL MEETING................................................1
        2.3    SPECIAL MEETING...............................................1
        2.4    NOTICE OF SHAREHOLDERS' MEETINGS..............................2
        2.5    MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..................2
        2.6    QUORUM........................................................3
        2.7    ADJOURNED MEETING; NOTICE.....................................3
        2.8    VOTING........................................................3
        2.9    VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT.............4
        2.10   SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......5
        2.11   RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS...6
        2.12   PROXIES.......................................................6
        2.13   INSPECTORS OF ELECTION........................................7

DIRECTORS....................................................................7

        3.1    POWERS........................................................7
        3.2    NUMBER OF DIRECTORS...........................................8
        3.3    ELECTION AND TERM OF OFFICE OF DIRECTORS......................8
        3.4    RESIGNATION AND VACANCIES.....................................8
        3.5    PLACE OF MEETINGS; MEETINGS BY TELEPHONE......................9
        3.6    REGULAR MEETINGS..............................................9
        3.7    SPECIAL MEETINGS; NOTICE......................................9
        3.8    QUORUM........................................................9
        3.9    WAIVER OF NOTICE.............................................10
        3.10   ADJOURNMENT..................................................10
        3.11   NOTICE OF ADJOURNMENT........................................10
</TABLE>



<PAGE>   3


<TABLE>
<S>                                                                         <C>
        3.12   BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............10
        3.13   FEES AND COMPENSATION OF DIRECTORS...........................10
        3.14   APPROVAL OF LOANS TO OFFICERS................................11

COMMITTEES..................................................................11

        4.1    COMMITTEES OF DIRECTORS......................................11
        4.2    MEETINGS AND ACTION OF COMMITTEES............................12

OFFICERS....................................................................12


        5.1    OFFICERS.....................................................12
        5.2    ELECTION OF OFFICERS.........................................12
        5.3    SUBORDINATE OFFICERS.........................................12
        5.4    REMOVAL AND RESIGNATION OF OFFICERS..........................12
        5.5    VACANCIES IN OFFICES.........................................13
        5.6    CHAIRMAN OF THE BOARD........................................13
        5.7    PRESIDENT....................................................13
        5.8    VICE PRESIDENTS..............................................13
        5.9    SECRETARY....................................................14
        5.10   CHIEF FINANCIAL OFFICER......................................14

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS..........14

        6.1    INDEMNIFICATION OF DIRECTORS AND OFFICERS....................15
        6.2    INDEMNIFICATION OF OTHERS....................................15
        6.3    PAYMENT OF EXPENSES IN ADVANCE...............................15
        6.4    INDEMNITY NOT EXCLUSIVE......................................15
        6.5    INSURANCE INDEMNIFICATION....................................16
        6.6    CONFLICTS....................................................16

RECORDS AND REPORTS.........................................................16

        7.1    MAINTENANCE AND INSPECTION OF SHARE REGISTER.................16
        7.2    MAINTENANCE AND INSPECTION OF BYLAWS.........................17
        7.3    MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS........17
        7.4    INSPECTION BY DIRECTORS......................................17
        7.5    ANNUAL REPORT TO SHAREHOLDERS; WAIVER........................17
        7.6    FINANCIAL STATEMENTS.........................................18
        7.7    REPRESENTATION OF SHARES OF OTHER CORPORATIONS...............19

GENERAL MATTERS.............................................................19

        8.1    RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING........19
        8.2    CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS....................19
        8.3    CORPORATE CONTRACTS AND INSTRUMENTS;  HOW EXECUTED...........19
</TABLE>


                                      (ii)


<PAGE>   4


<TABLE>
<S>                                                                         <C>
        8.4    CERTIFICATES FOR SHARES......................................19
        8.5    LOST CERTIFICATES............................................20
        8.6    CONSTRUCTION; DEFINITIONS....................................20

AMENDMENTS..................................................................20

        9.1    AMENDMENT BY SHAREHOLDERS....................................20
        9.2    AMENDMENT BY DIRECTORS.......................................20
</TABLE>


                                     (iii)


<PAGE>   5


                                     BYLAWS

                                       OF

                               PDF SOLUTIONS, INC.


                                    ARTICLE I

                                CORPORATE OFFICES

        1.1 PRINCIPAL OFFICE

        The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.

        1.2 OTHER OFFICES

        The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.


                                   ARTICLE II

                            MEETINGS OF SHAREHOLDERS

        2.1 PLACE OF MEETINGS

        Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.

        2.2 ANNUAL MEETING

        The annual meeting of shareholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the fourth
Monday of March of each year, at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.

        2.3 SPECIAL MEETING

        A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.


<PAGE>   6

        If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.

        2.4 NOTICE OF SHAREHOLDERS' MEETINGS

        All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30))
nor more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.

        If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.

        2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

        Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have 


                                      -2-

<PAGE>   7

been given if sent to that shareholder by mail or telegraphic or other written
communication to the corporation's principal executive office, or if published
at least once in a newspaper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.

        If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.

        An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.

        2.6 QUORUM

        The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.

        2.7 ADJOURNED MEETING; NOTICE

        Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.

        When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at the meeting at which the adjournment is
taken. However, if a new record date for the adjourned meeting is fixed or if
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice of
any such adjourned meeting shall be given to each shareholder of record entitled
to vote at the adjourned meeting in accordance with the provisions of Sections
2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may
transact any business which might have been transacted at the original meeting.

        2.8 VOTING

        The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of 

                                      -3-

<PAGE>   8

Sections 702 through 704 of the Code (relating to voting shares held by a
fiduciary, in the name of a corporation or in joint ownership).

        The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.

        Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.

        If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or a vote by
classes is required by the Code or by the articles of incorporation.

        At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes, up to the number
of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect.

        2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT

        The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, 

                                      -4-

<PAGE>   9

and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

        Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.

        2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

        Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.

        In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.

        All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.

        If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.

                                      -5-

<PAGE>   10

        2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS

        For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.

        If the board of directors does not so fix a record date:

            (a) the record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held; and

            (b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.

        The record date for any other purpose shall be as provided in Article
VIII of these bylaws.

        2.12 PROXIES

        Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) the person who
executed the proxy revokes it prior to the time of voting by delivering a
writing to the corporation stating that the proxy is revoked or by executing a
subsequent proxy and presenting it to the meeting or by voting in person at the
meeting, or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the corporation before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy, unless otherwise provided in the
proxy. The dates contained on the forms of proxy presumptively determine the
order of execution, regardless of the postmark dates on the envelopes in which
they are mailed. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of
the Code.


                                      -6-

<PAGE>   11

        2.13 INSPECTORS OF ELECTION

        Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The number
of inspectors shall be either one (l) or three (3). If inspectors are appointed
at a meeting pursuant to the request of one (l) or more shareholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (l) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any shareholder or
a shareholder's proxy shall, appoint a person to fill that vacancy.

        Such inspectors shall:

            (a) determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;

            (b) receive votes, ballots or consents;

            (c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;

            (d) count and tabulate all votes or consents;

            (e) determine when the polls shall close;

            (f) determine the result; and

            (g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.


                                   ARTICLE III

                                    DIRECTORS

        3.1 POWERS

        Subject to the provisions of the Code and any limitations in the
articles of incorporation and these bylaws relating to actions required to be
approved by the shareholders 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.


                                      -7-

<PAGE>   12

        3.2 NUMBER OF DIRECTORS

        The number of directors of the corporation shall be not less than five
(5) nor more than nine (9). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).

        No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.

        3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS

        Directors shall be elected at each annual meeting of shareholders to
hold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.

        3.4 RESIGNATION AND VACANCIES

        Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.

        Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders 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 required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.

        A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony, (iii) if the authorized number of directors is increased, or (iv)
if 

                                      -8-

<PAGE>   13

the shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.

        The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by removal, if by written consent, shall
require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.

        3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE

        Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.

        Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.

        3.6 REGULAR MEETINGS

        Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.

        3.7 SPECIAL MEETINGS; NOTICE

        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 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 or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. 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 or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.

        3.8 QUORUM

        A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.10 of these bylaws. Every act or 

                                      -9-

<PAGE>   14

decision done or made by a majority of the directors present at a duly held
meeting at which a quorum is present shall be regarded as the act of the board
of directors, subject to the provisions of Section 310 of the Code (as to
approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the articles of incorporation, and other applicable law.

        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

        Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.

        3.10 ADJOURNMENT

        A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.

        3.11 NOTICE OF ADJOURNMENT

        Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.

        3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

        Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board.

        3.13 FEES AND COMPENSATION OF DIRECTORS

        Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.


                                      -10-

<PAGE>   15

        3.14 APPROVAL OF LOANS TO OFFICERS

        The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.


                                   ARTICLE IV

                                   COMMITTEES

        4.1 COMMITTEES OF DIRECTORS

        The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:

            (a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;

            (b) the filling of vacancies on the board of directors or in any
committee;

            (c) the fixing of compensation of the directors for serving on the
board or any committee;

            (d) the amendment or repeal of these bylaws or the adoption of new
bylaws;

            (e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;

            (f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the board
of directors; or

            (g) the appointment of any other committees of the board of
directors or the members of such committees.


                                      -11-

<PAGE>   16

        4.2 MEETINGS AND ACTION OF COMMITTEES

        Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
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 president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and 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 ELECTION OF OFFICERS

        The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment. Any contract of employment with an
officer shall be unenforceable unless in writing and specifically authorized by
the board of directors.

        5.3 SUBORDINATE OFFICERS

        The board of directors may appoint, or may empower the president to
appoint, such other officers 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 the
board of directors at any regular or special 

                                      -12-

<PAGE>   17

meeting of the board or, except in case of an officer chosen by the board of
directors, by any officer upon whom such power of removal may be conferred by
the board of directors.

        Any officer may resign at any time by giving written notice to 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

        A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.

        5.6 CHAIRMAN OF THE BOARD

        The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of 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 there be such an officer, the
president shall be the chief executive officer of the corporation and 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
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have 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 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.


                                      -13-

<PAGE>   18

        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 shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' 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 shareholders 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 shareholders and of the board of directors required to be given by law or
by these bylaws. He 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 money 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 shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.



                                   ARTICLE VI

               INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
                                AND OTHER AGENTS


                                      -14-

<PAGE>   19

        6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS

        The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) 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 (iii) 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 extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) 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 (iii) 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.

        6.3 PAYMENT OF EXPENSES IN ADVANCE

        Expenses incurred in defending any civil or criminal 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 be
entitled 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 articles of
incorporation.


                                      -15-

<PAGE>   20

        6.5 INSURANCE INDEMNIFICATION

        The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such, whether
or not the corporation would have the power to indemnify him against such
liability under the provisions of this Article VI.

        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:

            (1) That it would be inconsistent with a provision of the articles
of incorporation, these bylaws, a resolution of the shareholders 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

            (2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.


                                   ARTICLE VII

                               RECORDS AND REPORTS

        7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER

        The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.

        A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.


                                      -16-

<PAGE>   21

        The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.

        Any inspection and copying under this Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.

        7.2 MAINTENANCE AND INSPECTION OF BYLAWS

        The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.

        7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS

        The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.

        The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.

        7.4 INSPECTION BY DIRECTORS

        Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.

        7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER

        The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the

                                      -17-

<PAGE>   22

manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.

        The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.

        The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.

        7.6 FINANCIAL STATEMENTS

        If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year.

        If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.

        The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.

        7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS

        The chairman of the board, 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 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 standing in the name of this corporation. The authority herein
granted 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 such person
having the authority.


                                      -18-

<PAGE>   23


                                  ARTICLE VIII

                                 GENERAL MATTERS

        8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING

        For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.

        If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.

        8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS

        From time to time, the board of directors shall determine by resolution
which 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.

        8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED

        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.

        8.4 CERTIFICATES FOR SHARES

        A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the president or a vice president and by the
chief financial officer or an assistant treasurer or the secretary or an
assistant secretary, certifying the number of shares and the class or 

                                      -19-

<PAGE>   24

series of shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile.

        In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.

        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 board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.

        8.6 CONSTRUCTION; DEFINITIONS

        Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code 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.


                                   ARTICLE IX

                                   AMENDMENTS

        9.1 AMENDMENT BY SHAREHOLDERS

        New bylaws may be adopted or these bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.

        9.2 AMENDMENT BY DIRECTORS

        Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.


                                      -20-



<PAGE>   1

                                                                     EXHIBIT 3.4











                                     BYLAWS

                                       OF

                               PDF SOLUTIONS, INC.



              (AS AMENDED AND RESTATED EFFECTIVE OCTOBER __, 2000,
                         AT THE CLOSING OF THE COMPANY'S
                            INITIAL PUBLIC OFFERING)














<PAGE>   2


                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                           Page
                                                                                           ----
<S>                                                                                        <C>
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........................................................8
        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.....................................................................10

        4.1  COMMITTEES OF DIRECTORS........................................................10
        4.2  COMMITTEE
 MINUTES..............................................................10
        4.3  MEETINGS AND ACTION OF COMMITTEES..............................................11

ARTICLE V - OFFICERS........................................................................11

        5.1  OFFICERS.......................................................................11
</TABLE>





                                       i



<PAGE>   3


<TABLE>
<S>                                                                                        <C>
        5.2  APPOINTMENT OF OFFICERS........................................................11
        5.3  SUBORDINATE OFFICERS...........................................................11
        5.4  REMOVAL AND RESIGNATION OF OFFICERS............................................12
        5.5  VACANCIES IN OFFICES...........................................................12
        5.6  CHIEF EXECUTIVE OFFICER........................................................12
        5.7  PRESIDENT......................................................................12
        5.8  VICE PRESIDENTS................................................................12
        5.9  SECRETARY......................................................................13
        5.10 CHIEF FINANCIAL OFFICER........................................................13
        5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.................................13
        5.12 AUTHORITY AND DUTIES OF OFFICERS...............................................14

ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS............14

        6.1  INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................14
        6.2  INDEMNIFICATION OF OTHERS......................................................14
        6.3  PAYMENT OF EXPENSES IN ADVANCE.................................................15
        6.4  INDEMNITY NOT EXCLUSIVE........................................................15
        6.5  INSURANCE......................................................................15
        6.6  CONFLICTS......................................................................15

ARTICLE VII - RECORDS AND REPORTS...........................................................16

        7.1  MAINTENANCE AND INSPECTION OF RECORDS..........................................16
        7.2  INSPECTION BY DIRECTORS........................................................16
        7.3  ANNUAL STATEMENT TO STOCKHOLDERS...............................................16

ARTICLE VIII - GENERAL MATTERS..............................................................17

        8.1  CHECKS.........................................................................17
        8.2  EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS...............................17
        8.3  STOCK CERTIFICATES; PARTLY PAID SHARES.........................................17
        8.4  SPECIAL DESIGNATION ON CERTIFICATES............................................18
        8.5  LOST CERTIFICATES..............................................................18
        8.6  CONSTRUCTION; DEFINITIONS......................................................18
        8.7  DIVIDENDS......................................................................18
        8.8  FISCAL YEAR....................................................................19
        8.9  SEAL...........................................................................19
        8.10 TRANSFER OF STOCK..............................................................19
        8.11 STOCK TRANSFER AGREEMENTS......................................................19
        8.12 REGISTERED STOCKHOLDERS........................................................19

ARTICLE IX..................................................................................19
</TABLE>





                                       ii


<PAGE>   4

                                     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 1013 Centre Road, 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,




<PAGE>   5

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.




                                       2

<PAGE>   6

        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 10th 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 director, (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
named 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 declare to
the meeting and the defective nomination shall be disregarded.




                                       3

<PAGE>   7

        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 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




                                       4

<PAGE>   8

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.


                                   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




                                       5

<PAGE>   9

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 five.

            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.

            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.




                                       6

<PAGE>   10

            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.

        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




                                       7

<PAGE>   11

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.

       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.




                                       8

<PAGE>   12

       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.

       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.


                                   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




                                       9

<PAGE>   13

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), 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




                                       10

<PAGE>   14

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 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.




                                       11

<PAGE>   15

        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.

        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.




                                       12

<PAGE>   16

            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 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, 



                                       13

<PAGE>   17
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.

        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




                                       14

<PAGE>   18

            (b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.


                                   ARTICLE VII

                               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.




                                       15

<PAGE>   19

                                  ARTICLE VIII

                                 GENERAL MATTERS

        8.1 CHECKS.

            From time to time, the Board of Directors shall determine by
resolution which 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.




                                       16

<PAGE>   20

        8.4 SPECIAL DESIGNATION ON CERTIFICATES.

            If the Corporation is authorized to issue more than one class of
stock or more 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.




                                       17

<PAGE>   21

        8.8 FISCAL YEAR.

            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.




                                       18






<PAGE>   1
                                                                     EXHIBIT 4.2



                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT


        THIS FIRST AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is
entered into as of the 4th day of August, 2000, by and among PDF Solutions,
Inc., a California corporation (the "Company"), the holders of shares of Series
A Preferred Stock (the "Series A Purchasers") and Series B Preferred Stock (the
"Series B Purchasers") listed on Exhibit A hereto, (the Series A Purchasers and
Series B Purchasers are referred to herein collectively as the "Preferred
Purchasers," and certain other shareholders listed on Exhibit B hereto (the
"Founders" and collectively with the Series A Purchasers and Series B Purchasers
the "Purchasers" or the "Investors").


                                    RECITALS

        WHEREAS, the Company, the Series A Purchasers and the Founders have
entered into a Rights Agreement dated as of December 4, 1995 (the "Original
Rights Agreement"). The Company, the Founders, and a majority of the holders of
Series A Preferred Stock desire to amend and restate in its entirety the
Original Rights Agreement in accordance with Section 3.7 thereof.

        WHEREAS, the Company and the Series B Purchasers are entering into a
Series B Preferred Stock Purchase Agreement of even date herewith (the "Purchase
Agreement"),
 pursuant to which the Company shall sell, and the Series B
Purchasers shall acquire, shares of the Company's Series B Preferred Stock.

        WHEREAS, a condition to the Series B Purchasers' obligations under the
Purchase Agreement is that the Company and the Purchasers enter into this
Agreement in order to provide the Series B Purchasers with (i) certain rights to
register shares of the Company's Common Stock issuable upon conversion of the
Series B Preferred Stock held by the Series B Purchasers and (ii) a right of
participation with respect to certain issuances by the Company of its
securities. The Company desires to induce the Series B Purchasers to purchase
shares of Series B Preferred Stock pursuant to the Purchase Agreement by
agreeing to the terms and conditions set forth herein.

        NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND COVENANTS
HEREINAFTER SET FORTH, THE PARTIES AGREE that effective and contingent upon
execution of this Agreement by the Company and the holders of a majority of the
Registrable Securities, as that term is defined in the Original Rights
Agreement, not including the stock held by the Founders, and upon closing of the
transactions contemplated by the Purchase Agreement, the Original Rights
Agreement is hereby amended and restated in its entirety to read as set forth in
this Agreement, and the Company, the Founders, and the Investors hereby agree to
be bound by the provisions hereof as the sole agreement of the Company, the
Founders and the Investors with respect to registration rights of the Company's
securities and certain other rights, as set forth herein;

         AND FURTHER AGREE AS FOLLOWS:




<PAGE>   2

                                    SECTION 1

                        Restrictions on Transferability;
                               Registration Rights

        1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:

            "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.

            "Common Shares" shall mean all shares of Common Stock issued to the
Founders as of the date hereof.

            "Conversion Shares" shall mean the Common Stock issued or issuable
upon conversion of the Preferred Shares as defined herein.

            "Holder" shall mean any Investor holding Registrable Securities and
any person holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.

            "Initiating Holders" shall mean Holders in the aggregate of not less
than fifty percent (50%) of the Registrable Securities as defined for purposes
of that particular section.

            "Major Purchaser" shall mean any Investor (together with its
affiliates) holding more than 100,000 shares of Registrable Securities.

            "Preferred Shares" shall mean shares of the Series A Preferred and
Series B Preferred Stock outstanding as of the date hereof.

            The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

            "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).

            "Registrable Securities" means (i) the Common Shares except that all
such Common Shares shall not be included in the definition of Registrable
Securities for the purposes of Section 1.5 and 1.7; (ii) the Conversion Shares;
and (iii) any Common Stock of the Company issued or issuable in respect of the
Common Shares, Preferred Shares or Conversion Shares or other securities issued
or issuable with respect to the Preferred Shares, Conversion Shares or Common
Shares upon any stock split, stock dividend, recapitalization, or similar event,
or any Common Stock otherwise issued or issuable with respect to the Common
Shares, Conversion




                                      -2-

<PAGE>   3

Shares or Preferred Shares; provided, however, that shares of Common Stock or
other securities shall only be treated as Registrable Securities if and so long
as they have not been (A) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (B) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the consummation
of such sale.

            "Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 1.3 of this Agreement.

            "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

            "Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).

        1.2 Restrictions. The Preferred Shares, the Conversion Shares and the
Common Shares shall not be sold, assigned, transferred or pledged except upon
the conditions specified in this Agreement, which conditions are intended to
ensure compliance with the provisions of the Securities Act. The Investors will
cause any proposed purchaser, assignee, transferee or pledgee of the Preferred
Shares, the Conversion Shares or the Common Shares to agree to take and hold
such securities subject to the provisions and upon the conditions specified in
this Agreement.

        1.3 Restrictive Legend. Each certificate representing (i) the Preferred
Shares, (ii) the Conversion Shares, (iii) the Common Shares and (iv) any other
securities issued in respect of the securities referenced in clauses (i), (ii)
and (iii) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.4 below) be stamped or otherwise imprinted with legends
in the following form (in addition to any legend required under applicable state
securities laws):

        "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
        INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
        1933. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE
        OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF
        COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO
        IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION
        AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."

        Each Investor and Holder consents to the Company making a notation on
its records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 1.

        1.4 Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted




                                      -3-

<PAGE>   4

Securities, unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder thereof shall give
written notice to the Company of such holder's intention to effect such
transfer, sale, assignment or pledge. Each such notice shall describe the manner
and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied at such holder's expense by either
(i) an unqualified written opinion of legal counsel who shall, and whose legal
opinion shall be, reasonably satisfactory to the Company, addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. The Company will not require such a legal opinion or
"no action" letter (a) in any transaction in compliance with Rule 144, (b) in
any transaction in which an Investor which is a corporation distributes
Restricted Securities after six (6) months after the purchase thereof solely to
its majority-owned subsidiaries or affiliates for no consideration, or (c) in
any transaction in which an Investor which is a partnership distributes
Restricted Securities after six (6) months after the purchase thereof solely to
partners thereof for no consideration, provided that each transferee agrees in
writing to be subject to the terms of this Section 1.4. Each certificate
evidencing the Restricted Securities transferred as above provided shall bear,
except if such transfer is made pursuant to Rule 144, the appropriate
restrictive legend set forth in Section 1.3 above, except that such certificate
shall not bear such restrictive legend if, in the opinion of counsel for such
holder and the Company, such legend is not required in order to establish
compliance with any provisions of the Securities Act.

        1.5 Requested Registration.

            (a) Request for Registration. In case the Company shall receive from
Initiating Holders a written request that the Company effect any qualification,
compliance or registration the reasonably anticipated aggregate price to the
public of which net of underwriting discounts and commissions, would exceed
$7,500,000, the Company shall:

                (i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and

                (ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 1.5:




                                      -4-

<PAGE>   5

                     (1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;

                     (2) Prior to the earlier of (i) six (6) months following
the Company's initial public offering or (ii) July 31, 2003;

                     (3) During the period ending on the date three (3) months
immediately following the effective date of any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan);

                     (4) After the Company has effected two (2) such
registrations pursuant to this subparagraph 1.5(a), such registrations have been
declared or ordered effective and the securities offered pursuant to such
registrations have been sold; or

                     (5) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 shall be deferred for a single period
not to exceed one hundred-twenty (120) days from the date of receipt of written
request from the Initiating Holders.

        Subject to the foregoing clauses (1) through (5), the Company shall file
a registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.

            (b) Underwriting. In the event that a registration pursuant to
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.

        The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders (which managing underwriter
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 1.5, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
Holders of Registrable Securities and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities held by such Holders at the
time of filing the registration statement. No Registrable Securities excluded
from the underwriting by reason of




                                      -5-

<PAGE>   6

the underwriter's marketing limitation shall be included in such registration.
To facilitate the allocation of shares in accordance with the above provisions,
the Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares.

        If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. The Registrable Securities and/or
other securities so withdrawn shall also be withdrawn from registration, and
such Registrable Securities shall not be transferred in a public distribution
prior to one hundred eighty (180) days after the effective date of such
registration.

        1.6 Company Registration.

            (a) Notice of Registration. If at any time or from time to time, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:

                (i) promptly give to each Holder written notice thereof; and

                (ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved in
such registration, all the Registrable Securities specified in a written request
or requests received within twenty (20) days after receipt of such written
notice from the Company by any Holder, but only to the extent that such
inclusion will not diminish the number of securities included by the Company or
by holders of the Company's securities who have demanded such registration.

            (b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Section 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration to a minimum of 30% of the total shares to be
included in such underwriting or exclude them entirely in the case of the
Company's initial public offering. The Company shall so advise all Holders and
the other holders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Section 1.6, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be first allocated among all
Preferred Purchasers in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Preferred Purchasers at the time
of filing the registration statement, and after satisfaction of the requirements
of the Preferred Purchasers, the remaining shares that may be included in the




                                      -6-

<PAGE>   7

registration and underwriting shall be allocated among the Founders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Founders at the time of filing of the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to any Holder or other holder to the nearest 100 shares. If any Holder
or other holder disapproves of the terms of any such underwriting, he or she may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities withdrawn from such underwriting shall be withdrawn
from such registration, and shall not be transferred in a public distribution
prior to one hundred eighty (180) days after the effective date of the
registration statement relating thereto (the "Lock-Up Period"); provided,
however, that if such registration is not the Company's initial public offering
such Lock-Up Period shall be one hundred twenty (120) days unless the managing
underwriter determines that marketing factors require a longer period in which
case the Lock-Up period shall be specified by the managing underwriter but shall
not exceed one hundred eighty (180) days.

            (c) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.

        1.7 Registration on Form S-3.

            (a) If Initiating Holders request that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of the Registrable Securities, the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $1,000,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
however, that the Company shall not be required to effect more than one
registration pursuant to this Section 1.7 in any twelve (12) month period. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company.
The substantive provisions of Section 1.5(b) shall be applicable to each
registration initiated under this Section 1.7.

            (b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
ending on a




                                      -7-

<PAGE>   8

date three (3) months following the effective date of a registration statement
(other than with respect to a registration statement relating to a Rule 145
transaction, an offering solely to employees or any other registration which is
not appropriate for the registration of Registrable Securities), or (iii) if the
Company shall furnish to such Holder a certificate signed by the President of
the Company stating that, in the good faith judgment of the Board of Directors,
it would be seriously detrimental to the Company or its shareholders for
registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a single period not to exceed one hundred twenty (120) days from
the receipt of the request to file such registration by such Holder or Holders.

        1.8 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless such holder derives its rights as
an additional Holder hereunder, or such shares or securities are entitled to be
included in registrations only to the extent that the inclusion of such
securities will not diminish the amount of Holder's Registrable Securities that
are included.

        1.9 Expenses of Registration. All Registration Expenses incurred in
connection with any registration pursuant to Sections 1.5, 1.6 or 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Section 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. In such case, the Holders
of Registrable Securities to have been registered shall bear all such
Registration Expenses pro rata on the basis of the number of shares to have been
registered unless the Holders of a majority of the Registrable Securities agree
to forfeit their right to one demand registration pursuant to Section 1.5.
Notwithstanding the foregoing, however, if at the time of the withdrawal, the
Holders have learned of a material adverse change in the condition, business or
prospects of the Company from that known to the Holders at the time of their
request, of which the Company had knowledge at the time of the request, then the
Holders shall not be required to pay any of said Registration Expenses or to
forfeit the right to one demand registration.

        1.10 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:

             (a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (120) days or until the distribution described in the registration
statement has been completed; and

             (b) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.




                                      -8-

<PAGE>   9

        1.11 Indemnification.

             (a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.

             (b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein; provided, however, that the liability
of a Holder for indemnification under this Section 1.11(b) shall not exceed the
net proceeds from the offering received by such Holder.




                                      -9-

<PAGE>   10

             (c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.

        1.12 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.

        1.13 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:

             (a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");

             (b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and

             (c) So long as an Investor owns any Restricted Securities, to
furnish to the Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.




                                      -10-

<PAGE>   11

        1.14 Transfer of Registration Rights. The rights to cause the Company to
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by an Investor (together with any
affiliate); provided, that (a) such transfer may otherwise be effected in
accordance with applicable securities laws, (b) notice of such assignment is
given to the Company, and (c) such transferee or assignee (i) is an affiliate of
such Investor or a constituent partner (including limited partners) of such
Investor, or (ii) acquires from such Investor the lesser of (a) 100,000 or more
shares of Restricted Securities (as appropriately adjusted for stock splits and
the like) or (b) all of the Restricted Securities then owned by such Investor.

        1.15 Standoff Agreement. Each Holder agrees in connection with the
initial public offering of the Company's securities that, upon request of the
Company or the underwriters managing any underwritten initial public offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time (not to exceed one hundred eighty (180) days from the effective date of
such registration) as may be requested by the Company or such managing
underwriters; provided, however, that the officers and directors of the Company
who own stock of the Company also agree to such restrictions.

        1.16 Termination of Rights. No Holder shall be entitled to exercise any
right provided for in this Section 1:

             (a) after five (5) years following the consummation of the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public, or

             (b) on or after the closing of a public offering of the Common
Stock of the Company when all shares of the Holder's Registrable Securities may
be sold under Rule 144 during any 90-day period; provided, however, that the
provisions of this subsection (b) shall not apply where the Holder owns more
than two percent (2%) of the Company's outstanding stock until such time as such
Holder owns less than two percent (2%) of the outstanding stock.


                                    SECTION 2

                             Right of Participation

        2.1 Purchasers' Right of Participation.

             (a) Right of Participation. Subject to the terms and conditions
contained in this Section 2.1, the Company hereby grants to each Major Purchaser
the right of participation to purchase its Pro Rata Portion of any New
Securities (as defined in subsection 2.1(b)) which the Company may, from time to
time, propose to sell and issue. A Major Purchaser's "Pro Rata Portion" for
purposes of this Section 2.1 is the ratio that (x) the sum of the number of
shares of the Company's Common Stock then held by such Major Purchaser and the
number of shares of the Company's Common Stock issuable upon conversion of the
Preferred Stock then held by such Major Purchaser, bears to (y) the sum of the
total number of shares of the Company's Common Stock then outstanding, the
number of shares of the Company's Common Stock




                                      -11-

<PAGE>   12

issuable upon the exercise of any issued and outstanding rights, options or
warrants, and the number of shares of the Company's Common Stock issuable upon
conversion of the then outstanding Preferred Stock.

             (b) Definition of New Securities. Except as set forth below, "New
Securities" shall mean any shares of capital stock of the Company, including
Common Stock and Preferred Stock, whether authorized or not, and rights, options
or warrants to purchase said shares of Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New
Securities" does not include (i) the Common Shares, the Preferred Shares or the
Conversion Shares, (ii) securities offered to the public generally pursuant to a
registration statement under the Securities Act, (iii) securities issued
pursuant to the acquisition of another corporation by the Company by merger,
purchase of substantially all of the assets or shares or other reorganization
whereby the Company or its shareholders own not less than a majority of the
voting power of the surviving or successor corporation, (iv) shares of the
Company's Common Stock or related options or warrants convertible into or
exercisable for such Common Stock issued to employees, officers and directors
of, and consultants to, the Company, pursuant to any arrangement approved by the
Board of Directors of the Company, (v) shares of the Company's Common Stock or
related options or warrants convertible into or exercisable for such Common
Stock issued to customers and vendors of the Company pursuant to any arrangement
unanimously approved by the Board of Directors of the Company; (vi) shares of
the Company's Common Stock or related options convertible into or exercisable
for such Common Stock issued to banks, commercial lenders, lessors and other
financial institutions in connection with the borrowing of money or the leasing
of equipment by the Company, (vii) stock issued pursuant to any rights or
agreements, including, without limitation, convertible securities, options and
warrants, provided that the Company shall have complied with the rights of
participation established by this Section 2.1 with respect to the initial sale
or grant by the Company of such rights or agreements, or (viii) shares of
capital stock issued in connection with any stock split, stock dividend or
recapitalization by the Company.

             (c) Notice of Right. In the event the Company proposes to undertake
an issuance of New Securities, it shall give each Purchaser written notice of
its intention, describing the type of New Securities and the price and terms
upon which the Company proposes to issue the same. Each Purchaser shall have
twenty (20) days from the date of receipt of any such notice to agree to
purchase shares of such New Securities (up to the amount referred to in
subsection 2.1(a)), for the price and upon the terms specified in the notice, by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.

             (d) Exercise of Right. If any Purchaser exercises its right of
participation under this Agreement, the closing of the purchase of the New
Securities with respect to which such right has been exercised shall take place
within ninety (90) calendar days after the Purchaser gives notice of such
exercise, which period of time shall be extended in order to comply with
applicable laws and regulations. Upon exercise of such right of participation,
the Company and the Purchaser shall be legally obligated to consummate the
purchase contemplated thereby and shall use their best efforts to secure any
approvals required in connection therewith.




                                      -12-

<PAGE>   13

             (e) Lapse and Reinstatement of Right. In the event a Purchaser
fails to exercise the right of participation provided in this Section 2.1 within
said twenty (20) day period, the Company shall have ninety (90) days thereafter
to sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date
of said agreement) to sell the New Securities not elected to be purchased by
such Purchaser at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60) days
from the date of said agreement), the Company shall not thereafter issue or sell
any New Securities without first offering such securities to the Purchasers in
the manner provided above.

             (f) Assignment. The right of the Purchasers to purchase any part of
the New Securities may be assigned in whole or in part to any partner,
subsidiary, affiliate or shareholder of a Purchaser, or other persons or
organizations who acquire the lesser of (i) 100,000 or more shares of Restricted
Securities (as adjusted for stock splits and the like) or (ii) all of the
Restricted Securities then owned by such Purchaser.

        2.2 Termination of Participation Right. The rights of participation
granted under Section 2.1 of this Agreement shall terminate on and be of no
further force or effect upon the earlier of (i) the consummation of the
Company's sale of its Common Stock in an underwritten public offering pursuant
to an effective registration statement filed under the Securities Act
immediately subsequent to which the Company shall be obligated to file annual
and quarterly reports with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act or (ii) the registration by the Company of a class of its equity
securities under Section 12(b) or 12(g) of the Exchange Act.


                                    SECTION 3

                                  Miscellaneous

        3.1 Assignment. Except as otherwise provided in this Agreement, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties to this
Agreement.

        3.2 Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

        3.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California in the United States of America
without giving effect to the conflicts of laws principles thereof.

        3.4 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.




                                      -13-

<PAGE>   14

        3.5 Notices. Any notice required or permitted by this Agreement shall be
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown below or at such other address for which
such party gives notice under this Agreement. Such notice shall be deemed to
have been given when delivered if delivered personally, or, if sent by mail, at
the earlier of its receipt or three (3) days after deposit in the mail.

        3.6 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.

        3.7 Amendment and Waiver. Any provision of this Agreement may be amended
or waived with the written consent of the Company and the Holders of at least a
majority of the outstanding shares of the Registrable Securities, so long as the
effect is to treat all Holders equally. ****************************************
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each Holder of Registrable Securities and the Company. In addition,
the Company may waive performance of any obligation owing to it, as to some or
all of the Holders of Registrable Securities, or agree to accept alternatives to
such performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into between
the Company and any Holder, and such underwriting agreement contains terms
differing from this Agreement, as to any such Holder the terms of such
underwriting agreement shall govern.

        3.8 Effect of Amendment or Waiver. The Investors and their successors
and assigns acknowledge that by the operation of Section 3.7 of this Agreement
the holders of a majority of the outstanding Registrable Securities, acting in
conjunction with the Company, will have the right and power to diminish or
eliminate any or all rights or increase any or all obligations pursuant to this
Agreement.

        3.9 Rights of Holders. Each holder of Registrable Securities shall have
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.

        3.10 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any




                                      -14-

<PAGE>   15

similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any party of any breach or default under
this Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.

        3.11 Aggregation of Stock. All Registrable Securities held or acquired
by affiliated entities or persons shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.





                            [SIGNATURE PAGE FOLLOWS]




                                      -15-

<PAGE>   16

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.


COMPANY:

PDF SOLUTIONS, INC.,
a California corporation

By: /s/ John K. Kibarian
    -------------------------------------------------------
    John K. Kibarian, President and Chief Executive Officer



FOUNDERS:

/s/ John K. Kibarian
-------------------------------------
JOHN K. KIBARIAN


/s/ Kimon Michaels
-------------------------------------
KIMON MICHAELS


/s/ Thomas Cobourn
-------------------------------------
THOMAS COBOURN


/s/ Howard Read
-------------------------------------
HOWARD READ




                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT




<PAGE>   17

SERIES A AND SERIES B HOLDERS:


U.S. VENTURE PARTNERS IV, L.P.

By: Presidio Management Group IV, L.P.
      Its General Partner


By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025


SECOND VENTURES II, L.P.

By: Presidio Management Group IV, L.P.
       Its General Partner


By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025


U.S.V.P. ENTREPRENEUR PARTNERS II, L.P.
A Delaware Limited Partnership

By: Presidio Management Group IV, L.P.
       Its General Partner


By: /s/ PHILIP M. YOUNG
   -----------------------------------
   Name:  Philip M. Young
   Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025




                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT



<PAGE>   18

2180 ASSOCIATES FUND


By: /s/ JONATHON D. ROOT, M.D.
    ---------------------------------------
    Name:  Jonathon D. Root, M.D.
    Title: General Partner

        2180 Sand Hill Road, Suite 300
        Menlo Park, CA 94025


TELOS VENTURE PARTNERS, L.P.


By: /s/ BRUCE R. BOURBON
    ---------------------------------------
    Name:  Bruce R. Bourbon
    Title: Managing Member of the General
           Partner, Telos Management LLC

        2350 Mission College Blvd., Suite 1070
        Santa Clara, CA 95054


THE CASSIN FAMILY TRUST U/D/T/
DTD 1/31/96, BRENDAN J. AND ISABEL
B. CASSIN, TRUSTEES


By:________________________________________
   Name:
   Title:

        3000 Sand Hill Road, Building 3, Suite 210
        Menlo Park, CA 94025


CASSIN FAMILY PARTNERS,
A CALIFORNIA LIMITED PARTNERSHIP


By:________________________________________
   Name:
   Title:

        3000 Sand Hill Road, Building 3, Suite 210
        Menlo Park, CA 94025




                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

<PAGE>   19

VLG INVESTMENTS 1995


By:________________________________________
   Name:
   Title:

        c/o Venture Law Group
        2800 Sand Hill Road
        Menlo Park, CA 94025


CRAIG W. JOHNSON


/s/ Craig W. Johnson
-------------------------------------------
Craig W. Johnson

        c/o Venture Law Group
        2800 Sand Hill Road
        Menlo Park, CA 94025


PETER COHN


/s/ Peter Cohn
-------------------------------------------
Peter Cohn

        c/o 1020 Marsh Road
        Menlo Park, CA 94025

PETER COHN, AS TRUSTEE OR THE
SUCCESSOR TRUSTEE OR TRUSTEES
U/A/D JUNE 29, 1995, AS AMENDED,
CREATING THE PETER COHN REVOCABLE TRUST


By: /s/ Peter Cohn
    ----------------------------------------

        1020 Marsh Road
        Menlo Park, CA 94025




                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT


<PAGE>   20

ORRICK, HERRINGTON & SUTCLIFFE LLP


By: /s/ Peter Cohn
   ----------------------------------------
   Peter Cohn
   Partner

        1020 Marsh Road
        Menlo Park, CA 94025


RICHARD M. LUCAS FOUNDATION


By: /s/ DONALD L. LUCAS
    ---------------------------------------
    Name:  Donald L. Lucas
    Title: Chairman of the Board

        3000 Sand Hill Road, Suite 3-210
        Menlo Park, CA 94025


ST. MARY'S COLLEGE OF CALIFORNIA


By:________________________________________
   Name:
   Title:

        1928 St Mary's Road
        Moraga, CA 94556


ST. FRANCIS GROWTH FUND


By:________________________________________
   Name:
   Title:

        San Francis High School
        1885 Miramonte Avenue
        Mountain View, CA 94049




                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT


<PAGE>   21

LARRY YOSHIDA

  /s/ LARRY YOSHIDA
-------------------------------------------
      Larry Yoshida

            Address: I-3-20 Tamagawa-Bakuen
            Machida City, Tokyo 194-0041
            Japan
            
DONALD L. LUCAS PROFIT SHARING TRUST


By: /s/ DONALD L. LUCAS
    ---------------------------------------
    Name:  Donald L. Lucas
    Title: Successor Trustee

        Attn:  Donald L. Lucas
        3000 Sand Hill Road, #3-210
        Menlo Park, CA 94025
        (650) 854-4223




                                SIGNATURE PAGE TO
                  FIRST AMENDED AND RESTATED RIGHTS AGREEMENT



<PAGE>   22


RWI GROUP IV, L.P.
By:  RWI GROUP LLC
        Its General Partner


By: /s/ Donald A. Lucas
   --------------------------------
   Name: Donald A. Lucas
   Title: Managing Member

        Attn:  Donald A. Lucas
        720 University Ave., # 103
        Palo Alto, CA 94301
        (650) 833-4980


BRIAN BURR


/s/ BRIAN BURR
___________________________________________
Brian Burr

        c/o 1020 Marsh Road
            Menlo Park, CA 94025




                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT



<PAGE>   23


TETON CAPITAL COMPANY,
A CALIFORNIA LIMITED PARTNERSHIP


By: /s/ Donald L. Lucas
   ---------------------------------------
   Name: Donald L. Lucas
   Title: General Partner

        Attn:  Donald L. Lucas
        3000 Sand Hill Road, #3-210
        Menlo Park, CA 94025
        (650) 854-4223


THE RYDE REVOCABLE TRUST
dated 12/15/94


By: /s/ MAGNUS RYDE
   ---------------------------------------
   Name: Magnus Ryde
   Title: Trustee

        39 Winchester Drive
        Atherton, CA 94027
        (650) 329-9738


                                SIGNATURE PAGE TO
                   FIRST AMENDED AND RESTATED RIGHTS AGREEMENT






<PAGE>   1
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                                                                    EXHIBIT 10.1

                             CONFIDENTIAL TREATMENT
                        PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                     THE SECURITIES ACT OF 1933, AS AMENDED.


                        INTEGRATION TECHNOLOGY AGREEMENT

        THIS INTEGRATION TECHNOLOGY AGREEMENT ("this Agreement") is made and
entered into as of *** (the "EFFECTIVE DATE") by and between Philips
Semiconductors, a Netherlands corporation ("CUSTOMER") with a Tax Identification
Number of _________________, and PDF Solutions, Inc., a California corporation
("PDF SOLUTIONS") with a Tax Identification Number of 25-1701361.

                                    RECITALS

        A. PDF Solutions possesses technology and expertise useful in
discovering, analyzing, and fixing problems in the design and manufacturing
processes that cause low yields of useable integrated circuits.

        B. Customer desires to engage PDF Solutions and receive a license to
certain technology useful to analyze its internal integrated circuit
manufacturing process, identify problems therewith, and recommend solutions
thereto, by way of methodology or otherwise, upon the terms
 and conditions
contained herein.

        C. PDF Solutions desires to be so engaged upon the terms and conditions
contained herein.

                                   DEFINITIONS

"Analysis" refers to all interpretations, recommendations, extractions,
statistical models or other yield and performance models developed by PDF
Solutions and derived in whole or in part from Customer's Raw Data; provided,
however, that Analysis does not include any information sufficiently detailed
that Raw Data could be feasibly re-constructed.

"Characterization Vehicle" or "CV" refers to the parameterized layout structures
or circuit elements, specific implementations of said structures or circuit
elements either in computer format or layout format, and images of said
structures or circuit elements, historically or hereafter created or customized
by PDF Solutions for the purposes of creating a test


                                       1

<PAGE>   2
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

vehicle used to characterize any given manufacturing process. Manufacturing
Designs are usually referenced in the process of generating CVs for the purposes
of optimizing or tuning the vehicle to the targeted designs and process. The CV
is used to create a Mask Set which is used by the fabrication facility to
generate test wafers.

"Foundry" refers to any facility Customer owns or operates to manufacture
products and any third party foundry with which Customer has a relationship that
manufactures products for Customer.

"Manufacturing Designs" refers to all non-public information relating to
Customer's manufacturing processes and integrated circuit designs (structures
and elements) used in connection with the CV to generate Raw Data.

"Mask Set" refers to translucent glass plates used as a light filter to transfer
designs onto a wafer.

"Proprietary Rights" shall mean all intellectual property rights including, but
not limited to, patents, patent applications, copyrights, copyright
registrations, moral rights, mask work rights, rights of authorship, industrial
design rights, trademarks, tradenames, know-how and trade secrets, irrespective
of whether such rights arise under U.S. or international intellectual property,
unfair competition or trade secret laws.

"PDF Technology" refers to all historically, or hereafter developed
methodologies, techniques, software, designs, CVs, problem solving processes and
practices utilized by PDF Solutions, and any modifications, compilations or
works derivative of the foregoing, excluding know-how, methodologies, techniques
or practices that are commonly known or that Customer independently has the
right to use.

"Raw Data" shall mean the data generated by PDF Solutions using the CV in
conjunction with Customer's Manufacturing Design.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the mutual promises herein
contained, the above recitals and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Customer and PDF
Solutions, intending to be legally bound, hereby agree as follows:

                         SECTION 1. TERM AND TERMINATION

        1.1 Term. This Agreement shall commence on the Effective Date and shall
expire on ***, unless sooner terminated in accordance with
Sections 1.2 or 1.3.

        1.2 Termination Without Cause. Either party may upon 120 days prior
written notice to the other party, at any time and/or for any reason, terminate
this Agreement. In such case, Customer shall pay PDF Solutions all Fixed Fees
(as defined in EXHIBIT "B" attached hereto) payable at the effective date of
such termination, all Reimbursements (as


                                       2

<PAGE>   3

defined below) incurred through the effective date of such termination and all
Incentive Fees and Gainshare Fees (as defined in EXHIBIT "B") that would
otherwise have been earned had this Agreement not been terminated; provided that
should PDF Solutions exercise its right to terminate this Agreement under this
Section 1.2 prior to the end of the term PDF Solutions shall thereby forfeit any
and all right it may have in any Incentive Fee, Gainshare Fee (as defined in
EXHIBIT "B" attached hereto) other than Incentive Fees and Gainshare Fees earned
based upon work completed prior to the effective date of such termination.

        1.3 Termination for Cause. This Agreement may be terminated upon thirty
(30) days prior written notice by either party if the other party materially
breaches or fails to perform any material obligations hereunder and the
breaching party fails to cure such breach within thirty (30) days of such
written notice. Notwithstanding the foregoing, the cure period for any failure
of Customer to pay Fees and Reimbursements due hereunder shall be 10 days from
the date of receipt by Customer of any notice of breach relating thereto. In the
event of a termination under this Section 1.3, Customer shall pay PDF Solutions
all Fixed Fees incurred through the effective date of such termination, all
Reimbursements incurred through the effective date of such termination and, if
PDF Solutions shall so terminate this Agreement, all Incentive Fees and
Gainshare Fees that would otherwise have been earned had this Agreement not been
terminated.

        1.4 Survival of Provisions. Any and all obligations and duties which
have accrued hereunder upon such termination shall survive the termination and
remain obligations and duties of the burdened party. Additionally, Sections 3
(Payment for Services and Technology) as modified by this Section 1, 4
(Proprietary Rights), 5 (Confidentiality), 6 (Representations and Warranties), 7
(Indemnity), 8 (Limitation of Liability) and 9 (Miscellaneous) shall survive the
expiration or sooner termination of this Agreement and remain binding upon the
parties hereto; provided that in the event of any termination of this Agreement
by PDF Solutions pursuant to Section 1.3, any and all rights and licenses
granted by PDF Solutions to Customer hereunder shall terminate effective upon
such termination.

                 SECTION 2. DELIVERY OF SERVICES AND TECHNOLOGY

        2.1 Scope of Services. During the term of this Agreement, PDF Solutions
shall furnish the PDF Technology and related services (the "SERVICES AND
TECHNOLOGY") described in detail in EXHIBIT "A" attached hereto (the "SCOPE OF
SERVICES AND TECHNOLOGY"). The manner and means used by PDF Solutions to provide
the Services and Technology are in the sole discretion and control of PDF
Solutions.

        2.2 Standard for Performance. PDF Solutions shall perform and deliver
the Services and Technology under this Agreement in accordance with the
standards and practices of care consistent with the quality of services PDF
Solutions performs for its other similarly situated clients. PDF Solutions at
all times shall provide such number of qualified and skilled personnel to
perform and deliver the Services and Technology in accordance with the quality
standards, time frames and other requirements set forth in this Agreement. PDF
Solutions shall utilize and comply with the relevant portions of any


                                       3

<PAGE>   4

regulatory standards applicable to the provision of the Services and Technology.
PDF Solutions shall promptly repair or replace at its own expense all damages,
scars or disfigurements to any materials or property that is part of, or
contained in, Customer's work site that are the result of the negligence of
personnel employed by PDF Solutions.

        2.3 Customer Assistance. Subject to Section 5 (Confidentiality),
Customer will provide PDF Solutions with such information, materials, technology
and Proprietary Rights as PDF Solutions shall reasonably require in order to
perform and deliver the Services and Technology as specified in the Scope of
Services and Technology.

        2.4 Mutual Cooperation; Schedule. Customer and PDF Solutions agree to
cooperate in good faith to achieve completion of the services specified in
EXHIBIT A in a timely and professional manner. Customer understands and agrees
that PDF Solutions' provision of the Services and Technology may depend on
Customer or a third party Foundry completing certain tasks or adhering to
certain schedules within Customer's control. Consequently, the schedule for
completion of the services specified in EXHIBIT A or any portion thereof may
require adjustments or changes in the event such tasks are not completed as
anticipated. PDF Solutions shall bear no liability or otherwise be responsible
for delays in the provision of services specified in EXHIBIT A or any portion
thereof proximately caused by failure by Customer or a third party Foundry to
complete a reasonable task or adhere to a reasonable schedule.

        2.5 Right to Perform Services for Others. Customer acknowledges that PDF
Solutions has extensive expertise, experience, technology and proprietary
products and tools in the area of electronic design and yield improvement and
that PDF Solutions intends to utilize such expertise, experience, products and
tools in providing consulting services and other services to other clients.
Subject to PDF Solutions' compliance with the confidentiality provisions stated
herein, nothing in this Agreement shall restrict or limit PDF Solutions from
providing integration technology or services to any other entity in any
industry, including the semiconductor and electronics industries. Customer
agrees that, except as otherwise agreed in this Agreement, PDF Solutions and its
employees may provide design consulting services similar in nature to the
Services and Technology for any third parties both during and after the term of
this Agreement. Subject to the limitations placed on PDF Solutions by this
Agreement, PDF Solutions may in its sole discretion develop, use, market,
license, offer for sale, or sell any software, application or product that is
similar or related to that which was developed by PDF Solutions for Customer
hereunder.

                 SECTION 3. PAYMENT FOR SERVICES AND TECHNOLOGY

        3.1 Fees. As compensation for the Services and Technology, Customer
shall pay to PDF Solutions the fees ("FEES") set forth in EXHIBIT "B" attached
hereto.

        3.2 Expenses. Customer shall also reimburse PDF Solutions for its
reasonable out-of-pocket expenses incurred in carrying out its obligations under
this Agreement including, but not limited to, travel, hotel, meals, document
production and other customary business expenses directly related to the
Services and Technology


                                       4

<PAGE>   5
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

("REIMBURSEMENT"). Travel, other than trips to Customer's office or fabrication
facilities, shall be in accordance with PDF Solution's travel policy.
Reimbursement for expenses incurred in an amount of up to ******** in any
calendar month shall not require the written approval of Customer; provided,
however, that any extraordinary engagement-related purchases including, but not
limited to, expenses for mask production, equipment purchases, on-site
facilities and on-site communications services, must receive Customer's prior
written authorization. Customer shall not have any liability to PDF Solutions
for any Reimbursement for expenses incurred in an amount in excess of ********
in any calendar month, unless such expenses are approved in writing by the
designated individual(s) set forth in EXHIBIT "C" attached hereto.

        3.3 Invoice. PDF Solutions shall bill Customer as agreed herein for
Services and Technology pursuant to an invoice delivered on a monthly basis.
Each invoice shall be accompanied by a reasonably detailed breakdown of the
invoiced amount. Invoices shall be mailed to:

               Philips Semiconductors
               9651 Westover Hills Blvd.
               San Antonio, TX 78251
               Attn:  ********

        3.4 Payment of Invoices. All payments by Customer hereunder shall be
made by corporate or other check. All invoices shall be due and payable within
thirty (30) days after the date of invoice. Amounts not paid in accordance
herewith shall be subject to a late charge equal to **************** (or, if
less, the maximum allowed by applicable law). Without prejudice to other
remedies available, PDF Solutions reserves the right to suspend performance and
delivery of Services and Technology until such delinquency is corrected,
provided that PDF Solutions shall give written notice of payment delinquency and
shall give 10 days advance written notice of its intention to suspend
performance. The amounts payable to PDF Solutions hereunder are exclusive of any
sales or use or other taxes or governmental charges. Customer shall be
responsible for payment of all such taxes or charges except for any taxes based
solely on PDF Solutions' net income. If Customer is required to pay any taxes
based on this Section 3.4, Customer shall pay such taxes with no reduction or
offset in the amounts payable to PDF Solutions hereunder.

                          SECTION 4. PROPRIETARY RIGHTS

        4.1 Ownership. Customer and PDF Solutions acknowledge and agree that, as
between them, ownership shall be as follows:

               (a) PDF Solutions is the exclusive owner of all PDF Technology
and all Proprietary Rights in the PDF Technology;

               (b) Customer is the exclusive owner of all Analysis,
Manufacturing Designs, Raw Data and all Proprietary Rights in the Analysis,
Manufacturing Design and the Raw Data; and

               (c) Customer is the exclusive owner of Mask Sets.


                                       5

<PAGE>   6
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

        To the extent the law would provide for ownership other than as provided
herein, (y) Customer hereby assigns to PDF Solutions its right, title and
interest in and to the PDF Technology and the Proprietary Rights in the PDF
Technology and (z) PDF Solutions hereby assigns to Customer its right, title and
interest in and to the Analysis, Manufacturing Designs, Raw Data and the
Proprietary Rights in the Analysis, Manufacturing Designs and Raw Data, and in
the Mask Sets.

        4.2 Grant of License by PDF Solutions. Subject to the terms and
conditions of this Agreement, including the timely payment of Fees, PDF
Solutions hereby grants to Customer and its subsidiaries, ***************
license ***** to use the PDF Technology and associated Proprietary Rights
disclosed by PDF Solutions under this Agreement, but only to the extent PDF
Solutions has the right to grant such license; provided that such license is
solely for use of PDF Technology in connection with the development, manufacture
and fabrication of integrated circuit products of Customer and its
majority-owned subsidiaries. The foregoing license includes all PDF Technology
disclosed by PDF Solutions in its work for Customer hereunder (including
methodologies or practices observed by Customer personnel in the course of PDF
Solutions' work hereunder); provided, however, that specifically excluded from
this license of PDF Technology is any and all software or software tools or
software manuals and documentation. Customer shall be bound by and shall cause
its sublicensees to be bound by the confidentiality obligations contained in
Section 5 or obligations at least as restrictive as the confidentiality
obligations contained in Section 5. Except as specifically provided herein,
Customer shall not disclose or license PDF Technology to any third party.
Customer understands that PDF Solutions will not disclose to Customer certain
proprietary methods or trade secrets in connection with the services to be
rendered by PDF Solutions hereunder. To this end, PDF Solutions retains the
right to take industry standard measures to keep such proprietary methods or
trade secrets from Customer, unless the same defeats or substantially impedes
the Scope of Services and Services and Technology under Section 2 of this
Agreement.

        4.3 Grant of License by Customer. Subject to the terms and conditions of
this Agreement, Customer hereby grants to PDF Solutions ************** license
*****, but only to the extent Customer has the right to grant such license, as
follows:

               (a) to incorporate Customer's Manufacturing Designs in CVs at any
time during the term solely for the purpose of performing under this Agreement;

               (b) to use, copy, compile, manipulate, analyze or reproduce Raw
Data and the Mask Sets solely for the purpose of performing under this
Agreement; and

               (c) to use and rely upon Raw Data and Analysis from any Foundry
for any purpose, including with other customers of PDF Solution. PDF Solutions
shall be bound by and shall cause its sublicensees to be bound by the
confidentiality obligations contained in Section 5 or obligations at least as
restrictive as the confidentiality obligations contained in Section 5. Customer
will, in good faith, work with PDF Solutions


                                       6

<PAGE>   7

and third party Foundry to encourage third party Foundry to provide any required
consents or licenses in accordance with this Section 4.

        4.4 No Other Rights. Except as otherwise set forth in this Section 4,
neither this Agreement nor performance and delivery of the Services and
Technology shall give either PDF Solutions or Customer any ownership, interest
in, or rights to, the Proprietary Rights owned or provided by the other party.

                           SECTION 5. CONFIDENTIALITY

The parties acknowledge and agree that during the course of the performance of
the mutual obligations hereunder, each party will occasionally deliver to the
other party certain information (including proprietary information, technical
data, trade secrets, know-how, research, software, developments, inventions,
processes, design flows, methods, methodologies, formulas, algorithms,
technologies, designs, drawings, engineering, hardware configuration
information, yield data or other similar information, and related documentation
and information) which the disclosing party deems to be confidential or
proprietary. Such information shall be considered and treated hereunder as
proprietary and other confidential information if it is marked as "Confidential"
or "Proprietary" (hereinafter referred to as "CONFIDENTIAL INFORMATION"): (i) by
stamp or legend if communicated in writing or other tangible form, or (ii)
orally at the time of disclosure with a written confirmation within thirty days
describing the Confidential Information communicated orally. All restrictions as
to use and disclosure shall apply during such thirty day period. Except as
permitted hereunder, the receiving party shall not use or disclose the
Confidential Information of the disclosing party. Any recipient of Confidential
Information disclosed pursuant to this Agreement shall hold the Confidential
Information in strictest confidence and shall protect the Confidential
Information by using the same degree of care, but no less than a reasonable
degree of care, to prevent the unauthorized use, disclosure, dissemination or
publication of the Confidential Information as the recipient uses to protect its
own comparable confidential and proprietary information. Any permitted
reproduction of Confidential Information shall contain all confidential or
proprietary legends which appear on the original. If the disclosing party
discloses any software, the recipient is prohibited from disassembling,
decompiling, reverse-engineering or otherwise attempting to discover or disclose
the disclosing party's software or methods or concepts embodied in such
software. Subject to the licenses granted in Section 4, upon receipt of the
written request of the disclosing party, the receiving party will return, or
give written certification of the destruction of all Confidential Information in
any tangible or digital form, including all copies thereof whether on paper or
in digital form, which are in the recipient's possession or control. The
recipient will immediately notify the disclosing party in the event of any loss
or unauthorized disclosure of Confidential Information. The above restrictions
on use and disclosure shall not apply to any Confidential Information that: (1)
is in the public domain or in the possession of the recipient without
restriction at the time of receipt under this Agreement through no wrongful act
or omission of the recipient, (2) is disclosed with the prior written approval
of the disclosing party, (3) is disclosed after five years from the date of
expiration or earlier termination of this Agreement, (4) is independently
developed by the recipient without breach of this Agreement which independent
development is


                                       7

<PAGE>   8

supported by reasonable contemporary evidence, (5) becomes known to the
recipient from a source other than the disclosing party without breach of this
Agreement by the recipient or any other wrongful act or omission by recipient or
any third party; or (6) is required to be disclosed pursuant to law, provided
the recipient uses reasonable efforts to give the disclosing party reasonable
notice of such required disclosure sufficient to give the disclosing party the
opportunity to contest such disclosure. The obligations of confidentiality shall
survive the expiration or sooner termination of this Agreement for a period of
******** years thereafter. Disclosing party assumes no responsibility or
liability whatever under this Agreement for any use of Confidential Information
by the recipient or its sublicensees, customers or agents. Nothing in this
Agreement shall restrict recipient's discretion to transfer or assign its
personnel, providing the obligations of recipient under this Agreement are
otherwise met. Subject to the provisions of Section 4, either party shall be
free to use for any purpose the "residuals" resulting from access to or work
with such Confidential Information, provided that such party shall maintain the
confidentiality of the Confidential Information as provided herein. The term
"residuals" means information in non-tangible form, which may be retained by
persons who have had access to the Confidential Information, including ideas,
concepts, know-how or techniques contained therein. Neither party shall have any
obligation to limit or restrict the assignment of such persons or to pay
royalties for any work resulting from the use of residuals. Each party hereto
recognizes and agrees that there is no adequate remedy at law for a breach of
this Section 5, that such a breach would irreparably harm the disclosing party
and that the disclosing party shall be entitled to seek equitable relief
(including, without limitation, injunctions) with respect to any such breach or
potential breach in addition to any other remedies.

                    SECTION 6. REPRESENTATIONS AND WARRANTIES

        6.1 Corporate Warranties. Each party hereby represents and warrants to
the other party that: (i) it is duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was organized, (ii) the
person executing this Agreement on behalf of each party is duly authorized to
bind such party to all terms and conditions of this Agreement, (iii) this
Agreement, when executed and delivered by each party, will be the legal, valid,
and binding obligation of such party, enforceable against it in accordance with
its terms, and (iv) the execution, delivery and performance of this Agreement by
each party does not and will not conflict with or constitute a breach or default
under such party's charter documents, delegations of authority, or any material
agreement, contract or commitment of such party, or require the consent,
approval or authorization of, or notice, declaration, filing or registration
with, any third party or governmental or regulatory authority.

        6.2 Infringement. PDF Solutions warrants that it is not aware of
infringement or alleged infringement of its deliverables under third parties'
valid U.S. intellectual property rights.

        6.3 Disclaimer of Warranties. THE WARRANTIES STATED IN THIS SECTION 6
ARE THE PARTIES' SOLE AND EXCLUSIVE WARRANTIES PERTAINING TO THE SUBJECT MATTER
OF THIS AGREEMENT, AND EACH


                                       8

<PAGE>   9

PARTY HEREBY DISCLAIMS ANY OTHER WARRANTY, EXPRESS OR IMPLIED, WRITTEN OR ORAL,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF TITLE, MERCHANTABILITY,
NON-INFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE. NOTHING UNDER THIS
AGREEMENT, OR THE STATEMENT OF WORK OR PROJECT SHALL BE DEEMED TO BE A WARRANTY
AS TO THE OUTCOME OF ANY PROJECT OR THE EFFICACY OF ANY RECOMMENDATIONS MADE BY
PDF SOLUTIONS. NOTHING UNDER THIS AGREEMENT OR THE STATEMENT OF WORK SHALL BE
DEEMED TO CREATE ANY LIABILITY ON THE PART OF EITHER PARTY WITH RESPECT TO THE
OUTCOME OF A PROJECT OR ANY ACTIONS TAKEN BY CUSTOMER OR THE PDF SOLUTIONS AS A
CONSEQUENCE OF THE OTHER PARTIE'S RECOMMENDATIONS.

                           SECTION 7. INDEMNIFICATION.

PDF Solutions shall defend or settle at PDF Solutions' expense any claim
("Claim") brought against Customer that the Services and Technology and/or any
tangible or intangible delivered in connection therewith impermissibly contains
third party's proprietary rights, trade secrets, or copyrighted materials or
that Customer's use of any such materials, as permitted hereunder, infringes any
United States patent; provided that such indemnification shall not extend (a) to
any infringement by Customer's designs or products, (b) to any infringement
resulting from any infringement contained in any technical data, Manufacturing
Designs, Mask Sets or materials or reports or information provided by Customer.
The indemnification obligations set forth in this Section 7 are subject to the
conditions that the Customer: (i) gives prompt written notice of the Claim to
the PDF Solutions, (ii) gives the PDF Solutions the exclusive authority to
control and direct the defense or settlement of such Claim, provided that the
PDF Solutions does not take adopt any positions that may be prejudicial to
Customer and (iii) gives the PDF Solutions, at Customer's own expense (except
for the value of the Customer's employees' time), all reasonably necessary
information and reasonable assistance with respect to such Claim. PDF Solutions
shall pay all amounts paid in settlement and all damages and costs awarded with
respect to such Claim. PDF Solutions will not be liable for any costs or
expenses incurred without its prior written authorization. In the event of any
Claim under this Section 7, PDF Solutions shall have the option, at its
election, to (a) obtain a license to permit continued use of the allegedly
infringing item or practice, (b) modify the allegedly infringing item or
practice to avoid continued infringement provided the modified item or practice
is substantially equivalent, (c) procure or provide a substantially equivalent
substitute for the allegedly infringing item or practice or (d) if PDF Solutions
is unable to achieve (a), (b) or (c) after reasonable efforts, then PDF
Solutions may require that Customer cease use of the infringing item or practice
as soon as feasible and terminate this Agreement and refund all Incentive Fees
and Gainshare Fees paid by Customer to PDF Solutions.

                       SECTION 8. LIMITATION OF LIABILITY

THE LIABILITY OF EITHER PARTY AND OF SUCH PARTY'S OFFICERS, DIRECTORS,
EMPLOYEES,CONTRACTORS AND AGENTS, TAKEN AS A


                                       9

<PAGE>   10

WHOLE, WHETHER IN TORT, CONTRACT OR OTHERWISE, AND NOTWITHSTANDING ANY FAULT,
NEGLIGENCE, STRICT LIABILITY OR PRODUCT LIABILITY OF SUCH PARTY OR OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, OR AGENTS OR FAILURE OF ESSENTIAL PURPOSE, WITH
REGARD TO ANY SERVICES OR OTHER ITEMS FURNISHED UNDER THIS AGREEMENT SHALL IN NO
EVENT EXCEED THE AGGREGATE COMPENSATION PAID BY CUSTOMER TO SERVICE PROVIDER
HEREUNDER. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO
EVENT SHALL EITHER PARTY BE LIABLE FOR ANY CLAIM FOR ANY INDIRECT, INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES, COVER OR ANY LOSS OF DATA, PROFIT, REVENUE OR
USE UNDER ANY THEORY OF LAW OR FOR ANY CAUSE OF ACTION.

                            SECTION 9. MISCELLANEOUS

        9.1 Publicity. Neither party shall disclose the terms of this Agreement
to any third party, or in any manner advertise or publish statements to such
effect, without the prior written consent and mutual agreement as to the
content, medium, and manner of the public announcement of the other party.
Customer agrees during the term to work in good faith with PDF Solutions to
produce five mutually acceptable public announcements of PDF Solutions'
engagement with Customer under this Agreement. Notwithstanding the above, should
one of the parties be required to disclose either the existence or terms of this
Agreement to a court of law, a governmental agency, an auditor or a bank, such
party may do so without the prior written consent of the other party provided
that the disclosing party: (i) notifies the recipient of the confidential nature
of the information, (ii) requests confidential treatment of such information,
(iii) limits the disclosure to only such information as is required under the
circumstances, and (iv) delivers prompt notice to the other party of such
requested or actual disclosure.

        9.2 Assignment. Neither party shall assign any portion of its rights,
duties, or obligations under this Agreement without the prior written consent of
the other party, which consent will not be unreasonably withheld or delayed,
provided that PDF Solutions may utilize the services of consultants and
subcontractors to perform hereunder.

        9.3 Changes. No modification to this Agreement will be binding unless in
writing and signed by a duly authorized representative of each party. Change
orders affecting any Scope of Services will not be effective until reviewed and
approved in writing by PDF Solutions and Customer. PDF Solutions will submit to
Customer a report on how the proposed changes will affect the current Services
including the effect on the time schedule and cost estimates. The parties will
have no obligation to proceed with changed work until both parties have approved
the change in writing.

        9.4 Notices. All notices or correspondence pertaining to this Agreement
shall be in writing, delivered by either first class mail with receipt or by
facsimile with receipt. Such notice shall be effective upon the earlier of
actual receipt or the expiration of three


                                       10

<PAGE>   11
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

days following the date of mailing to the addresses as follows, or such
alternative address the parties may designate in the future:

        To Customer:

               Philips Semiconductors
               9651 Westover Hills Blvd.
               San Antonio, TX 78251
               Attn:  *************
               Tel:  (210) 522-7010
               Fax: (210) 522-7301


        To PDF Solutions:

               PDF Solutions, Inc.
               333 West San Carlos Street
               Suite 700
               San Jose, CA 95110
               Attn:  Chief Financial Officer
               Tel:   (408) 938-6445
               Fax:   (408) 938-6478

        9.5 Independent Contractors. PDF Solutions and Customer shall perform
their obligations under this Agreement as independent contractors, and nothing
contained in this Agreement shall be construed to create or imply a joint
venture, partnership, principal-agent or employment relationship between the
parties. Neither party shall take any action or permit any action to be taken on
its behalf which purports to be done in the name of or on behalf of the other
party and shall have no power or authority to bind the other party to assume or
create any obligation or responsibility express or implied on the other party's
behalf or in its name, nor shall such party represent to any one that it has
such power or authority.

        9.6 Force Majeure. Neither party shall be liable to the other party for
any loss, damage, or penalty arising from delay to the extent due to causes
beyond its reasonable control including acts of God, acts of government, war,
riots, or embargoes.

        9.7 Severability. If any term or provision of this Agreement is
determined to be invalid or unenforceable for any reason, it shall be adjusted
rather than voided, if possible, to achieve the intent of the parties to extent
possible. In any event, all other terms and provisions shall be deemed valid and
enforceable to the maximum extent possible.

        9.8 Insurance. PDF Solutions shall carry Workers' Compensation and
Comprehensive General Liability Insurance (including Products, Contractual, and
Automobile Liability) having limits of liability not less than $1 million
combined single limit per occurrence for bodily injury, including death and
property damages, prior to performing any services on site at Foundry.


                                       11

<PAGE>   12

        9.9 Disputes. If any claim or controversy arises out of this Agreement,
the parties shall first make a good faith attempt to resolve the matter through
a designated executive officer. The officers having cognizance of the subject
matter of the Agreement for each of the parties shall first meet and make a good
faith attempt to resolve such controversy or claim. In the event such good faith
negotiation fails to settle any dispute within sixty (60) days from notice of
such dispute, the controversy shall be settled by binding arbitration by one or
three arbitrators, (if three are used, each party shall select one, and the
third shall be selected by mutual agreement of the parties), conducted in Santa
Clara County, California and in accordance with the Commercial Arbitration Rules
of the American Arbitration Association and judgment upon the award rendered by
the arbitrator(s) may be entered by any court having jurisdiction thereof. The
arbitrator(s) shall not be empowered to award damages in excess of, and/or in
addition to, actual damages, and the arbitrator(s) shall deliver a reasoned
opinion in connection with his/her/their decision. Nothing herein, however,
shall prohibit either party from seeking injunctive relief if such party would
be substantially prejudiced by a failure to act during the time that such good
faith efforts are being made to resolve the claim or controversy. In the event
either party seeks injunctive relief, the parties agree that jurisdiction will
be before a state or district court seated in either Santa Clara County,
California.

        9.10 Governing Law. This Agreement and any and all disputes arising
hereunder shall be governed by the internal laws of the State of California,
without regard to choice of law principles. This Agreement is prepared and
executed and shall be interpreted in the English language only, and no
translation of the Agreement into another language shall have any effect. The
parties agree that the United Nations Convention on Contracts for the
International Sale of Goods (1980) is specifically excluded from and shall not
apply to this Agreement.

        9.11 Waiver. The failure of any party hereto to enforce at any time any
of the provisions of this Agreement or to require at any time performance by the
other party of any of the provisions of this Agreement, or any part hereof,
shall not be construed to be a waiver of said provision or to effect the right
of any party to enforce each and every provision in accordance with the terms of
this Agreement.

        9.12 Interpretation. In the event that any term of the Scope of Services
conflicts with the terms of this Agreement, the terms of this Agreement shall
take precedence.

        9.13 Non-Solicitation. Customer shall not actively solicit or influence
or attempt to influence any person employed by PDF Solutions to terminate or
otherwise cease his or her employment with PDF Solutions or become an employee
of Customer. PDF Solutions shall not actively solicit or influence or attempt to
influence any person employed by Customer to terminate or otherwise cease his or
her employment with Customer or become an employee of PDF Solutions.

        9.14 Drafter. Neither party will be deemed the drafter of this
Agreement, which Agreement will be deemed to have been jointly prepared by the
parties. If this Agreement is ever construed, whether by a court or by an
arbitrator, such court or arbitrator will not construe this Agreement or any
provision hereof against any party as drafter.


                                       12

<PAGE>   13

        9.15 Entire Agreement. The parties acknowledge that PDF Solutions is not
providing or licensing to Customer under this Agreement any software programs or
products and anticipate that they will enter into a Software Evaluation and/or
Software License Agreement related to the subject matter hereof. Such agreement
shall also not be affected by this Agreement. Except for such software
agreements, this Agreement shall constitute the entire agreement between the
parties with respect to the subject matter hereof and: (i) shall supersede all
prior contemporaneous oral or written communications, proposals and
representations with respect to its subject matter, and (ii) shall prevail over
any conflicting or additional terms of any statement of work, quote, order
acknowledgment or similar communication between the parties during the term of
this Agreement.

        9.16 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

        9.17 Exhibits. Exhibits "A," "B," and "C" attached hereto are
incorporated herein by this reference as if fully set forth herein.

        IN WITNESS WHEREOF, the parties hereto have executed this Services
Agreement as of the date(s) set forth below to be effective as of the Effective
Date.

PDF SOLUTIONS, INC., A CALIFORNIA CORPORATION     PHILIPS SEMICONDUCTORS


By:     /s/ PS Melman                             By:     /s/ David N. Ledvina
   -----------------------------------------         ---------------------------
Name:   PS Melman                                 Name:   David Ledvina
     ---------------------------------------           -------------------------
Title:  CFO                                       Title:  VP - General Manager
      --------------------------------------            ------------------------
Date:   6/15/00                                   Date:   6/14/00
     ---------------------------------------           -------------------------


                                       13

<PAGE>   14
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                                STATEMENT OF WORK

                                       for

                                  ************
                     Philips Semiconductor, Inc. - ********


        SCOPE: THIS STATEMENT OF WORK (SOW) DESCRIBES TASKS TO BE PERFORMED BY
PDF SOLUTIONS INC. IN COLLABORATION WITH PHILIPS SEMICONDUCTOR, INC. - ********.
AS INDICATED BELOW, IT IS THE GOAL OF THIS EFFORT TO GENERATE A CHARACTERIZATION
VEHICLE (CV) FOR A SCALABLE _ FLOW FRONT-END AND SUPPORT FOR PHILIPS'
***************.


1.      PROJECT PLAN


        1.1     Phase I *****************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************

                        -       ********

                        -       ********

                        -       ********

                        -       ********

                        -       ********

                        -       ********

        1.2     Phase II ****************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************

        1.3     Phase III ******************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************

        1.4     Phase IV *******************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ****************************************************************
                ******************


                                       14

<PAGE>   15
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

2.      PROJECT MILESTONES


<TABLE>
<CAPTION>
STEP              DESCRIPTION               PHASE        DELIVERABLE           DATE*
----       ---------------------------      -----        -----------      ---------------

<S>        <C>                              <C>          <C>              <C>
0          Project Start Date                N/A             N/A                TBD

1          *************                      I                           Start date plus
           **********************                                            ********
           ********  **************
           **************************
           ******

2          ************                       I               0             Step 1 plus
                                                                             ********

3          ************************          II              0             Step 2 plus
           ************************                                          ********

4          **************************         II              0             Step 3 plus
           **************************                                        ********

5          **************************        III              0                 TBD
           **************************
           ********

6          ***********************           III                                TBD

7          ****************************       IV                            Step 6 plus
                                                                             ********

8          **************************         IV              0             Step 7 plus
           **************************                                        ********
           ***********
</TABLE>



3.      DELIVERABLES


The deliverables are itemized below:

        ***********************************************************************
        ***********************************************************************
        ***********************************************************************

        ***********************************************************************
        ***********************************************************************
        ***********************************************************************

        ***********************************************************************
        ***********************************************************************
        ***********************************************************************

        ***********************************************************************
        ***********************************************************************
        ***********************************************************************
        ***********************************************************************

        ***********************************************************************
        ********.


                                       15

<PAGE>   16
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

1       COMPENSATION


        1.1     Service Fees for this IP and service will be ******** for the CV
                and initial full support plus ******** per month for on-going
                support.

                1.1.1.  The initial support period will last for *************
                        The start of the ************ support period will
                        commence after **************************************
                        *****************************************************
                        ****************************** whichever occurs first.

        1.2     Philips will reimburse all authorized travel by PDF Solutions up
                to a limit of ***********.

        1.3.    CV and CVA License Fees

                1.3.1.  NRE: CV (GDSII) and associated analysis - included in
                        fixed fee.

                1.3.2.  CV use in ******** for ************* technology -
                        included in fixed fee.

        1.4.    Other expenses to be paid by Philips include ***************
                cost.


                                       16

<PAGE>   17
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

        Philips Semiconductors
        9651 Westover Hills Blvd.
        San Antonio, TX 78251
        Attn:  ********
        Tel:  (210) 522-7010
        FAX:  (210) 522-7301


        PDF Solutions
        101 West Renner RD
        Suite 325 
        Richardson, TX 75082
        Attn: ********
        Tel:  (972) 889-3085 ext. 208
        FAX:  (972) 889-2486
 



<PAGE>   1
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                                                                    EXHIBIT 10.2

                             CONFIDENTIAL TREATMENT
                        PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                     THE SECURITIES ACT OF 1933, AS AMENDED.


                        INTEGRATION TECHNOLOGY AGREEMENT

        THIS INTEGRATION TECHNOLOGY AGREEMENT ("this AGREEMENT") is made and
entered into as of ************** (the "EFFECTIVE DATE") by and between Conexant
Systems, Inc., a Delaware corporation ("CONEXANT") with a Tax Identification
Number of 251799439 and its principal place of business at 4311 Jamboree Road,
Newport Beach, California 92660, and PDF Solutions, Inc., a California
corporation ("PDF SOLUTIONS") with a Tax Identification Number of 25-1701361 and
its principal place of business at 333 West San Carlos Street, Suite 700, San
Jose, California 95110.

                                    RECITALS

        A. PDF Solutions possesses technology and expertise useful in
discovering, analyzing, and fixing problems in the design and manufacturing
processes that cause low yields of useable integrated circuits.

        B. Conexant desires to engage PDF Solutions and receive a license to
certain technology
 useful to analyze its internal integrated circuit
manufacturing process, identify problems therewith, and recommend solutions
thereto, by way of methodology or otherwise, upon the terms and conditions
contained herein.

        C. PDF Solutions desires to be so engaged upon the terms and conditions
contained herein.

                                   DEFINITIONS

"ANALYSIS" refers to all interpretations, recommendations, extractions,
statistical models or other yield and performance models developed by PDF
Solutions and derived in whole or in part from Conexant's Raw Data; provided,
however, that Analysis does not include any information sufficiently detailed
that Raw Data could be feasibly re-constructed.

"CHARACTERIZATION VEHICLE" or "CV" refers to the parameterized layout structures
or circuit elements, specific implementations of said structures or circuit
elements either in computer format or layout format, and images of said
structures or circuit elements


                                       1

<PAGE>   2
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

historically or hereafter created or customized by PDF Solutions for the
purposes of creating a test vehicle used to characterize any given manufacturing
process. Manufacturing Designs are usually referenced in the process of
generating CVs for the purposes of optimizing or tuning the vehicle to the
targeted designs and process. The CV is used to create a Mask Set which is used
by the fabrication facility to generate test wafers.

"FOUNDRY" refers to any foundry with which Conexant has a relationship that
manufactures **** technology products for Conexant.

 "MANUFACTURING DESIGNS" refers to all non-public information relating to
Conexant's manufacturing processes and integrated circuit designs (structures
and elements) used in connection with the CV to generate Raw Data.

"MASK SET" refers to translucent glass plates used as a light filter to transfer
designs onto a wafer.

 "PROPRIETARY RIGHTS" shall mean all intellectual property rights including, but
not limited to, patents, patent applications, copyrights, copyright
registrations, moral rights, mask work rights, rights of authorship, industrial
design rights, trademarks, tradenames, know-how and trade secrets, irrespective
of whether such rights arise under U.S. or international intellectual property,
unfair competition or trade secret laws.

"PDF TECHNOLOGY" refers to all historically, or hereafter developed
methodologies, techniques, software, designs, CVs, problem solving processes and
practices utilized by PDF Solutions, and any modifications, compilations or
works derivative of the foregoing, excluding know-how, methodologies, techniques
or practices that are commonly known or that Conexant independently has the
right to use.

"RAW DATA" shall mean the data generated by PDF Solutions using the CV in
conjunction with Conexant's Manufacturing Design.

"******" shall be defined as the following ****************************
processes run          by Conexant using
             
*****************************************************.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the mutual promises herein
contained, the above recitals and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Conexant and PDF
Solutions, intending to be legally bound, hereby agree as follows:

SECTION 1. TERM AND TERMINATION

        1.1 Term. This Agreement shall commence on the Effective Date and shall
expire on ****************************, unless sooner terminated in accordance
with Sections 1.2, 1.3 or 1.4.


                                       2

<PAGE>   3
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

        1.2 Termination Without Cause. Either party may upon 60 days prior
written notice to the other party, at any time and/or for any reason, terminate
this Agreement. In such case, Conexant shall pay PDF Solutions all Fixed Fees
(as defined in Exhibit "B" attached hereto) payable at the effective date of
such termination, all Reimbursements (as defined below) incurred through the
effective date of such termination and all Incentive Fees and Gainshare Fees
that would otherwise have been earned had this Agreement not been terminated;
provided that should PDF Solutions exercise its right to terminate this
Agreement under this Section 1.2 prior to ************************** PDF
Solutions shall thereby forfeit any and all right it may have in any Incentive
Fee, Gainshare Fee (as defined in Exhibit "B" attached hereto) other than
Incentive Fees and Gainshare Fees earned prior to the effective date of such
termination.

        1.3 Termination for Cause. This Agreement may be terminated upon thirty
(30) days prior written notice by either party if the other party materially
breaches or fails to perform any material obligations hereunder and the
breaching party fails to cure such breach within thirty (30) days of such
written notice. Notwithstanding the foregoing, the cure period for any failure
of Conexant to pay Fees and Reimbursements due hereunder shall be 20 days from
the date of receipt by Conexant of any notice of breach relating thereto. In the
event of a termination under this Section 1.3, Conexant shall pay PDF Solutions
all Fixed Fees incurred through the effective date of such termination, all
Reimbursements incurred through the effective date of such termination and, if
PDF Solutions shall so terminate this Agreement, all Incentive Fees and
Gainshare Fees that would otherwise have been earned had this Agreement not been
terminated.

        1.4 Change of Control Termination. This Agreement may be terminated upon
thirty (30) days prior written notice by either party if either party has
experienced a Change of Control and continuation under this Agreement is not
feasible, provided such notice is given within six (6) months of the
Announcement Date. If termination occurs under this Section 1.4 then both
parties will work together in good faith to agree upon a reasonable settlement
payment for dissolution of the Agreement. If the parties are unable to achieve
mutual agreement within thirty (30) days of termination notice under this
Section 1.4, then the settlement payment due to PDF Solutions shall be finally
determined in arbitration pursuant to Section 9.10; provided that the reasonable
settlement is intended to be an estimate of the Fixed Fees, Incentive Fees and
Gainshare Fees PDF Solutions would have earned for PDF Solution's efforts
extended prior to the termination under this Section 1.4.

* INCORPORATE "CHANGE OF CONTROL" DEFINITION PER ATTACHED EMAIL FROM ******** 
  DATED 5/18/00.

        1.5 Survival of Provisions. Any and all obligations and duties which
have accrued hereunder upon such termination shall survive the termination and
remain obligations and duties of the burdened party. Sections 3 (Payment for
Services and Technology) as modified by this Section 1, 4 (Proprietary Rights),
5 (Confidentiality), 6 (Representations and Warranties), 7 (Indemnity), 8
(Limitation of Liability) and 9 (Miscellaneous) shall survive the expiration or
sooner termination of this Agreement and remain binding upon the parties hereto;
provided that in the event of any termination of


                                       3

<PAGE>   4

this Agreement by PDF Solutions pursuant to Section 1.3, any and all rights and
licenses granted by PDF Solutions to Conexant hereunder shall terminate
effective upon such termination; and provided that in the event of any
termination of this Agreement Conexant pursuant to Section 1.3, any and all
rights and licenses granted by Conexant to PDF Solutions hereunder shall
terminate effective upon such termination.

SECTION 2. DELIVERY OF SERVICES AND TECHNOLOGY

        2.1 Scope of Services. During the term of this Agreement, PDF Solutions
shall furnish the PDF Technology and related services (the "SERVICES AND
TECHNOLOGY") described in detail in Exhibit "A" attached hereto (the "SCOPE OF
SERVICES AND TECHNOLOGY"). The manner and means used by PDF Solutions to provide
the Services and Technology are in the sole discretion and control of PDF
Solutions. The Scope of the Services and Technology shall be governed by the
terms and conditions of this Agreement.

        2.2 Standard for Performance. PDF Solutions shall perform and deliver
the Services and Technology under this Agreement in accordance with the
standards and practices of care consistent with the quality of services PDF
Solutions performs for its other similarly situated clients. PDF Solutions at
all times shall provide such number of qualified and skilled personnel to
perform and deliver the Services and Technology in accordance with the quality
standards, time frames and other requirements set forth in this Agreement. PDF
Solutions shall utilize and comply with the relevant portions of any regulatory
standards applicable to the provision of the Services and Technology. PDF
Solutions shall promptly repair or replace at its own expense all damages, scars
or disfigurements to any materials or property that is part of, or contained in,
Conexant's work site that are the result of the methods or materials used or
employed by PDF Solutions, its personnel or its other agents.

        2.3 Conexant Assistance. Subject to Section 5 (Confidentiality),
Conexant will provide PDF Solutions with such information, materials, technology
and Proprietary Rights as PDF Solutions shall reasonably require in order to
perform and deliver the Services and Technology as specified in the Scope of
Services and Technology.

        2.4 Mutual Cooperation; Schedule. Conexant and PDF Solutions agree to
cooperate in good faith to achieve completion of the services specified in
Exhibit A in a timely and professional manner. Conexant understands and agrees
that PDF Solutions' provision of the Services and Technology may depend on
Conexant completing certain tasks or adhering to certain schedules within
Conexant's control. Consequently, the schedule for completion of the services
specified in Exhibit A or any portion thereof may require adjustments or changes
in the event such tasks are not completed as anticipated. PDF Solutions shall
bear no liability or otherwise be responsible for delays in the provision of
services specified in Exhibit A or any portion thereof proximately caused by
Conexant's failure to complete a reasonable Conexant task or adhere to a
reasonable Conexant schedule. PDF Solutions shall provide prior written notice,
allowing reasonable time for Conexant to act on the notice, of any Conexant task
and/or Conexant schedule upon which PDF Solutions is depending on to perform
services specified in Exhibit A. Conexant shall bear no liability or otherwise
be responsible for delays in the provision of services


                                       4

<PAGE>   5
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

specified in Exhibit A or any portion thereof proximately caused by a Foundry's
failure to complete tasks or schedules upon which Conexant and PDF Solutions may
depend.

        2.5 Right to Perform Services for Others. Conexant acknowledges that PDF
Solutions has extensive expertise, experience, technology and proprietary
products and tools in the area of electronic design and yield improvement and
that PDF Solutions intends to utilize such expertise, experience, products and
tools in providing consulting services and other services to other clients.
Subject to PDF Solutions' compliance with the confidentiality provisions stated
herein, nothing in this Agreement shall restrict or limit PDF Solutions from
performing such design consulting or other services to any other entity in any
industry, including the semiconductor and electronics industries. Conexant
agrees that, except as otherwise agreed in this Agreement, PDF Solutions and its
employees may provide design consulting services similar in nature to the
Services and Technology for any third parties both during and after the term of
this Agreement. Subject to the limitations placed on PDF Solutions by this
Agreement or by any existing Non-Disclosure Agreement between PDF Solutions and
Conexant, PDF Solutions may in its sole discretion develop, use, market,
license, offer for sale, or sell any software, application or product that is
similar or related to that which was developed by PDF Solutions for Conexant
hereunder.

SECTION 3. PAYMENT FOR SERVICES AND TECHNOLOGY

        3.1 Fees. As compensation for the Services and Technology, Conexant
shall pay to PDF Solutions the fees ("FEES") set forth in Exhibit "B" attached
hereto.

        3.2 Expenses. Conexant shall also reimburse PDF Solutions for its
reasonable out-of-pocket expenses incurred in carrying out its obligations under
this Agreement including, but not limited to, travel, hotel, meals, document
production and other customary business expenses directly related to the
Services and Technology ("REIMBURSEMENT"). Travel, other than trips to
Conexant's office or fabrication facilities, shall be in accordance with
Conexant's travel policy (provided that PDF Solutions may select its own travel
agency). Reimbursement for expenses incurred in an amount of up to
*********************** in any calendar month shall not require the written
approval of Conexant; provided, however, that any extraordinary
engagement-related purchases including, but not limited to, expenses for mask
production, equipment purchases, on-site facilities and communications services,
must receive Conexant's prior written authorization. Conexant shall not have any
liability to PDF Solutions for any Reimbursement for expenses incurred in an
amount in excess of ******************** in any calendar month, unless such
expenses are approved in writing by the designated individual(s) set forth in
Exhibit "C" attached hereto. Reimbursement shall be made only upon presentation
by PDF Solutions of mutually agreed upon documentation substantiating the amount
and purpose of such expense.

        3.3 Invoice. PDF Solutions shall bill Conexant as agreed herein for
Services and Technology pursuant to an invoice delivered on a monthly basis.
Each invoice shall be accompanied by a reasonably detailed breakdown of the
invoiced amount. Invoices shall be mailed to:


                                       5

<PAGE>   6
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

               Conexant Systems, Inc.
               4311 Jamboree Road, PO Box 7370
               Newport Beach, CA 92658-7370
               Attention: Accounts Payable

        3.4 Payment of Invoices. All payments by Conexant hereunder shall be
made by corporate or other check. All invoices shall be due and payable within
thirty (30) days after the date of invoice. Amounts not paid in accordance
herewith shall be subject to a late charge equal to ***********************
(1.5%) per month (or, if less, the maximum allowed by applicable law). Without
prejudice to other remedies available, PDF Solutions reserves the right to
suspend performance and delivery of Services and Technology until such
delinquency is corrected, provided that PDF Solutions shall give written notice
of payment delinquency and shall give ************ advance written notice of its
intention to suspend performance. The amounts payable to PDF Solutions hereunder
are exclusive of any sales or use or other taxes or governmental charges.
Conexant shall be responsible for payment of all such taxes or charges except
for any taxes based solely on PDF Solutions' net income. If Conexant is required
to pay any taxes based on this Section 3.4, Conexant shall pay such taxes with
no reduction or offset in the amounts payable to PDF Solutions hereunder.

SECTION 4. PROPRIETARY RIGHTS

        4.1 Ownership. Conexant and PDF Solutions acknowledge and agree that, as
between them, ownership shall be as follows:

               (a) PDF Solutions is the exclusive owner of all PDF Technology
and all Proprietary Rights in the PDF Technology;

               (b) Conexant is the exclusive owner of all Analysis,
Manufacturing Designs, Raw Data and all Proprietary Rights in the Analysis,
Manufacturing Design and the Raw Data; and

               (c) Conexant is the exclusive owner of Mask Sets.

        To the extent the law would provide for ownership other than as provided
herein, (y) Conexant hereby assigns to PDF Solutions its right, title and
interest in and to the PDF Technology and the Proprietary Rights in the PDF
Technology and (z) PDF Solutions hereby assigns to Conexant its right, title and
interest in and to the Analysis, Manufacturing Designs, Raw Data and the
Proprietary Rights in the Analysis, Manufacturing Designs and Raw Data, and in
the Mask Sets.

        4.2 Grant of License by PDF Solutions. Subject to the terms and
conditions of this Agreement, including the timely payment of Fees, PDF
Solutions hereby grants to Conexant and its subsidiaries, a ******************
************************************************* license *********************
to use the PDF Technology and associated Proprietary Rights disclosed by PDF
Solutions under this Agreement, but only to the extent PDF Solutions has the
right to grant such license; provided that such license is only for use of PDF
Technology in connection with the development, manufacture and


                                       6

<PAGE>   7
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

fabrication of *********** technology products of Conexant and its
majority-owned subsidiaries. The foregoing license includes all PDF Technology
disclosed by PDF Solutions in its work for Conexant hereunder (including
methodologies or practices observed by Conexant personnel in the course of PDF
Solutions' work hereunder); provided, however, that specifically excluded from
this license of PDF Technology is any and all software or software tools or
software manuals and documentation. Conexant shall be bound by and shall cause
its sublicensees to be bound by the confidentiality obligations contained in
Section 5 or obligations at least as restrictive as the confidentiality
obligations contained in Section 5. Except as specifically provided herein,
Conexant shall not disclose or license PDF Technology to any third party.
Conexant understands that PDF Solutions will not disclose to Conexant certain
proprietary methods or trade secrets in connection with the services to be
rendered by PDF Solutions hereunder. To this end, PDF Solutions retains the
right to take industry standard measures to keep such proprietary methods or
trade secrets from Conexant, unless the same defeats or substantially impedes
the Scope of Services and Services and Technology under Section 2 of this
Agreement. This Section 4.2 shall not limit or alter any other Software license
or rights that may exist between the parties under a separate agreement.

        4.3 Grant of License by Conexant. Subject to the terms and conditions of

this Agreement, Conexant hereby grants to PDF Solutions ***********************
******************************************************** license ***********,
but only to the extent Conexant has the right to grant such license, as follows:

               (a) to incorporate Conexant's Manufacturing Designs in CVs at any
time during the term solely for the purpose of performing under this Agreement;

               (b) to use, copy, compile, manipulate, analyze or reproduce Raw
Data and the Mask Sets solely for the purpose of performing under this
Agreement; and

               (c) to use and rely upon Raw Data and Analysis from any Foundry
for any purpose, including with other customers of PDF Solutions; provided,
however that (i) PDF Solutions shall not use and rely upon CVs incorporating
Conexant's Manufacturing Designs, Raw Data or Analysis from any Foundry for any
other customers for a period of four months from the date of CV approval by
Conexant and (ii) PDF Solutions may itself rely upon, but shall not disclose or
deliver Raw Data to any third party. (iii) PDF Solutions shall be bound by and
shall cause its sublicensees to be bound by the confidentiality obligations
contained in Section 5 or obligations at least as restrictive as the
confidentiality obligations contained in Section 5. Conexant will, in good
faith, work with PDF Solutions and Foundry to encourage Foundry to provide any
required consents or licenses in accordance with this Section 4.

        4.4 No Other Rights. Except as otherwise set forth in this Section 4,
neither this Agreement nor performance and delivery of the Services and
Technology shall give either PDF Solutions or Conexant any ownership, interest
in, or rights to, the Proprietary Rights owned or provided by the other party.


                                       7

<PAGE>   8
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

SECTION 5. CONFIDENTIALITY

Both parties hereto acknowledge and agree that they are parties to that certain
Master Non-Disclosure Agreement numbered ****************, the "Master NDA"
pursuant to which they have exchanged confidential and/or proprietary
information under cover of various Confidential Information Transmittal Records
("CITR'S"). Both parties further acknowledge that the Raw Data developed
pursuant to PDF Solutions' services to Conexant under this Agreement shall be
deemed Confidential and shall not be disclosed. Both parties agree that this
Agreement shall not modify, alter or extinguish the Master NDA nor any CITR's
currently existing or to be executed in the future. The parties acknowledge and
agree that during the course of the performance of the mutual obligations
hereunder, each party will occasionally deliver to the other party certain
information (including proprietary information, technical data, trade secrets,
know-how, research, software, developments, inventions, processes, design flows,
methods, methodologies, formulas, algorithms, technologies, designs, drawings,
engineering, hardware configuration information, yield data or other similar
information, and related documentation and information) which the disclosing
party deems to be confidential or proprietary. Such information shall be
considered and treated hereunder as proprietary and other confidential
information if it is marked as "Confidential" or "Proprietary" (hereinafter
referred to as "CONFIDENTIAL INFORMATION"): (i) by stamp or legend if
communicated in writing or other tangible form, or (ii) orally at the time of
disclosure with a written confirmation within thirty days describing the
Confidential Information communicated orally. All restrictions as to use and
disclosure shall apply during such thirty day period. Any recipient of
Confidential Information disclosed pursuant to this Agreement shall hold the
Confidential Information in strictest confidence and shall protect the
Confidential Information by using the same degree of care, but no less than a
reasonable degree of care, to prevent the unauthorized use, disclosure,
dissemination or publication of the Confidential Information as the recipient
uses to protect its own comparable confidential and proprietary information. Any
permitted reproduction of Confidential Information shall contain all
confidential or proprietary legends which appear on the original. If the
disclosing party discloses any software, the recipient is prohibited from
disassembling, decompiling, reverse-engineering or otherwise attempting to
discover or disclose the disclosing party's software or methods or concepts
embodied in such software. Subject to the licenses granted in Section 4, upon
receipt of the written request of the disclosing party, the receiving party will
return, or give written certification of the destruction of all Confidential
Information in any tangible or digital form, including all copies thereof
whether on paper or in digital form, which are in the recipient's possession or
control. The recipient will immediately notify the disclosing party in the event
of any loss or unauthorized disclosure of Confidential Information. The above
restrictions on use and disclosure shall not apply to any Confidential
Information that: (1) is in the public domain or in the possession of the
recipient without restriction at the time of receipt under this Agreement
through no wrongful act or omission of the recipient, (2) is used or disclosed
with the prior written approval of the disclosing party, (3) is used or
disclosed after *** years from the date of expiration or earlier termination of
this Agreement, (4) is independently developed by the recipient without breach
of this Agreement which independent development is supported by reasonable
contemporary evidence, (5) becomes known to the recipient from a source other
than the disclosing party without breach of this


                                       8

<PAGE>   9
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

Agreement by the recipient or any other wrongful act or omission by recipient or
any third party; or (6) is required to be disclosed pursuant to law, provided
the recipient uses reasonable efforts to give the disclosing party reasonable
notice of such required disclosure sufficient to give the disclosing party the
opportunity to contest such disclosure. The obligations of confidentiality shall
survive the expiration or sooner termination of this Agreement for a period of
**************** thereafter. Disclosing party assumes no responsibility or
liability whatever under this Agreement for any use of Confidential Information
by the recipient or its customers or agents. Nothing in this Agreement shall
restrict recipient's discretion to transfer or assign its personnel, providing
the obligations of recipient under this Agreement are otherwise met. Each party
understands that the other party may currently or in the future be developing
information internally, or receiving information from third parties that may be
similar to the Confidential Information. Accordingly, nothing in this Agreement
will be construed as a representation or inference that either party will not
develop products, or have products developed for it, or enter into joint
ventures, alliances, or licensing arrangements that, without violation of this
Agreement, compete with the products or systems embodying the Confidential
Information. Further, subject to the provisions of Section 4, either party shall
be free to use for any purpose the "residuals" resulting from access to or work
with such Confidential Information, provided that such party shall maintain the
confidentiality of the Confidential Information as provided herein. The term
"RESIDUALS" means information in non-tangible form, which may be retained by
persons who have had access to the Confidential Information, including ideas,
concepts, know-how or techniques contained therein. Neither party shall have any
obligation to limit or restrict the assignment of such persons or to pay
royalties for any work resulting from the use of residuals. The parties do not
intend that any agency or partnership relationship be created between them by
this Agreement. Each party hereto recognizes and agrees that there is no
adequate remedy at law for a breach of this Section 5, that such a breach would
irreparably harm the disclosing party and that the disclosing party shall be
entitled to seek equitable relief (including, without limitation, injunctions)
with respect to any such breach or potential breach in addition to any other
remedies.

SECTION 6. REPRESENTATIONS AND WARRANTIES

        6.1 Corporate Warranties. Each party hereby represents and warrants to
the other party that: (i) it is duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was organized, (ii) the
person executing this Agreement on behalf of each party is duly authorized to
bind such party to all terms and conditions of this Agreement, (iii) this
Agreement, when executed and delivered by each party, will be the legal, valid,
and binding obligation of such party, enforceable against it in accordance with
its terms, and (iv) the execution, delivery and performance of this Agreement by
each party does not and will not conflict with or constitute a breach or default
under such party's charter documents, delegations of authority, or any material
agreement, contract or commitment of such party, or require the consent,
approval or authorization of, or notice, declaration, filing or registration
with, any third party or governmental or regulatory authority.


                                       9

<PAGE>   10

        6.2 Infringement. PDF Solutions warrants that it is not aware of
infringement or alleged infringement of its deliverables under third parties'
intellectual property rights.

        6.3 Disclaimer of Warranties. THE WARRANTIES STATED IN THIS SECTION 6
ARE PARTIES' SOLE AND EXCLUSIVE WARRANTIES PERTAINING TO THE SUBJECT MATTER OF
THIS AGREEMENT, AND EACH PARTY HEREBY DISCLAIMS ANY OTHER WARRANTY, EXPRESS OR
IMPLIED, WRITTEN OR ORAL, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF TITLE,
MERCHANTABILITY, NON-INFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE. NOTHING
UNDER THIS AGREEMENT, OR THE STATEMENT OF WORK OR PROJECT SHALL BE DEEMED TO BE
A WARRANTY AS TO THE OUTCOME OF ANY PROJECT OR THE EFFICACY OF ANY
RECOMMENDATIONS MADE BY PDF SOLUTIONS. NOTHING UNDER THIS AGREEMENT OR THE
STATEMENT OF WORK SHALL BE DEEMED TO CREATE ANY LIABILITY ON THE PART OF EITHER
PARTY WITH RESPECT TO THE OUTCOME OF A PROJECT OR ANY ACTIONS TAKEN BY CONEXANT
OR THE PDF SOLUTIONS AS A CONSEQUENCE OF THE OTHER PARTIE'S RECOMMENDATIONS.

        6.4 Limitation. Nothing in this Agreement shall extend the time or
remedies allowable under law or remedy for either party to file an action
against the other party.

SECTION 7. INDEMNIFICATION

        7.1 Infringement Indemnity. PDF Solutions shall defend or settle at PDF
Solutions' expense any claim ("CLAIM") brought against Conexant that the
Services and Technology and/or any tangible or intangible delivered in
connection therewith impermissibly contains third party's proprietary rights,
trade secrets, patents or copyrighted materials or that Conexant's use of any
such materials, as permitted hereunder, infringes any United States, Singapore,
Korean, Japanese, or Taiwanese patent; provided that such indemnification shall
not extend (a) to any infringement by Conexant's designs or products, provided
such designs, processes or products are not influenced by PDF Solutions in a way
that renders it infringing, (b) to the extent any infringement results from any
infringement contained in any technical data, Manufacturing Designs, Mask Sets
or materials or reports or information provided by Conexant. The indemnification
obligations set forth above in this Section 7 are subject to the conditions that
the Indemnified Party: (i) gives prompt written notice of the Claim to the
Indemnifying Party, (ii) gives the PDF Solutions the exclusive authority to
control and direct the defense or settlement of such Claim, provided that the
PDF Solutions does not take adopt any positions that may be prejudicial to
Conexant and (iii) gives the PDF Solutions, at the Indemnified Party's own
expense (except for the value of the Indemnified Party's employees' time), all
reasonably necessary information and reasonable assistance with respect to such
Claim. PDF Solutions shall pay all amounts paid in settlement and all damages
and costs awarded with respect to such Claim. PDF Solutions will not be liable
for any costs or expenses incurred without its prior written authorization. In
the event of any Claim under this Section 7.2, PDF Solutions shall have the
option, at its election, to (a) obtain a license to permit continued use of the
allegedly infringing item or practice, (b) modify the allegedly


                                       10

<PAGE>   11

infringing item or practice to avoid continued infringement provided the
modified item or practice is substantially equivalent, (c) procure or provide a
substantially equivalent substitute for the allegedly infringing item or
practice or (d) if PDF Solutions is unable to achieve (a), (b) or (c) after best
efforts, then PDF Solutions may require that Conexant cease use of the
infringing item or practice as soon as feasible and terminate this Agreement and
refund all Incentive Fees and Gainshare Fees paid by Conexant to PDF Solutions.

SECTION 8. LIMITATION OF LIABILITY

THE LIABILITY OF EITHER PARTY AND OF SUCH PARTY'S OFFICERS, DIRECTORS,
EMPLOYEES, CONTRACTORS AND AGENTS, TAKEN AS A WHOLE, WHETHER IN TORT, CONTRACT
OR OTHERWISE, AND NOTWITHSTANDING ANY FAULT, NEGLIGENCE, STRICT LIABILITY OR
PRODUCT LIABILITY OF SUCH PARTY OR OF ITS OFFICERS, DIRECTORS, EMPLOYEES, OR
AGENTS OR FAILURE OF ESSENTIAL PURPOSE, WITH REGARD TO ANY SERVICES OR OTHER
ITEMS FURNISHED UNDER THIS AGREEMENT SHALL IN NO EVENT EXCEED THE AGGREGATE
COMPENSATION PAID BY CONEXANT TO SERVICE PROVIDER HEREUNDER. NOTWITHSTANDING
ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR ANY CLAIM FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL
DAMAGES, COVER OR ANY LOSS OF DATA, PROFIT, REVENUE OR USE UNDER ANY THEORY OF
LAW OR FOR ANY CAUSE OF ACTION.

SECTION 9. MISCELLANEOUS

        9.1 Publicity. Neither party shall disclose the terms of this Agreement
to any third party, or in any manner advertise or publish statements to such
effect, without the prior written consent and mutual agreement as to the
content, medium, and manner of the public announcement of the other party.
Conexant agrees to work in good faith with PDF Solutions to produce two mutually
acceptable public announcements of PDF Solutions' engagement with Conexant under
this Agreement. Notwithstanding the above, should one of the parties be required
to disclose either the existence or terms of this Agreement to a court of law, a
governmental agency, an auditor or a bank, such party may do so without the
prior written consent of the other party provided that the disclosing party: (i)
notifies the recipient of the confidential nature of the information, (ii)
requests confidential treatment of such information, (iii) limits the disclosure
to only such information as is required under the circumstances, and (iv)
delivers prompt notice to the other party of such requested or actual
disclosure.

        9.2 Assignment. Neither party shall assign, delegate, or subcontract any
portion of its rights, duties, or obligations under this Agreement without the
prior written consent of the other party, which consent will not be unreasonably
withheld or delayed, provided that PDF Solutions may utilize the services of
consultants whose services it utilizes on a regular basis.


                                       11

<PAGE>   12

        9.3 Changes. No modification to this Agreement will be binding unless in
writing and signed by a duly authorized representative of each party. Change
orders affecting any Scope of Services will not be effective until reviewed and
approved in writing by PDF Solutions and Conexant and attached to this
Agreement. PDF Solutions will submit to Conexant a report on how the proposed
changes will affect the current Services including the effect on the time
schedule and cost estimates. The parties will have no obligation to proceed with
changed work until both parties have approved the change in writing. Conexant
will be under no obligation to pay for work performed under a change order
without prior written authorization in accordance herewith.

        9.4 Notices. All notices or correspondence pertaining to this Agreement
shall be in writing, delivered by either first class mail with receipt or by
facsimile with receipt. Such notice shall be effective upon the earlier of
actual receipt or the expiration of three days following the date of mailing to
the addresses as follows, or such alternative address the parties may designate
in the future:

        To Conexant:

               Conexant Systems, Inc.
               4311 Jamboree Rd.
               Newport Beach, CA 92660
               Attn:  Manager, Contracts
               Tel:   (949) 483-6610
               Fax:   (949) 483-4176

        To PDF Solutions:

               PDF Solutions, Inc.
               333 West San Carlos Street
               Suite 700
               San Jose, CA 95110
               Attn:  Chief Financial Officer
               Tel:   (408) 938-6445
               Fax:   (408) 938-6478

        9.5 Independent Contractors. PDF Solutions and Conexant shall perform
their obligations under this Agreement as independent contractors, and nothing
contained in this Agreement shall be construed to create or imply a joint
venture, partnership, principal-agent or employment relationship between the
parties. Neither party shall take any action or permit any action to be taken on
its behalf which purports to be done in the name of or on behalf of the other
party and shall have no power or authority to bind the other party to assume or
create any obligation or responsibility express or implied on the other party's
behalf or in its name, nor shall such party represent to any one that it has
such power or authority.


                                       12

<PAGE>   13
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

        9.6 Force Majeure. Neither party shall be liable to the other party for
any loss, damage, or penalty arising from delay due to causes beyond its
reasonable control including acts of God, acts of government, war, riots, or
embargoes.

        9.7 Severability. If any term or provision of this Agreement is
determined to be invalid or unenforceable for any reason, it shall be adjusted
rather than voided, if possible, to achieve the intent of the parties to extent
possible. In any event, all other terms and provisions shall be deemed valid and
enforceable to the maximum extent possible.

        9.8 Insurance. PDF Solutions shall carry Workers' Compensation and
Comprehensive General Liability Insurance (including Products, Contractual, and
Automobile Liability) in such form as to protect PDF Solutions and Conexant,
their directors and officers, and the agents and employees as additional
insureds from any claims or omissions of PDF Solutions under this Agreement. PDF
Solutions shall furnish Conexant with a Certificate(s) of Insurance evidencing
limits of liability not less than *********** combined single limit per
occurrence for bodily injury, including death and property damages, prior to
performing any services on site at Conexant's facility. Such insurance shall be
primary and non-contributing to any insurance maintained or obtained by Conexant
and shall not be canceled or materially reduced without thirty (30) days
prior written notice to Conexant. PDF Solutions agrees to waive any rights of
subrogation PDF Solutions or PDF Solutions' insurers may have against Conexant
under applicable Workers' Compensation laws.

        9.9 Export Control Laws and Regulations. Each party, for itself and any
of its employees and agents who may be given access by such party to technical
information pursuant to the performance of the Services hereunder, acknowledges
its obligations to control access to such technical information and to ensure
that such access does not result in a violation of the U.S. Export Control Laws
and Regulations.

        9.10 Disputes. If any claim or controversy arises out of this Agreement,
the parties shall first make a good faith attempt to resolve the matter through
a designated executive officer. The officers having cognizance of the subject
matter of the Agreement for each of the parties shall first meet and make a good
faith attempt to resolve such controversy or claim. In the event such good faith
negotiation fails to settle any dispute within sixty (60) days from
notice of such dispute, the parties shall endeavor to resolve such dispute
arising out of this Agreement by mediation in either Santa Clara County, Orange
County or Los Angeles County California or at such other place as the parties
hereto mutually agree upon, in accordance with the Center for Public Resources
(CPR) Model Procedure for Mediation of a Business Dispute. Unless the parties
agree otherwise, the mediator will be selected from the CPR Panels of
Distinguished Neutrals and each party shall be responsible for its own costs
associated with such mediation. If the matter has not been resolved pursuant to
the aforementioned mediation procedure within sixty (60) days of the
initiation of such procedure, the controversy shall be settled by binding
arbitration by one or three arbitrators, (if three are used, each party shall
select one, and the third shall be selected by mutual agreement of the parties),
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and judgment upon the award rendered by the
arbitrator(s) may be entered by


                                       13

<PAGE>   14

any court having jurisdiction thereof. The arbitrator(s) shall not be empowered
to award damages in excess of, and/or in addition to, actual damages, including
punitive damages, and the arbitrator(s) shall deliver a reasoned opinion in
connection with his/her/their decision. Nothing herein, however, shall prohibit
either party from seeking injunctive relief if such party would be substantially
prejudiced by a failure to act during the time that such good faith efforts are
being made to resolve the claim or controversy. In the event either party seeks
injunctive relief, the parties agree that jurisdiction will be before a state or
district court seated in either Santa Clara County, Orange County or Los Angeles
County, California. All deadlines in this Section 9.10 may be extended by mutual
agreement.

        9.11 Governing Law. This Agreement and any and all disputes arising
hereunder shall be governed by the internal laws of the State of California.
This Agreement is prepared and executed and shall be interpreted in the English
language only, and no translation of the Agreement into another language shall
have any effect. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods (1980) is specifically excluded
from and shall not apply to this Agreement.

        9.12 Waiver. The failure of any party hereto to enforce at any time any
of the provisions of this Agreement or to require at any time performance by the
other party of any of the provisions of this Agreement, or any part hereof,
shall not be construed to be a waiver of said provision or to effect the right
of any party to enforce each and every provision in accordance with the terms of
this Agreement.

        9.13 Interpretation. In the event that any term of the Scope of Services
conflicts with the terms of this Agreement, the terms of this Agreement shall
take precedence.

        9.14 Non-Solicitation. Conexant shall not actively solicit or influence
or attempt to influence any person employed by PDF Solutions to terminate or
otherwise cease his or her employment with PDF Solutions or become an employee
of Conexant. PDF Solutions shall not actively solicit or influence or attempt to
influence any person employed by Conexant to terminate or otherwise cease his or
her employment with Conexant or become an employee of PDF Solutions.

        9.15 Drafter. Neither party will be deemed the drafter of this
Agreement, which Agreement will be deemed to have been jointly prepared by the
parties. If this Agreement is ever construed, whether by a court or by an
arbitrator, such court or arbitrator will not construe this Agreement or any
provision hereof against any party as drafter.

        9.16 Entire Agreement. As noted in Section 5 relating to
confidentiality, the parties hereto have a separate confidentiality agreement in
place that will not be affected by this Agreement. The parties also acknowledge
that PDF Solutions is not providing or licensing to Conexant under this
Agreement any existing software programs or products and anticipate that they
will enter into a Software Evaluation and/or Software License Agreement related
to the subject matter hereof. Such agreement shall also not be affected by this
Agreement. Other than these specified agreements, this Agreement shall
constitute the entire agreement between the parties with respect to the subject
matter hereof and: (i) shall supersede all prior contemporaneous oral or written
communications, proposals and


                                       14

<PAGE>   15

representations with respect to its subject matter, and (ii) shall prevail over
any conflicting or additional terms of any statement of work, quote, order
acknowledgment or similar communication between the parties during the term of
this Agreement.

        9.17 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

        9.18 Exhibits. Exhibits "A," "B" and "C" attached hereto are
incorporated herein by this reference as if fully set forth herein.


                                       15

<PAGE>   16

        IN WITNESS WHEREOF, the parties hereto have executed this Services
Agreement as of the date(s) set forth below to be effective as of the Effective
Date.

PDF SOLUTIONS, INC., A CALIFORNIA     CONEXANT SYSTEMS, INC., A DELAWARE 
CORPORATION                           CORPORATION

By:     /s/ P.S. Melman               By:     /s/ James Spoto
   --------------------------------      ---------------------------------------
Name:   P.S. Melman                   Name:   James P. Spoto
     ------------------------------        -------------------------------------
Title:  CFO                           Title:  Senior VP, ********************* 
      -----------------------------           Group
Date:   5/18/00                             ------------------------------------
     ------------------------------   Date:   5/16/00
                                            ------------------------------------

                                       16

<PAGE>   17
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


      EXHIBIT "A" TO SERVICES AGREEMENT - SCOPE OF SERVICES AND TECHNOLOGY


        This Exhibit specifies in detail the Services and Technology to be
performed by PDF Solutions during the term of this Agreement.

PROJECT DESCRIPTION & GOALS

PDF Solutions agrees to provide Conexant with ************ services for all of
Conexant's products targeted for ***** technology. Services in support of these
products are divided into two major components: (1) CONEXANT'S
******************* ******* AND (2) CONEXANT'S ****************
*********************.

The primary goals of the project are (1) to accelerate Conexant's historical
yield ramp rates at ********************** and (2) to improve Conexant's yield
****************** management of products ***********************************

At **********************, PDF Solutions and Conexant will jointly attempt to
improve Conexant's ********************** the estimated month the ****** process
will be brought to mass production. The project will target to improve yield in
the range of ************** after ***************. The specified **************
improvement target represents the project goal with no implicit performance
obligations on either party. PDF Solutions agrees to provide Conexant with yield
improvement recommendations for the ***** ******* and to assist in its
implementation.

PDF Solutions and Conexant will also jointly implement a ***************
***************** for the purpose of ******************************************
************************************** for the ***** process. The system will
also provide insight to both PDF Solutions and Conexant to improve product
yields through changes in ********************************************

PROJECT ACCOUNTABILITY

PDF Solutions will maintain an engagement manager to lead the project effort
throughout the duration of the project. PDF Solutions' engagement manager
currently assigned to the ****** process project is **********************.
************** will report to ***************************. Conexant will also
maintain a project leader to lead the project effort and Conexant team for the
****** process. ***************** is currently assigned as Conexant's project
leader. ********* will serve as the primary point of contact for **************
or other Conexant representatives regarding project status and updates.

REPORTS AND DOCUMENTATION

PDF Solutions agrees to provide at minimum bi-weekly updates to *************.
PDF Solutions will provide a written summary report with a formal presentation
to Conexant after the *******************************************************
phases.

******************* ***********************************

This component of the project is described below in the following *** phases.
Phases may be amended upon written notice to more appropriately achieve the
targeted project goals.


                                       17                           CONFIDENTIAL

<PAGE>   18

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------
   PROJECT PHASE                   PDF SOLUTIONS WORK STEPS                    ESTIMATED
                                                                                DURATION
------------------------------------------------------------------------------------------
<S>                  <C> <C>                                                   <C>
                                        ***********
                                                                               ***********

------------------------------------------------------------------------------------------
***********          -                  ***********
                                                                               ***********
------------------------------------------------------------------------------------------
***********          -                  ***********
                         
                                                                               ***********

                     -   

                     -   
------------------------------------------------------------------------------------------
***********          -                  ***********
                                                                               ***********
                     -   
                     -   
                         
                     -   
                         
------------------------------------------------------------------------------------------
****                 -                  ***********
                                                                               ***********   
(Level 2)
------------------------------------------------------------------------------------------
****                 -                  ***********
                                                                               ***********
(Level 3)
------------------------------------------------------------------------------------------

DELIVERABLES: **********************    ***********               SYSTEM

PDF Solutions agrees to provide Conexant the following deliverables:
------------------------------------------------------------------------------------------
                                                                            ESTIMATED
    DELIVERABLE                         DESCRIPTION                      DELIVERY PERIOD
------------------------------------------------------------------------------------------
***********          -                  ***********

                                                                               ***********

                     -   
------------------------------------------------------------------------------------------
***********          -                  ***********
                                                                               ***********

------------------------------------------------------------------------------------------
</TABLE>



                                       18                           CONFIDENTIAL

<PAGE>   19
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

***********                         SYSTEM

PDF Solution agrees to develop, *********** *********** for all of Conexant's
***********. Data to be used to manage potential improvements to Conexant's
*********** process (only if necessary) to increase yield.


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------
                                                                               ESTIMATED
   PROJECT PHASE                   PDF SOLUTIONS WORK STEPS                    DURATION
------------------------------------------------------------------------------------------
<S>                  <C> <C>                                                  <C>
***********          -   ***********                                          ***********
***********
------------------------------------------------------------------------------------------
***********          -   ***********
                         ***********                                          ***********
------------------------------------------------------------------------------------------
***********              ***********                                          ***********
------------------------------------------------------------------------------------------
***********              ***********                                          ***********
------------------------------------------------------------------------------------------
***********              ***********
                         ***********
                         ***********
                         ***********                                          ***********
------------------------------------------------------------------------------------------
***********              ***********
                                                                              ***********
------------------------------------------------------------------------------------------
</TABLE>


DELIVERABLES: ***********

PDF Solutions agrees to provide Conexant the following deliverables:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
                                                                           ESTIMATED
    DELIVERABLE                         DESCRIPTION                     DELIVERY PERIOD
-----------------------------------------------------------------------------------------
<S>                   <C> <C>                                           <C>
***********           ***********
***********           ***********                                         ***********
-----------------------------------------------------------------------------------------
***********           ***********
                      ***********
                      ***********                                         ***********
-----------------------------------------------------------------------------------------
***********           ***********
***********           ***********                                         ***********

-----------------------------------------------------------------------------------------
***********           ***********                                         ***********
***********
-----------------------------------------------------------------------------------------
</TABLE>


REQUIREMENTS FROM CONEXANT

PDF Solutions believes the following is necessary to enable the successful
completion of this project: Conexant agrees to run *********** *********** at
the *********** facility. Conexant agrees to run *********** at each ***********
******** products on an as-needed basis. Conexant shall not be responsible for
*********** delays or refusal to cooperate with the terms of this agreement.

                                       19                           CONFIDENTIAL


<PAGE>   20
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

GENERAL

The Services and Technology specifically contemplate the acceleration of
Conexant's historical ********** rates at *********** (with anticipated yield
improvement of **************** projections after ***********); and the
improvement of Conexant's yield ************** and management of ***********
products targeted **************************** (with anticipated yield
improvement above ******************************** *********** products).

Conexant agrees to pay three types of fees associated with the Services and
Technology: a *********** (the "FIXED FEE"), an *********** with conditions
described below (the "INCENTIVE FEE") and a variable Gainshare fee paid over
************************************** and calculated according to the Gainshare
Fee Calculation models defined below ("GAINSHARE FEE") (collectively referred to
as "FEES"). ***************** ***************************. Conexant shall not
have any liability to PDF Solutions for any Fees incurred in an amount in excess
of ***********.

PDF Solutions agrees and acknowledges that Conexant does not guarantee a minimum
production volume either expressly, impliedly or otherwise, for any purpose
whatsoever, including the calculation of any and all Fees under this Exhibit B.

FIXED FEE

PDF Solutions shall invoice Conexant the Fixed Fee on a monthly basis at
***********per month for services rendered from *********** to *********** and
********* per month for services rendered after ************************** and
Conexant shall pay such invoices in accordance with this Agreement. If the term
of this Agreement is extended with prior written approval, both parties may
elect to continue services under this Agreement at a Fixed Fee rate of
*******************.

***************

*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*************************************************************
**********************************************************. ******************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*************************.

GAINSHARE FEE

*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
***************.

                                       20                          CONFIDENTIAL


<PAGE>   21

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


PRODUCT VOLUME EXCLUDED FROM GAINSHARE FEE COGS REDUCTION CALCULATIONS

The following volume shall be excluded from the calculation of the defect
density for both **************************** and Conexant ********* ********
run at *******:

-   Pre-production lots
-   Engineering lots
-   Lots adversely affected by equipment failures or malfunctions.
-   Lots adversely affected by non-qualified PM adjustments. Non-qualified means
    equipment introduced not verified to process tolerances. Conexant and PDF
    Solutions agree to review the qualification process by ***********. Conexant
    may elect not to make any changes suggested by PDF Solutions that are deemed
    unreasonable or beyond Conexant's control.
-   Mis-processed lots or lots otherwise adversely affected by mishandling.
-   Products identified with yield issues that are not adequately addressed
    during the engineering phase and prematurely introduced into mass
    production for reasons beyond PDF Solutions' control. For products to be
    considered under this exclusion, products must be first identified by PDF
    Solutions during the engineering phase as products to be excluded from the
    calculations. In such an event, products will be excluded from the
    calculations for a grace period of ************** after date product is
    identified by PDF Solutions by written notice.

GAINSHARE FEE CALCULATION SCHEDULE

Gainshare Fee is to be calculated quarterly, but accumulated monthly. The
Gainshare Fee will be calculated during the months of (1)January, (2) April, (3)
July and (4) October for the prior three months. An example schedule is provided
to clarify the calculation dates. Each party will work together in good faith,
to determine and agree upon the appropriate Gainshare amount within the first
twenty (20) days of the stated month.

-------------------------------------------------------------------------------
    GAINSHARE FEE MONTH          WHEN CALCULATED             WHEN INVOICED
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------
            ***                        ***                        ***
-------------------------------------------------------------------------------


                                       21                          CONFIDENTIAL


<PAGE>   22

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

NPB COGS REDUCTION MODEL: *************** PROCESS

--------------------------------------------------------------------------------

****
****

--------------------------------------------------------------------------------


YIELD MODEL

For the purposes of this Agreement, the *********** equation used in determining
Gainshare Fees when appropriate will be *****************************, described
as ******************************* *** in Conexant's use of the model. The
*********** *********************** was developed with the use of the *********
as described above. Both Conexant and PDF Solutions agree that the complexity
factor, ***, will vary based on the design and may be adjusted as required. Both
Engagement Managers will verbally agree to such changes.


                                       22                          CONFIDENTIAL


<PAGE>   23

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

************* ***********************

The baseline information is described in the following table:


<TABLE>
<CAPTION>

--------------------------------------------------------------
   CALENDAR MONTH                                 D0
--------------------------------------------------------------
<S>                                             <C>
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
************                                    *******
--------------------------------------------------------------
</TABLE>


If Conexant's ********************************************, both parties agree
to discuss actions to be taken.


                                       23                         CONFIDENTIAL


<PAGE>   24

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

******* **** ********* MODEL: CONEXANT'S **************** ********

--------------------------------------------------------------------------------
                                  *************
--------------------------------------------------------------------------------




******* BASELINE ****** *******

   The ******** will be set to each ********* **** forecast for Conexant's
  ****** products, unless otherwise mutually agreed to in writing. Conexant
  agrees to meet with PDF Solutions
                                 on or around ***************

to re-evaluate the methodology for ******** ***********.

                                       24                          CONFIDENTIAL


<PAGE>   25

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

GAINSHARE FEE CALCULATION MODEL

--------------------------------------------------------------------------------

********

--------------------------------------------------------------------------------

                                       25                          CONFIDENTIAL


<PAGE>   26

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

For questions on technical issues contact:

Conexant Systems, Inc.
Attn: ************, Yield Engineering
Tel:  ************
Fax: 

For approval of expenses and/or questions on contract or business related
issues, contact:

Conexant Systems, Inc.
Attn: ************, Strategic Sourcing
Tel: *************
Fax: 

                                       26                          CONFIDENTIAL


<PAGE>   27

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


Subject: Re. Change of Control
   Date: Thu, 11:28:25 - 0700
   From: *******
     To: dan@PDF.COM
     CC: *******

Dan,

As discussed this morning regarding the ******** Conexant hereby defines the
term "Change of Control" as follows:

"Change of Control" is defined as any of the following events: (i) any 
consolidation or merger of a party in which such party is not the continuing or 
surviving corporation, or pursuant to which a material number of shares of such 
party's common stock would be converted to cash, securities or other property; 
(ii) any sale, exchange or other transfer (in one transaction or series of 
related transactions) of all or substantially all the assets of such party; 
(iii) any sale or other transfer of stock or assets, any consolidation or 
merger, or any other transaction, that results in management or control of the 
facility resting with a third party.

If PDF accepts this definition as applicable and binding under the above 
referenced Integrated Technology Agreement, please respond with your
acknowledgement.

Thanks,

Conexant Systems, Inc.
*******
*******
*******


                                       27                          CONFIDENTIAL


<PAGE>   28

                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                     INTEGRATION TECHNOLOGY AGREEMENT (ITA)

**********



<PAGE>   1
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION




                                                                    EXHIBIT 10.3

                             CONFIDENTIAL TREATMENT
                        PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                     THE SECURITIES ACT OF 1933, AS AMENDED.


                                                              PROJECT: TOSHIBA -
                                                          **********************

                     YIELD IMPROVEMENT CONSULTING AGREEMENT


        This Yield Improvement Consulting Agreement dated as of *************
(this "AGREEMENT") is entered into by and between Toshiba Corporation, a
corporation organized under the laws of Japan ("TOSHIBA") having its principal
place of business at 1-1 Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, and
PDF Solutions, Inc., a corporation organized under the laws of California
("PDF") having its principal place of business at 333 West San Carlos Street,
Suite 700, San Jose, California, U.S.A.


RECITALS

               A. PDF Solutions possesses technology and expertise useful in
discovering, analyzing, and fixing problems in the design and manufacturing
processes that cause low yields of useable integrated circuits.

               B. Toshiba desires to engage PDF Solutions and receive a license
to certain technology useful to analyze its internal integrated circuit
manufacturing process,
 identify problems therewith, and recommend solutions
thereto, by way of methodology or otherwise, upon the terms and conditions
contained herein.

               C. PDF Solutions desires to be so engaged upon the terms and
conditions contained herein.

DEFINITIONS


"Analysis" refers to all interpretations, recommendations, extractions,
statistical models or other yield and performance models developed by PDF
Solutions and derived in whole or in part from Toshiba's Raw Data; provided,
however, that Analysis does not include any information sufficiently detailed
that Raw Data could be feasibly re-constructed.


                                      -1-

<PAGE>   2
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

"Characterization Vehicle" or "CV" refers to the parameterized layout structures
or circuit elements, specific implementations of said structures or circuit
elements either in computer format or layout format (for example, GDS-II files),
and images of said structures or circuit elements, historically or hereafter
created or customized by PDF Solutions for the purposes of creating a test
vehicle used to characterize any given manufacturing process. Manufacturing
Designs are usually referenced in the process of generating CVs for the purposes
of optimizing or tuning the vehicle to the targeted designs and process. The CV
is used to create a Mask Set which is used by the fabrication facility to
generate test wafers.

"Foundry" refers to any facility Toshiba owns or operates to manufacture
products and any third party foundry with which Toshiba has a relationship that
manufactures products for Toshiba.

"Manufacturing Designs" refers to all non-public information relating to
Toshiba's manufacturing processes and integrated circuit designs (structures and
elements) used in connection with the CV to generate Raw Data.

"Mask Set" refers to translucent glass plates used as a light filter to transfer
designs onto a wafer.

"Proprietary Rights" shall mean all intellectual property rights including, but
not limited to, patents, patent applications, copyrights, copyright
registrations, moral rights, mask work rights, rights of authorship, industrial
design rights, trademarks, tradenames, know-how and trade secrets, irrespective
of whether such rights arise under U.S. or international intellectual property,
unfair competition or trade secret laws.

"PDF Technology" refers to all historically, or hereafter developed
methodologies, techniques, software, designs, CVs, problem solving processes and
practices utilized by PDF Solutions, and any modifications, compilations or
works derivative of the foregoing, excluding know-how, methodologies, techniques
or practices that are commonly known or that Toshiba independently has the right
to use. PDF Technology also refers to the CV layout and the Design of
Experiments used in creating the CV layout.

"Raw Data" shall mean the data generated by PDF Solutions using the CV in
conjunction with Toshiba's Manufacturing Design.

                                    AGREEMENT

               NOW, THEREFORE, in consideration of the mutual promises herein
contained, the above recitals and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Toshiba and PDF
Solutions, intending to be legally bound, hereby agree as follows:

1.      YIELD IMPROVEMENT SERVICES.


                                      -2-

<PAGE>   3
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

        1.1 PROVISION OF SERVICES. During the term of this Agreement, PDF will
provide to Toshiba development work and services with respect to integrated
circuit yield management issues. The services and the Deliverables to be
delivered as a result thereof (the "PROJECT") are described in detail on a
statement of work (the "STATEMENT OF WORK") attached hereto as Exhibit A. The
Statement of Work shall be governed by the terms of this Agreement, and
specifies:

               (a)  Deliverables. The specific deliverables (the "DELIVERABLES")
                    to be delivered under the Project and relevant milestones
                    for delivering the Deliverables;

               (b)  Team Structure. The team members from PDF and Toshiba who
                    are to work on the Project and the expected time
                    contributions for each such member;

               (c)  Tools. The required data, tools, hardware, software,
                    materials, access to personnel and facilities, and other
                    materials required for effectively completing the Project;

               (d)  Location. The geographic location where each component of
                    the Project will be completed;

               (e)  Fees and Expenses. The amount and structure of PDF's Fees
                    (as defined below) payable upon delivery of the Deliverables
                    and Expenses (as defined below).

        1.2 TOSHIBA INTELLECTUAL PROPERTY. Toshiba will disclose to PDF on a
timely basis such Proprietary Rights (as defined in Section 3.1) and such other
data and materials as PDF shall reasonably require in order to perform the
Project and/or prepare the Deliverables as defined in the Statement of Work.

        1.3 DELIVERABLES. In performing the Project, PDF shall develop and/or
make for Toshiba the Deliverables in accordance with any schedules set forth in
the Statement of Work. The Deliverables shall meet in all material respects the
description of the Deliverable (the "DELIVERABLE DESCRIPTION") set forth in the
Statement of Work.

        1.4 ACCEPTANCE. Upon delivery of any Deliverable by PDF to Toshiba,
Toshiba shall examine the Deliverable to determine whether it reasonably
conforms to the Deliverable Description. If the Deliverable does not reasonably
conform to such Deliverable Description, Toshiba shall have fifteen (15) days
from the date of delivery thereof to reject such Deliverable and specify in
writing why it does not reasonably conform to such Deliverable Description. Upon
such rejection the parties shall work together to determine what needs to be
done to bring such Deliverable up to such Deliverable Description. If the
Deliverable does not meet the Deliverable Description, PDF shall exercise
reasonable efforts to correct promptly such nonconformity of the Deliverable
with the Deliverable Description and redeliver the Deliverable to Toshiba


                                      -3-

<PAGE>   4
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

upon completion of such correction within one month following the parties'
agreement referenced in the preceding sentence but only if there are no
limitations outside of PDF's control. If there are limitations outside PDF's
control, PDF and Toshiba will negotiate in good faith a time for delivery of the
Deliverable. If a rejection of the Deliverable is not received by PDF within
fifteen (15) days after any delivery or redelivery of a Deliverable under this
Section 1.4, the Deliverable shall be deemed accepted. "ACCEPTANCE" (including
with correlative meaning the term "ACCEPT") shall mean any acceptance under this
Section 1.4. Toshiba agrees to deliver a notice of Acceptance (the "NOTICE OF
ACCEPTANCE") upon its decision to Accept any Deliverable hereunder within such
fifteen (15) days following such delivery or redelivery.

2.      FEES AND EXPENSES.

        2.1 SERVICES FEES AND EXPENSES. Upon delivery of each of the respective
Deliverables provided by PDF hereunder, Toshiba shall pay to PDF the fees
specified to the extent and in the manner set forth in the Statement of Work
("FEES"), and shall reimburse PDF for its out-of-pocket expenses incurred in
carrying out its obligations under this Agreement including, but not limited to,
travel, hotel, meal, document production, equipment and other expenses directly
related to the services performed hereunder further subject to the terms and
conditions set forth in the Statement of Work ("EXPENSES"). In no event shall
the Expenses for which Toshiba shall be liable hereunder exceed any limitation
on Expenses specified in the Statement of Work without written agreement from
Toshiba. PDF shall use reasonable and diligent efforts to deliver the
Deliverables hereunder within the estimated expenses and time schedule specified
in the Statement of Work.



        2.2 PAYMENT OF INVOICES If required by applicable law, PDF shall pay any
taxes and assessments levied or imposed by any Japanese tax or other
governmental body resulting from the services or the Deliverables to be provided
by PDF to Toshiba and the payment to be made by Toshiba to PDF hereunder,
including without limitation all personal property taxes on any of the foregoing
and any taxes or amounts in lieu of any of the foregoing paid or payable by PDF,
other than taxes based on PDF's net income. Toshiba agrees that PDF Solutions or
PDF Solutions' designated representative will have the right to participate and
negotiate in all discussions with the appropriate tax authorities regarding
taxes to be paid by PDF Solutions in the process of determining the required tax
burden, if any. The parties acknowledge that PDF Solutions shall be obligated to
pay any such tax at the reduced withholding income tax rate rather than the
ordinary rate by filing "Application Form for Income Tax Convention between the
United States and Japan" with the Japanese tax authorities. If applicable,
Toshiba shall send PDF the application form immediately after the execution of
this Agreement for PDF's signature and PDF shall promptly sign it and return it
to Toshiba so that Toshiba may file it with the applicable Japanese tax
authorities on behalf of PDF.

                                      -4-

<PAGE>   5
                              CONFIDENTIAL MATERIAL
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3.      PROPRIETARY RIGHTS

        3.1 OWNERSHIP. Toshiba and PDF Solutions acknowledge and agree that, as
between them, ownership shall be as follows:

                      (a) PDF Solutions is the exclusive owner of all PDF
Technology and all Proprietary Rights in the PDF Technology;

                      (b) Toshiba is the exclusive owner of all Analysis,
Manufacturing Designs, Raw Data and all Proprietary Rights in the Analysis,
Manufacturing Design and the Raw Data; and

                      (c) Toshiba is the exclusive owner of Mask Sets.

        3.2 SOLELY DEVELOPED PROPRIETARY RIGHTS OWNERSHIP. Each party shall
solely own any Proprietary Rights solely developed by such party or the
employee(s) of such party, whether before, during or after the term of this
Agreement.

        3.3 GRANT OF LICENSE BY PDF SOLUTIONS. Subject to the terms and
conditions of this Agreement, including the timely payment of Fees, PDF
Solutions hereby grants to Toshiba and its Subsidiaries, *********** license to
***** (as set forth in the Statement of Work), any PDF Technology and associated
Proprietary Rights disclosed by PDF Solutions under this Agreement, but only to
the extent PDF Solutions has the right to grant such license; provided that such
license is solely for the development, manufacture,fabrication and sale of all
Toshiba's semiconductor products associated with Toshiba's ******** Process. The
foregoing license includes all PDF Technology disclosed by PDF Solutions in its
work for Toshiba hereunder; provided, however, that specifically excluded from
this license of PDF Technology is any and all software or software tools used by
PDF in connection with or during the course of such services, or software
manuals and documentation relating to such software or tools. Notwithstanding
the foregoing, Toshiba shall not be limited to the ******** Process with respect
to PDF Technology that consists of methodologies or practices observed by
Toshiba personnel in the course of PDF Solutions' work hereunder. In particular,
Toshiba shall have the right to create any new CV, GDS-II and related software
for the purpose of tranferring to other semiconductor process than ********
Process by using PDF's know-how of CV and modifying CVs generated by PDF under
this Agreement ("**********"); provided that Toshiba shall not violate any PDF's
copyright or patent. In the event that Toshiba reasonably determines that there
is a possibility of violating PDF's copyright or patent in connection with the
modification of ************ to be implemented by Toshiba, Toshiba shall consult
PDF and PDF shall provide Toshiba with it views thereon and/or alternative
solutions to avoid such possible violation. Toshiba shall be bound by and shall
cause its sublicensees to be bound by the confidentiality obligations contained
in

                                      -5-

<PAGE>   6
                              CONFIDENTIAL MATERIAL
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Section 6 or obligations at least as restrictive as the confidentiality
obligations contained in Section 6. Except as specifically provided herein,
Toshiba shall not disclose or license PDF Technology to any third party. Toshiba
understands that PDF Solutions will not disclose to Toshiba certain proprietary
methods or trade secrets in connection with the services to be rendered by PDF
Solutions hereunder. To this end, PDF Solutions retains the right to take
industry standard measures to keep such proprietary methods or trade secrets
from Toshiba, unless the same defeats or substantially impedes the Scope of
Services and Technology under this Agreement.

        3.4 PDF SOLUTIONS SERVICES. PDF Solutions may do the following:

                      (a) to use, copy, compile, manipulate, analyze or
reproduce Raw Data and the Mask Sets solely for the purpose of performing under
this Agreement; and

                      (b) to use and rely upon Raw Data and Analysis for the
purpose of supporting Toshiba's yield ramp. PDF Solutions shall be bound by and
shall cause its sublicensees to be bound by the confidentiality obligations
contained in Section 6 or obligations at least as restrictive as the
confidentiality obligations contained in Section 6.

        3.5 NO OTHER RIGHTS. Except as otherwise set forth in this Section 3,
neither this Agreement nor performance and delivery of the Services and
Technology shall give either PDF Solutions or Toshiba any ownership, interest
in, or rights to, the Proprietary Rights owned or provided by the other party.

        3.6 DEFINITION OF SUBSIDIARY. For the purpose of this Agreement and the
Statement of Work, the term "SUBSIDIARY" of any party shall mean any corporation
or other entity more than fifty percent (50%) of the Voting Stock of which is
beneficially owned or controlled, directly or indirectly, by such party;
provided that such corporation, company or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists. "VOTING STOCK" of
any entity shall mean any stock or other equity interest entitled to vote for
the election of directors or any equivalent governing body of such entity.
Notwithstanding the above, *********************************
************************************************************************
************************************************************************
**********.

4.      TERM AND TERMINATION.

        4.1 COMMENCEMENT. This Agreement shall commence as of the date first set
forth above and shall continue in force until completion of the Project, unless
sooner terminated as provided in this Section 4.

        4.2 TERMINATION.

               (a) If either party defaults in the performance of any material
obligation hereunder the non-defaulting party may give the defaulting party
written notice


                                      -6-

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of such default within twenty (20) days following the non-defaulting party's
discovery of such default. If the defaulting party fails to cure such default
within forty-five (45) days (or such other time period as the parties shall
mutually agree) after the defaulting party's receipt of such notice of default,
then the non-defaulting party, at its option, may, terminate this Agreement by
giving the defaulting party written notice of termination of this Agreement
within ten days following the end of such 45-day period. If such notice of
default or notice of termination is not given within such period, then the
default shall no longer constitute cause for termination of this Agreement.

               (b) Either party may terminate this Agreement effective upon
written notice to the other party in the event the other party becomes the
subject of a voluntary or involuntary petition in bankruptcy or any proceeding
relating to insolvency, or assignment for the benefit creditors, if that
petition or proceeding is not dismissed within sixty (60) days after filing.
Such written notice of termination must be delivered no later than ten (10) days
following the expiration of such 60-day period. If such notice of termination is
not given within such 10-day period, then the default shall no longer constitute
cause for termination of this Agreement.

               (c) Either party may terminate this Agreement effective upon
written notice to the other party in the event that the other party is merged
with or into, or all or substantially all or the other party's assets are sold
to, a third party corporation or other entity, unless such acquiring corporation
or entity expressly agrees to assume the other party's obligations under this
Agreement. Such written notice of termination must be delivered no later than
ten (10) days following the consummation of such transaction. If such notice of
termination is not given within such 10-day period, then the default shall no
longer constitute cause for termination of this Agreement.

               (d) Toshiba shall be entitled to terminate this Agreement
upon forty-five (45) days prior written notice if (i) Toshiba reasonably rejects
the Deliverables due to their material nonconformity with the Deliverable
Description set forth in the Statement of Work (and clearly and properly
specifies the reason for such nonconformity), the Acceptance procedure set forth
in Section 1.4 shall have been exhausted without an Acceptance, and PDF does not
reasonably cure such material nonconformity within forty-five (45) days
following the final written rejection of such Deliverable, or (ii) Toshiba
reasonably and in good faith judges that the expected progress for the services
to be performed by PDF necessary to deliver the Deliverables hereunder cannot be
achieved within the mutually agreed time frame, and within forty-five (45) days
following such notice PDF cannot reasonably establish that such progress can be
achieved. This Agreement may then be terminated by a written notice of
termination delivered within ten (10) days following the applicable foregoing
forty-five (45) day period. If such written notice of termination is not given
within such 10-day period, then the default under this Section 4.2(d) shall no
longer constitute cause for termination of this Agreement.

                                      -7-

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        4.3 TERMINATION OF RIGHTS. Upon expiration or termination of this
Agreement, all rights and licenses granted and all obligations undertaken
hereunder shall forthwith terminate except the following:

               (a) Any and all licenses granted by PDF to Toshiba and its
Subsidiaries under this Agreement as to previously delivered, Accepted and paid
for Deliverables shall survive the expiration or termination of this Agreement
unless this Agreement is terminated by PDF in accordance with the provisions of
Section 4.2(a), (b) or (c) in which case none of such licenses shall survive and
all copies of such Deliverables shall be returned to PDF.

               (b) If Toshiba terminates this Agreement for the reason as stated
in Section 4.2, Toshiba shall pay to PDF, within thirty (30) days after the date
of termination, (i) the actual amount of unreimbursed Expenses incurred by PDF
through the date of termination by Toshiba, (ii) the amount of the Deliverables
Fees with respect to Deliverables delivered or otherwise accrued, and unpaid
through the date of termination; provided that payment of such Fees and Expenses
shall be subject to the provisions of Section 2.

               (c) If Toshiba terminates this Agreement for the reason specified
in Section 4.2, Toshiba shall pay to PDF:

                      (i) the amount of any unpaid Product Fees accrued prior to
the date of termination; and

                      (ii) the amount of any future Product Fees in accordance
with Paragraph (e)(iii) of the Statement of Work with respect to any Product
that incorporates any Deliverable delivered by PDF to Toshiba which Product Fees
shall be payable through the term of payment specified in such Paragraph
(e)(iii); provided that Product Fees to be accrued and paid following a date of
termination shall terminate only if the basis for termination of this Agreement
shall be (A) an involuntary bankruptcy under Section 4.2(b) or (B) the material
default under PDF's confidentiality obligations under Section 6 of this
Agreement;

provided that payment of such Product Fees under this Section 4.3(c) shall be
subject to the provisions of Section 2.

               (d) The provisions of Sections 2 (including by reference
Toshiba's obligations to pay Fees and Expenses set forth in the Statement of
Work but subject to Section 4.3(b) and (c)), 3.1, 3.2, 3.4 (with respect to
Deliverables delivered by PDF to Toshiba and Accepted and paid for by Toshiba),
4, 6, 7, 8.4, 8.7 and 8.8 shall survive any expiration or termination of this
Agreement.

5. INDEPENDENT CONTRACTORS. The relationship of PDF and Toshiba established by
this Agreement is that of independent contractors, and nothing contained in this

                                      -8-

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Agreement shall be construed to (i) give either party the power to direct or
control the day-to-day activities of the other, (ii) constitute the parties as
agents, partners, joint venturers, co-owners or otherwise as participants in a
joint or common undertaking, or (iii) allow either party to create or assume any
obligation on behalf of the other for any purpose whatsoever.

6. CONFIDENTIALITY. Except as otherwise provided herein, each party agrees, at
all times during the term of this Agreement and for ***** years after receipt of
Confidential Information, to hold in strictest confidence (and to cause its
Subsidiaries to hold in strictest confidence), and not to use, except for the
purposes contemplated herein, or to disclose to any person, firm or corporation
without written authorization of the other party, any Confidential Information
of the disclosing party. As used in this Agreement, "CONFIDENTIAL INFORMATION"
means any proprietary information, technical data, trade secrets or know-how,
including, but not limited to, research, software, developments, inventions,
processes, formulas, technology, designs, drawings, engineering, hardware
configuration information, yield data or other information disclosed by one
party to the other, which is marked as "Confidential," and/or orally or in other
tangible form identified as confidential at the time of disclosure and confirmed
as Confidential Information in writing within thirty (30) days of its initial
disclosure, provided that any methodologies, practices or procedures used by PDF
and observed by Toshiba shall constitute "Confidential Information" within the
meaning of this Agreement without any such notification. Confidential
Information does not include any of the foregoing items which have become
publicly known and made generally available through no wrongful act of the
receiving party, or which is already known by the receiving party as evidenced
by the receiving party's files immediately prior to such disclosure, or which
the receiving party proves was independently developed, prior to the receiving
party's receipt of such Confidential Information, by employees or other
representatives of such receiving party who have not had access to such
information or the ideas or theories underlying such Confidential Information.
Each party receiving Confidential Information of the other party agrees to limit
disclosure of Confidential Information to only those of its officers and
employees the receiving party considers necessary to complete its services
contemplated in this Agreement and then only after such officers and employees
have undertaken by Recipient under this Agreement. Except as otherwise agreed by
both parties, PDF shall return to Toshiba all Confidential Information of
Toshiba owned by Toshiba and not licensed to PDF or jointly owned by PDF and
Toshiba and copies thereof, within thirty (30) days after completion of the
Project or after expiration or termination of this Agreement. Except as
otherwise agreed by both parties, Toshiba shall return to PDF all Confidential
Information of PDF owned by PDF and not licensed to Toshiba or jointly owned by
PDF and Toshiba and copies thereof, within thirty (30) days after completion of
the Project or after expiration or termination of this Agreement.

                                      -9-

<PAGE>   10
                              CONFIDENTIAL MATERIAL
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7. WARRANTY. PDF warrants to Toshiba that PDF's Intellectual Property utilized
by PDF in performing the Project does not infringe any patent, copyright, trade
secret, and any other proprietary rights of any third party. EXCEPT FOR THE
FOREGOING, NOTHING UNDER THIS AGREEMENT, OR THE STATEMENT OF WORK OR PROJECT
SHALL BE DEEMED TO BE A WARRANTY OR REPRESENTATION AS TO THE OUTCOME OF ANY
PROJECT OR THE EFFICACY OF ANY RECOMMENDATIONS MADE BY PDF. NOTHING UNDER THIS
AGREEMENT OR THE STATEMENT OF WORK SHALL BE DEEMED TO CREATE ANY LIABILITY ON
THE PART OF PDF WITH RESPECT TO THE OUTCOME OF A PROJECT OR ANY ACTIONS TAKEN BY
TOSHIBA AS A CONSEQUENCE OF PDF'S RECOMMENDATIONS.

8. MISCELLANEOUS.

        8.1 AMENDMENTS AND WAIVERS. Any term of this Agreement or any Statement
of Work may be amended or waived only with the written consent by the
representatives of the parties.

        8.2 SOLE AGREEMENT. This Agreement and the Statement of Work constitute
the sole agreement of the parties and supersede all oral negotiations and prior
writings with respect to the subject matter hereof.

        8.3 NOTICES. Any notice required or permitted by this Agreement shall be
in writing and shall be deemed sufficient upon receipt, when delivered
personally or by an internationally-recognized delivery service (such as Federal
Express or DHL), or after being deposited in the U.S. mail as certified or
registered mail with postage prepaid, if such notice is addressed to the party
to be notified at such party's address as set forth above or as subsequently
modified by written notice.

        8.4 CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.

        8.5 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of this
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of this Agreement shall be enforceable in accordance with its other
terms.

        8.6 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

        8.7 ARBITRATION. The parties shall attempt in good faith to resolve any
dispute


                                      -10-

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arising under this Agreement. If the parties are unable to resolve dispute
within a reasonable period then the dispute shall be finally settled by binding
arbitration (a) if brought by Toshiba, in San Jose, California, in accordance
with the Commercial Rules of the American Arbitration Association and, (b) if
brought by PDF, in Tokyo, Japan in accordance with the rules of the
International Chamber of Commerce. In either case such arbitration shall be
conducted by one arbitrator appointed in accordance with said rules. The
arbitrator shall apply California law, without reference to rules of conflicts
of law or rules of statutory arbitration, to the resolution of any dispute.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Notwithstanding the foregoing, the parties may
apply to any court of competent jurisdiction for preliminary or interim
equitable relief, or to compel arbitration in accordance with this paragraph,
without breach of this arbitration provision.

        8.8 EXPORT CONTROL. Neither party shall, directly or indirectly export
or re-export any technical data or information or data received from the other
party hereunder or the direct products thereof to any destination prohibited or
restricted by export control regulations of Japan and the United States,
including U.S. Export Administration Regulations, without proper authorization
from the appropriate governmental authorities. In addition, the parties agree
that no technology furnished to the other will be used for any purpose to
develop and/or manufacture nuclear, chemical or biological weapons and/or
missiles.

        8.9 NON-SOLICITATION. Toshiba shall not solicit or influence or attempt
to influence any person employed by PDF to terminate or otherwise cease his or
her employment with PDF or become an employee of Toshiba or any competitor of
PDF. A company's status as a competitor of PDF shall be determined by PDF in its
sole discretion.

        8.10 PUBLICITY. Neither party shall disclose the terms of this Agreement
to any third party, or in any manner advertise or publish statements to such
effect, without the prior written consent and mutual agreement as to the
content, medium, and manner of the public announcement of the other party.
Customer agrees during the term to work in good faith with PDF Solutions to
produce mutually acceptable public announcements by PDF Solutions of PDF
Solutions' engagement with Customer under this Agreement. Notwithstanding the
above, should one of the parties be required to disclose either the existence or
terms of this Agreement to a court of law, a governmental agency, an auditor or
a bank, such party may do so without the prior written consent of the other
party provided that the disclosing party: (i) notifies the recipient of the
confidential nature of the information, (ii) requests confidential treatment of
such information, (iii) limits the disclosure to only such information as is
required under the circumstances, and (iv) delivers prompt notice to the other
party of such requested or actual disclosure.



IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first

                                      -11-

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set forth above.

PDF SOLUTIONS, INC.                         TOSHIBA CORPORATION


By:    /s/ John K. Kibarian                 By:  /s/ Yasuo Morimoto

Name:    John K. Kibarian                   Name:    Yasuo Morimoto

Title:           President                  Title:      President & CEO,
                                                     Semiconductor Company

                                      -12-

<PAGE>   13
                              CONFIDENTIAL MATERIAL
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                                    EXHIBIT A

                                STATEMENT OF WORK

                               *******************
                                       For
                           **************************
                        *********************************

        This Statement of Work is made between PDF Solutions, Inc. ("PDF") and
Toshiba Corporation ("TOSHIBA") pursuant to and attached as an exhibit to that
certain Technology Cooperation Agreement dated as of ************** (the
"AGREEMENT") between PDF and Toshiba. All terms and conditions contained in this
Statement of Work are subject to the terms and conditions set forth in the
Agreement. The date of commencement of services under this Agreement was
************* (the "ENGAGEMENT COMMENCEMENT DATE").

PROJECT DESCRIPTION & GOALS

               PDF Solutions agrees to provide Toshiba with *******************
services for Toshiba's ********************** technology development. Services
in support of this project are divided into two major components:
               (1)******** ***************************
               (2)******** **************************

                      (a) PROJECTS, DELIVERABLES AND FEE

               Two sections are outlined below that review the project services.
The two sections each have Project Phases and Deliverables.

(1) ******** *******************  PROJECT (START DATE = ********)
               Seven phases are included in this project;
                 (i) *******************************************
                 (ii) ******************************
                 (iii) **************************************
                 (iv) **********************
                 (v) ******************
                 (vi) *************************
                 (vii)******************************************
               Five deliverables are included in this project;
                 (i) *****************************
                 (ii) ****************************
                 (iii)************** **************
                 (iv) *************************************
                 (v) ******** ************************

                                     SOW-1



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        (a) DESCRIPTION OF PHASES (START DATE : **********)

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
PROJECT PHASE                        PDF SOLUTIONS WORK STEPS                               DURATION
-----------------------------------------------------------------------------------------------------------
<S>                                  <C>                                                    <C>
**********                            *****                                                 ***     
**********                            *****                                                 ***     
**********                            *****                                                 ***     
**********                            *****                                                 ***     
**********                            *****                                                 ***     
**********                            *****                                                 ***     
**********                            *****                                                 ***     
</TABLE>









                                      SOW-2

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        (b) DELIVERABLES

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
DELIVERABLE                DESCRIPTION            PLANED      DELIVER-    QUARTERLY   ESTIMATED
                                                 DELIVERY     ABLE FEE   ***********  PERIOD OF
                                                   MONTH                     FEE      ***********
                                                                                      FEE
-----------------------------------------------------------------------------------------------------
<S>               <C> <C>                        <C>           <C>       <C>          <C>

**********             *****                      ***          ***       ***          ***      
**********             *****                      ***          ***       ***          ***      
**********             *****                      ***          ***       ***          ***      
**********             *****                      ***          ***       ***          ***      
**********             *****                      ***          ***       ***          ***      
**********             *****                      ***          ***       ***          ***      
</TABLE>




                                     SOW-3

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(2)            ****************** PROJECT
               Four major phases are included in this project;
                 (i) **********************************
                 (ii) *********************
                 (iii) ****************************************************
                 (iv) **********************************************************
               Six deliverables are included in this project;
                 (i) *********************
                 (ii) *********
                 (iii) *********************
                 (iv) ***************
                 (v) **************** ***********
                 (vi) ********************************************************

        (a) DESCRIPTION OF PHASES (START DATE : *********)

(i) ************************************PHASE (START DATE = **********)


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------
PROJECT PHASE                       PDF SOLUTIONS WORK STEPS       ESTIMATED DURATION
------------------------------------------------------------------------------------------
<S>                                 <C>                            <C>

**********

(ii) ************************************PHASES (START DATE = **********)

------------------------------------------------------------------------------------------
PROJECT PHASE                       PDF SOLUTIONS WORK STEPS       ESTIMATED DURATION
------------------------------------------------------------------------------------------

**********

</TABLE>




                                      SOW-4


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(iii) ************* ********** ******* ****** *********** (START DATE = *******)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------
    PROJECT PHASE                   PDF SOLUTIONS WORK STEPS                  ESTIMATED
                                                                              DURATION
------------------------------------------------------------------------------------------
<S>                    <C> <C>                                                <C>

**********

------------------------------------------------------------------------------------------

(iv) *********** ** ********** **** ** *********** **** ******* (START DATE = *********)

------------------------------------------------------------------------------------------
PROJECT PHASE                       PDF SOLUTIONS WORK STEPS                  ESTIMATED
                                                                              DURATION
------------------------------------------------------------------------------------------

**********                                                                    ************

------------------------------------------------------------------------------------------

**********

------------------------------------------------------------------------------------------
</TABLE>


                                      SOW-5

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        (b)     DELIVERABLES

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
DELIVERABLE                DESCRIPTION            PLANED      DELIVER-    *********   ESTIMATED
                                                 DELIVERY     ABLE FEE   ***********  PERIOD OF
                                                   MONTH                     FEE      ***********
                                                                                      FEE
-----------------------------------------------------------------------------------------------------
<S>               <C> <C>                        <C>           <C>       <C>          <C>

**********

-----------------------------------------------------------------------------------------------------
</TABLE>


*1 : ******* *** ********* ******* *********** ** ******** *** ** **** ********
****** ***** ******** ******* *********** ******* ******** **** **** ****
*******.


                                      SOW-6

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        (b)    TEAM STRUCTURE

        The team is structured to divide the decision-making, project leadership
and analysis management between three bodies in the form of "TEAM STRUCTURE" in
the form attached to this Statement of Work as Exhibit C.

        Toshiba will establish a Steering Committee (the "STEERING COMMITTEE")
which will consist of (a) ******************** and any other Toshiba manager who
is necessary in order for yield improvement decisions to be made, and (b)
****************** or another senior executive of PDF. The Steering Committee
will be limited to four representatives of Toshiba and one representative of
PDF. The Steering Committee will have sufficient authority to make the relevant
decisions concerning this Project. The Steering Committee is responsible for
giving the team its charter, deciding which yield improvement actions to take
and who in the Toshiba organization will be responsible for carrying out the
improvement.

        Project leadership responsibility will be shared by *****************
(the "TOSHIBA PROJECT MANAGER") on behalf of Toshiba, and *******************
(the "PDF PROJECT MANAGER"), on behalf of PDF. Their primary responsibility will
be to ensure overall project status include delivery timing and the deliverables
of the work chartered by the Steering Committee. In order to maximize the
likelihood that the team is making good progress, the Project Managers will
monitor the team's work on a monthly basis and help reduce any organizational
obstacles which may impede the team's progress.

        Technical responsibility will be shared by **************** for
************* project, **************** for *************** project,
**************** for ********* and others (the "TOSHIBA ENGAGEMENT MANAGER") on
behalf of Toshiba, and ************** ************************, ****************
for ******************* (the "PDF ENGAGEMENT MANAGER"), on behalf of PDF. Their
primary responsibility will be to ensure that the team is making good progress
toward delivery of the work. Engagement Managers will monitor the team's work on
a weekly basis and ensure the project from technical view point.

        The day-to-day analyses will be conducted by a ******************* Team
("****") of engineers from Toshiba and PDF. A PDF Engagement Manager will manage
the activities of the ****. The PDF Engagement Manager will be responsible for
directing all team members in their analyses as well as aggregating and
synthesizing the results of all the analyses conducted by the entire team. In
addition, the Engagement Managers will be the principal point of contact for any
technical questions regarding the project.


        Up to *************** Toshiba engineers will be asked to participate
actively with the ****. Toshiba team members should be assigned to **** and be
skilled at ********************************************************************.
Toshiba engineers will be placed on the Team after approval by PDF for the
purpose of gathering data and conducting analyses. The Toshiba team members will
work at the direction of the Engagement Managers.

                                      SOW-7

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        (c)    TOOLS

        Toshiba will provide PDF with office space and other reasonable and
customary business resources. In particular, Toshiba will provide PDF with
secure office space large enough to accommodate the required PDF personnel in
addition to the Toshiba engineers assigned to work on the ***. Toshiba will
provide PDF with office equipment reasonably requested by PDF from time to time
including **** international access telephones (including such analog lines as
PDF shall request), an international access Facsimile machine and line, and a
photocopier. Toshiba will provide PDF with 24-hour access to the team office so
work can continue at night and on weekends.
       
        Toshiba will provide PDF with computing resources that PDF reasonably
deems necessary to conduct ********************. The details of such request
will be sent in a separate document to the Toshiba Engineering Manager but in
general, Toshiba will provide **** engineering workstations connected to both
the Toshiba network and the Internet. Toshiba will also provide such other
accessories as PDF shall reasonably request including, but not limited to, a
removable data storage device, such as a tape drive and a printer.

        (d)    LOCATION

        The Project will be conducted by Toshiba's and PDF's personnel at
Toshiba's **********************************************************************
************, and PDF's facilities in San Jose, CA. In certain cases, PDF may
require Toshiba engineers to work at the PDF facility in San Jose, California.
PDF engineers may also work in ***** and **** factory when the engagement
manager believes this is necessary to achieve progress. If Toshiba shall provide
PDF employees with an English version of the employee rules and regulations in
force at the Toshiba facilities, then PDF employees shall comply with such rules
and regulations in all material respects in an equivalent manner as other
Toshiba employees generally. Any failure to comply with such rules and
regulations shall not constitute a default of a material obligation constituting
a basis for termination of this Agreement unless (A) Toshiba has repeatedly
given notices of such failure to PDF and PDF has repeatedly failed to remedy
such noncompliance as specified in such notices, (B) Toshiba shall notify PDF in
writing that failure to cure such repeated non compliance within 45 days shall
constitute a basis for termination of the Agreement and PDF shall fail to remedy
such non compliance, and (C) Toshiba gives final notice of termination within
ten (10) days following such 45 day period. PDF shall take all reasonable steps
necessary to ensure that all employees resident at or visiting a Toshiba
facility shall treat as confidential in accordance with Section 6 all material
information of a proprietary nature observed by or disclosed to such employee,
and shall comply in all material respects with the all export control
obligations contained in Section 8.8.

        FEES AND EXPENSES.

        Toshiba will pay PDF Fees consisting of three components: (1) the
*********** Fees and (2) the *********** Fees and (3) the ******* Fees, each as
defined below:

                                      SOW-8

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(i)     DELIVERABLE FEES. Toshiba will pay PDF a deliverable fee described in
        each deliverable tables after each deliverable are provided to Toshiba
        (the "DELIVERABLE FEES"). The payment will be made within thirty (30)
        days of receipt of an invoice covering such Deliverable Fees.

(ii)    ************************************************************************
        
(iii)   ************************************************************************

EXPENSES.

        Toshiba will reimburse PDF for all reasonable and customary Expenses
incurred by PDF in performing the services, delivering the Deliverables and
fulfilling its obligations under the Project. The Expenses will be billed to
Toshiba at PDF's cost and will not exceed an average of ******** per calendar
quarter without the written consent of Toshiba. PDF will submit to Toshiba
invoices specifying the Expenses and Toshiba will pay the Expenses within thirty
(30) days of the receipt of the invoice. Invoices will be submitted to Toshiba
no more frequently than a monthly basis. Payments of invoices for PDF's expenses
will be made in accordance with the provisions of Section 2.2 of the Agreement.
Notwithstanding the foregoing if PDF is entitled to receive reimbursement of the
same travel, lodging and other similar expenses from both Toshiba and other
customers, then PDF will allocate any expenses that are for the benefit of both
Toshiba and such other customers, among Toshiba and such other customers on a
basis that PDF shall determine is fair, just and equitable to Toshiba and such
other customers taking into account all relevant factors.

                                      SOW-9




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                        ASTERISKS DENOTE SUCH OMISSIONS.

                                                                    EXHIBIT 10.4
                             CONFIDENTIAL TREATMENT
                        PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                     THE SECURITIES ACT OF 1933, AS AMENDED.



PHILIPS SEMICONDUCTOR
JANUARY 21, 2000


                                YIELD IMPROVEMENT
                              CONSULTING AGREEMENT


        This Yield Improvement Consulting Agreement (this "AGREEMENT") effective
as of ****************** (the "EFFECTIVE DATE") is entered into by and between
Philips Semiconductor, a corporation organized under the laws of California
having its principal place of business at PO Box 3409, Sunnyvale, CA 94088,
("PHILIPS") and PDF Solutions, Inc., a corporation organized under the laws of
California, having its principal place of business at 333 West San Carlos
Street, Suite 700, San Jose, California, U.S.A. ("PDF").

1.      YIELD IMPROVEMENT SERVICES.

        1.1 During the term of this Agreement, PDF will provide consulting
services with respect to integrated circuit yield management issues to Philips.
The services (the "PROJECT") are described in detail on a statement of work (the
"STATEMENT OF WORK") attached hereto as Exhibit A. The
 manner and means used by
PDF to perform the Services desired by Philips are in the sole discretion and
control of PDF. The Statement of Work shall be governed by the terms of this
Agreement, and specifies:

               (a)  Deliverables. The specific deliverables (the "DELIVERABLES")
                    to be delivered under the Project and relevant milestones
                    for delivering the Deliverables;

               (b)  Time Line. A time line for the Project and delivery of the
                    Deliverables;

               (c)  Team Members. The team members from PDF and Philips who are
                    to work on the Project and the expected time contributions
                    for each such member;




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               (d)  Data and Tools. The required data, tools, hardware,
                    software, materials, access to personnel and facilities, and
                    other materials required for effectively completing the
                    Project;

               (e)  Location. The geographic location where each component of
                    the Project will be completed;

               (f)  Fees. The amount and structure of service fees and expenses
                    payable to PDF.

        1.2 Under this Agreement, PDF is not providing or licensing to Philips
any existing PDF software programs or products, except to the extent set forth
in the Statement of Work, but then only to the extent set forth in a separate
software license agreement specifying the software licensed.

        1.3 Philips will provide PDF with such information, materials,
technology and Intellectual Property (as defined in Section 3.1) as PDF shall
reasonably require in order to perform the Project and/or prepare the
Deliverables as specified in the Statement of Work (the "LICENSED PHILIPS
TECHNOLOGY"). Philips hereby grants PDF a **************************************
license to use and practice the Licensed Philips Technology, in order for PDF to
perform the Services and develop or prepare the Deliverables solely during the
term of this Agreement. Philips agrees to obtain for PDF the right to use, for
the purpose of performing the Services and preparing the Deliverables, such
third party information, materials and technology, and the Intellectual Property
rights therein, as PDF reasonably requires in order to perform the Services
and/or prepare the Deliverables.

        1.4 In performing the Project, PDF shall exercise all commercially
reasonable efforts to prepare, develop and/or make for Philips the Deliverables
in accordance with the time schedules set forth in the Statement of Work. PDF
shall exercise all commercially reasonable efforts to prepare the Deliverables
in conformity with the specifications set forth in the Statement of Work for
such Deliverables.

        1.5 Upon delivery of any Deliverable by PDF to Philips, Philips shall
examine the Deliverable to determine whether it reasonably meets the
Specifications set forth in the Statement of Work. If the Deliverable does not
reasonably meet such Specifications, Philips shall have ten (10) days from the
date of delivery thereof to reject such Deliverable and specify why it does not
reasonably meet such Specifications. Upon such rejection the parties shall work
together to determine what needs to be done to bring such Deliverable up to such
Specifications. If the Deliverable does not meet the Specifications, PDF shall
exercise reasonable efforts to correct promptly such nonconformity of the
Deliverable with the Specification and redeliver the Deliverable to Philips upon
completion of such correction as soon as reasonably practicable. If a rejection
of the Deliverable is not received by PDF within such ten (10) day Period, the
Deliverable shall be deemed accepted. Any such acceptance is referred to as an
"ACCEPTANCE." Philips agrees to deliver a notice of Acceptance (the "NOTICE OF
ACCEPTANCE") of any Deliverable that is Accepted hereunder within such ten (10)
day period.

                                       2


<PAGE>   3

                             CONFIDENTIAL MATERIAL
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                        ASTERISKS DENOTE SUCH OMISSIONS.


        1.6 Philips and PDF agree to cooperate in good faith to achieve
completion of the Services in a timely and professional manner. Philips
understands and agrees that PDF's provision of the Services may depend on
Philips completing certain tasks or adhering to certain schedules within
Philips's control. Consequently, the schedule for completion of the Services or
any portion thereof or delivery of any Deliverable may require adjustments or
changes in the event such Philips's tasks or schedules change or are modified or
are not completed as anticipated. PDF shall bear no liability or otherwise be
responsible for delays in the provision of Services or any portion thereof
occasioned by Philips's failure to complete a Philips task or adhere to a
Philips schedule.

2.      FEES AND EXPENSES.

        2.1 For the performance of the Project and the Deliverables provided by
PDF hereunder, Philips shall pay to PDF the fees and expenses set forth in the
Statement of Work ("SERVICE FEES"). Philips shall also reimburse PDF for its
out-of-pocket expenses incurred in carrying out its obligations under this
Agreement including, but not limited to, travel, hotel, meal, document
production and other expenses directly related to the Services performed
hereunder further subject to the terms and conditions set forth in the Statement
of Work ("EXPENSES").

        2.2 PDF shall invoice Philips for its Service Fees and Expenses upon
delivery of a Deliverable or otherwise earning a Service Fee, and otherwise on a
monthly basis. Such invoice shall be accompanied by a reasonably detailed
brokedown of the invoiced amount. All invoices shall be due and payable when
invoiced, and shall be deemed overdue if they remain unpaid 30 days after they
become payable. Philips shall pay to PDF the Service Fee so invoiced, within
thirty (30) days after its receipt of PDF's invoice therefor.

        2.3 All payments by Philips hereunder shall be made by wire transfer to
a bank account to be designated by PDF. The amounts payable to PDF set forth in
the Statement of Work are exclusive of any sales or use or other taxes or
governmental charges. Philips shall be responsible for payment of all such taxes
or charges except for any taxes based solely on PDF's net income. If Philips is
required to pay any taxes based on this Section 2.3, Philips shall pay such
taxes with no reduction or offset in the amounts payable to PDF hereunder.

        2.4 All amounts which Philips does not pay on a timely basis as required
by this Agreement shall be subject to a late charge equal to one and one-half
percent (1.5%) per month (or, if less, the maximum allowed by applicable law).
In the event that any payment due hereunder is overdue, PDF reserves the right
to suspend performance until such delinquency is corrected.

3.      OWNERSHIP.

        3.1 Each party shall solely own any Intellectual Property developed
solely by the employee(s) or agents of such party, whether before, during or
after the term of this Agreement. For the purposes of this Agreement, provided
however, that PDF shall grant Philips a ********* ******** license ***** to use
any Intellectual Property constituting a Deliverable that is developed solely by
PDF pursuant to a Statement of Work. "INTELLECTUAL

                                       3


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                        ASTERISKS DENOTE SUCH OMISSIONS.


PROPERTY" shall mean the Confidential Information (as defined in Section 7),
patent and patent applications, copyrights, trademarks, trade secrets, know how,
maskworks, industrial design rights, rights of authorship, rights of priority,
and any other intellectual property rights or rights protecting intangible
property information recognized by the law of any country or jurisdiction of the
world.

        3.2 Any Intellectual Property jointly developed by the employees of both
parties in connection with or as a result of the Services shall be jointly-owned
by PDF and Philips; provided, however, that any such Intellectual Property so
jointly developed by PDF and Philips which consists of, effects or results in
any improvement, enhancement or derivative work of PDF's software and
methodologies (including, problem solving processes and practices) and
Intellectual Property shall be solely owned by PDF but subject to the license
provided in Section 3.4; provided, further, that any such Intellectual Property
so jointly developed by PDF and Philips in the manner embodied in the
Deliverables and in Philips's product designs, products, fabrication facilities
or fabrication processes shall be owned solely by Philips. Each party shall have
the right to use, exercise, disclose and license to third parties such jointly
developed Intellectual Property that is not solely owned by the other party
without accounting to or the consent of the other party.

        3.3 PDF shall grant to Philips and its subsidiaries a **************
************ ******** *** ******** license (****************************
*****************************) to use, have used for Philips and/or its
subsidiaries, copy, modify and/or enhance the Deliverables as set forth in the
Statement of Work and any PDF-owned methodologies or practices that Philips
shall observe in the ordinary course of the provision of services by PDF under
this Agreement (collectively, the "LICENSED PROPERTY") for any purpose in
connection with sales, development, manufacture, fabrication, and/or use of
products of Philips and/or its subsidiaries, but only to the extent PDF has the
right to grant such license; provided that such license shall not extend to any
software or tools used by PDF in connection with or during the course of such
services or to any software manuals or documents relating to such software or
tools except as specifically provided herein; provided, further, that Philips
shall be bound by and shall cause its sublicensees to be bound by the
confidentiality obligations contained in Section 7; provided, further, that
Philips shall not disclose or license any such Licensed Property to any third
party independent of the third party's sale, development, manufacturing,
fabrication and/or use of semiconductor products in connection with Philips
technology or Philips products. Philips understands that PDF will not disclose
to Philips certain proprietary methods or trade secrets in connection with the
services to be rendered by PDF hereunder. To this end, PDF retains the right to
take industry standard measures to keep such proprietary methods or trade
secrets from Philips.

        3.4 Except as otherwise set forth in this Section 3, neither this
Agreement nor performance of the Project shall give either PDF or Philips any
ownership, interest in or rights to the Intellectual Property owned or provided
by the other party.

4.      TERM AND TERMINATION.

        4.1 This Agreement shall commence as of the date first set forth above
and shall continue in force until completion of the Project, unless sooner
terminated as provided in this Section 4.

                                       4


<PAGE>   5


        4.2 This Agreement may be terminated upon **************** prior written
notice by either party if the other party materially breaches or fails to
perform any material obligations-hereunder and the breaching party fails to cure
such breach within thirty (30) days of written notice of breach from the non
breaching party. Notwithstanding the foregoing, the cure period for any failure
of Philips to pay fees and charges due hereunder shall be 10 days from the date
of receipt by Philips of any notice of breach relating thereto.

        4.3 Upon expiration or termination of this Agreement, all rights and
licenses granted and obligations undertaken hereunder shall forthwith terminate
except the following:

               (a)    Any and all licenses granted by PDF to Philips under this
                      Agreement shall survive the expiration or termination
                      unless this Agreement is terminated by PDF or Philips in
                      accordance with the provisions of Section 4.2.

               (b)    Within thirty (30) days of termination of this Agreement
                      for any reason, PDF shall submit to Philips an itemized
                      invoice for any Service Fees or Expenses accrued and
                      unpaid under this Agreement prior to the date of such
                      termination. Payments shall be made in accordance with
                      Section 2.

               (c)    The provisions of Sections 3.1, 3.2, 3.4, 4, 5, 6, 7, 8,
                      9, 10, 11 shall survive any expiration or termination of
                      this Agreement. .

5. INDEPENDENT CONTRACTORS. The relationship of PDF and Philips established by
this Agreement is that of independent contractors, and nothing contained in this
Agreement shall be construed to (i) give either party the power to direct or
control the day-to-day activities of the other, (ii) constitute the, parties as
agents, partners, joint venturers, co-owners, or otherwise as participants in a
joint or common undertaking, or (iii) either party to create or assume any
obligation on behalf of the other or bind the other for any purpose whatsoever
nor shall either party represent to anyone that it has such power or authority.

6. RIGHT TO PERFORM SERVICES FOR OTHERS. Philips acknowledges that PDF has
extensive expertise, experience, and proprietary products and tools in the area
of electronic design and yield improvement and that PDF intends to utilize such
expertise, experience, products and tools in providing consulting services and
other services to other clients. Subject to PDF's compliance with the
confidentiality provisions stated herein, nothing in this Agreement shall
restrict or limit PDF from performing such design consulting or other services
to any other entity in any industry, including the semiconductor and electronics
industries. Philips agrees that, except as otherwise agreed in this Agreement,
PDF and its employees may provide design consulting services similar in nature
to the Services for any third parties both during and after the term of this
Agreement. Subject to the limitations placed on PDF by the confidentiality
provisions of this Agreement or by any existing Non-Disclosure Agreement between
PDF and Philips, PDF may in its sole discretion develop, use, market, license,
offer for sale, or sell any software, application or product that is similar or
related to that which was developed by PDF for Philips hereunder.

7. CONFIDENTIALITY.

                                       5


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        7.1 Except as otherwise provided herein, each party agrees, at all times
during the term of this Agreement and for ***** years after receipt of
Confidential Information, to hold in strictest confidence (and to cause its
subsidiaries, employees and affiliates to hold in strictest confidence), and not
to use, except for the purposes contemplated herein, or to disclose to any
person, firm or corporation without written authorization of the other party,
any Confidential Information of the disclosing party. As used in this Agreement,
"CONFIDENTIAL INFORMATION" means any proprietary information, technical data,
trade secrets or know-how, including, but not limited to, research, software,
developments, inventions, processes, design flows, methods, methodologies,
formulas, algorithms, technologies, designs, drawings, engineering, hardware
configuration information, yield data or other information disclosed by one
party to the other either directly or indirectly in writing, orally or by
drawings or observation of parts or equipment.

        7.2 Confidential Information does not include any of the foregoing items
which (a) is or becomes a part of the public domain through no act or omission
of the other party; (b) was in the other party's lawful possession prior to the
disclosure as evidenced by the receiving party's files immediately prior to such
disclosure and had not been obtained by the other party either directly or
indirectly from the disclosing party; (c) is lawfully disclosed to the other
party by a third party without restriction on disclosure; or (d) is
independently developed by the other party by employees or agents without access
to the party's Confidential Information.

        7.3 Except as otherwise agreed by both parties, PDF shall return to
Philips all Confidential Information of Philips owned by Philips and not
licensed to PDF or jointly owned by PDF and Philips and copies thereof, within
thirty (30) days after completion of the Project or after expiration or
termination of this Agreement. Except as otherwise agreed by both parties,
Philips shall return to PDF all Confidential Information of PDF owned by PDF and
not licensed to Philips or jointly owned by PDF and Philips and copies thereof,
within thirty (30) days after completion of the Project or after expiration or
termination of this Agreement.

8.      WARRANTY.

        8.1 PDF warrants to Philips that the Services provided hereunder will be
performed in a professional manner consistent with the quality of PDF's
performance of services for similarly situated clients.

        8.2 THE WARRANTY ABOVE IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT, WHICH ARE EXPRESSLY
DISCLAIMED. NOTHING UNDER THIS AGREEMENT, OR THE STATEMENT OF WORK OR PROJECT
SHALL BE DEEMED TO BE A WARRANTY AS TO THE OUTCOME OF ANY PROJECT OR THE
EFFICACY OF ANY RECOMMENDATIONS MADE BY PDF. NOTHING UNDER THIS AGREEMENT OR THE
STATEMENT OF WORK SHALL BE DEEMED TO CREATE ANY LIABILITY ON THE PART OF PDF
WITH RESPECT TO THE OUTCOME OF A PROJECT OR ANY ACTIONS TAKEN BY PHILIPS AS A
CONSEQUENCE OF PDF'S RECOMMENDATIONS.

                                       6


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9.      LIMITATIONS ON LIABILITY.

        9.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR SPECIAL,
CONSEQUENTIAL, INCIDENTAL, INDIRECT, PUNITIVE OR EXEMPLARY DAMAGES, HOWEVER
CAUSED, WHETHER FOR BREACH OF WARRANTY, CONTRACT, TORT NEGLIGENCE, STRICT
LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.

        9.2 No action, regardless of form, arising from this Agreement may be
brought by either party more than one (1) year after the cause of action has
accrued, except that an action for non-payment may be brought within
one (1) year after the later of the date of last payment or the date such
unpaid amount should have been paid.

10.     DISPUTE RESOLUTION.

        10.1 The parties shall attempt in good faith to resolve any dispute
arising under this Agreement informally according to the following procedure.
Upon written request of either party identifying a dispute to be resolved, each
party will designate an executive officer with the responsibility and authority
to resolve the dispute. These officers shall meet preliminarily within fifteen
(15) days (or such longer time period as the parties shall agree) after the
request to identify the scope of the dispute and the information needed to
discuss and attempt to resolve such dispute. These officers shall then gather
relevant information regarding the dispute and shall meet to discuss the issue
and to negotiate in good faith to resolve the issue.

        10.2 In the event the parties are unable to resolve the dispute within
thirty (30) days after the first meeting of the designated officers as specified
above (or such longer time period as the parties agree), then the dispute shall
be resolved by binding arbitration under the terms of this Section 10.2. The
arbitration shall be held in the city of San Jose, California U.S.A. in
accordance with the then existing Commercial Arbitration Rules of the American
Arbitration Association, as modified hereunder. The arbitration shall be
conducted by one (1) arbitrator, who shall be an expert in the area of the
industry and not associated with either party. The decision of the arbitrator
shall be binding upon the parties, and judgment in accordance with that decision
may be entered in any court having jurisdiction thereof.

        10.3 Nothing in this Section shall restrict the right of either party to
apply to a court of competent jurisdiction for emergency equitable relief prior
to or pending final determination of a claim by arbitration in accordance with
this Section. The prevailing party in any arbitration or judicial action brought
to enforce or interpret this Agreement or for relief for its breach shall be
entitled to recover its costs (including its share of arbitration fees) and its
reasonable attorneys fees therein incurred.

11.     MISCELLANEOUS

        11.1 AMENDMENTS AND WAIVERS; INTERPRETATION. Any term of this Agreement
or any Statement of Work may be amended or waived only with the written consent
by the representatives of the parties. The failure of a party to enforce any
provision of this Agreement shall not constitute a waiver of such provision or
the right of such party to enforce such provision


                                       7


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or any other provision. In the event that any term of the Statement of Work
conflicts with the terms of this Agreement, the terms of this Agreement shall
take precedence.

        11.2 ASSIGNMENT. Neither party shall assign, delegate, or subcontract
any portion of its Canada and the United States, including U.S. Export
Administration Regulations, without proper authorization from the appropriate
governmental authorities. In addition, the parties agree that no technology
furnished to the other will be used for any purpose to develop and/or
manufacture nuclear, chemical or biological weapons and/or missiles.

        11.3 NON-SOLICITATION. Philips shall not solicit or influence or attempt
to influence any person employed by PDF to terminate or otherwise cease his or
her employment with PDF or become an employee of Philips or any competitor of
PDF. A company's status as a competitor of PDF shall be determined by PDF in its
sole discretion.

                                       8


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        IN WITNESS WHEREOF, the-parties have executed this Agreement as of the
date first set forth above.


PHILIPS SEMICONDUCTOR               PDF SOLUTIONS, INC.


By:     /s/ David Ledvina           By:    /s/ PS Melman

Title:  Vice President              Title: CFO

                                       9


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                        PHILIPS SEMICONDUCTORS - ********

DATE:          1/21/2000

TO:            Dave Joseph - PDF Solutions

CC:            *****************************************************************
               ****************************

FROM:          Miguel Delgado

RE.            PDF - Yield Improvement Deliverables

PRIORITY:      (Urgent)
------------------------------------------------------------------------------

The scope of the yield consulting service is to improve Philips *************
************** as outlined in the PDF Solutions, Inc. presentation "Yield
Improvement Proposal ******** ************, ********", dated ***************.

PDF's overall services shall be aimed to improve ******** yield to achieve
************** *****************************************************, plus
various deliverables as outlined in the above cited document and PDF revision
1.2, including software.

Outlined below is a list of essential deliverables from PDF Solutions, Inc. to
the ************. The bases of these deliverables are the above-named documents,
with the following clarifications and modifications:

1.      ***********************************************************************
        ****************************** *************************************
        *******************************.

2.      ************************ ************************.

        2.1    **************************************************************
               ********************************************************
               *********************************.

3.      Software License Fees:

        3.1    Philips-******** to be granted, ************, a software license
               to use **** for the duration of the project (expected to be *
               months).

        3.2    For use beyond the projects duration:

               3.2.1  ********************************************************
                      ********************************************************
                      ********************************

                                                                   CONFIDENTIAL


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               3.2.2  ********************************************************
                      ********************************************************
                      ********************************

               3.2.3  ********************************************************
                      ********************************************************
                      ********************************

        3.3    *****************************************************************
               *****************************************************************
               *****************************************************************
               *****************************************************************
               **********************************************.

        3.4    *****************************************************************
               *****************************************************************
               *****************************************************************

        3.5    Complete training of the use of the software and analysis
               techniques - provide ***** classes that cover the use of the
               tools. Details to be worked out between PDF and Philips
               Semiconductors,***************.

               3.5.l   Training of approx. *** engineers over the *** months
                       engagement period in up to ******** classes.

        3.6    Software customization specific to ***************** will
               provided at mutually acceptable time frame throughout the life of
               the engagement.

4.      CV and CVA License Fees:

        4.1    ***************** included in fixed fee.

        4.2    ***************************************************

        4.3    Characterization Vehicles -
               **************************************** *****************. These
               are vehicles to provide the *******************************
               ***********.

        4.4    ****************************************************************
               ************************************************************.

        4.5    ****************************************************************
               ************************************************************.

5.      Module Support and Resources:

                                       2                            CONFIDENTIAL


<PAGE>   12
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

        5.1    ****************************************************************
               ************************************************************.

        5.2    Philips Semiconductors will have full access to all PDF research
               and experience on best known methods/practices that are not
               restricted by confidentiality agreements.

        5.3    Philips ****************** will have full access to data search
               capabilities and resources within PDF to bring resolutions to
               issues and or enhancements to *************** and or ***********
               issues.

        5.4    On site resources for module issues and or software will be
               provided *******************************************************
               ************************************************************.

        5.5    Minimum PDF resources dedicated to the program:

               5.5.1  ***** Engagement Leader (~ **% on site).

               5.5.2  ***** ***************


                                       3                           CONFIDENTIAL

<PAGE>   13
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.



                                   EXHIBIT "B"
                              TO SERVICES AGREEMENT

                                      FEES

GENERAL

The Services specifically contemplate is the improvement of Philips
************* yield ramp for *** from the baseline yield ramp as defined in the
Statement of Work (SOW). ***********
*****************************************************************************.

FIXED FEE

PDF shall invoice Philips for ***************************. The estimate is for
Phase 1 as described in the SOW is *****************. The duration may be
modified in writing by mutual agreement. Philips shall pay such invoices in
accordance with this Agreement.

INCENTIVE FEE

PDF and Philips shall review the yield of all wafers processed on the ****
product line and determine the yields.
***********************************************************
************************************************************ commencing upon
project commencement. ***************************************************
************************************************************.

* **************************************************************************
***************************************************************************
*****************************************************..

TRAVEL REIMBURSEMENT

PDF shall invoice Philips for all actual authorized travel in support of the
project. The time period for travel reimbursement shall include Phase 1 and
Phase 2 of the project
******************.

SOFTWARE LICENSE FEES

********************************************************************************
****************************************************************.

********************************************************************************
********************************************************************************
********************************************************************************
****************************************************.




<PAGE>   1

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                                                                    EXHIBIT 10.5
                             CONFIDENTIAL TREATMENT
                         PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                      THE SECURITIES ACT OF 1933, AS AMENDED.

                                                       PROJECT: SONY CORPORATION
                                                                 ***************


                           YIELD IMPROVEMENT AGREEMENT

        This Yield Improvement Agreement is made as of the *** *** ** *******,
****, by and between SONY Corporation, a corporation organized and existing
under and by virtue of the laws of Japan, maintaining its principal office at
7-35, Kitashinagawa 6-chome, Shinagawa-ku, Tokyo, Japan (hereinafter referred to
as "SONY") and PDF Solutions, Inc., a corporation organized and existing under
and by virtue of the laws of the State of California, having its principal place
of business at 333 West San Carlos Street, San Jose, California 95110 U.S.A.
(hereinafter referred to as "PDF").

                               W I T N E S S E T H:

        WHEREAS, SONY is, among other things, engaged in the business of
manufacturing and selling ******************* referred to as the ***** Product
designed by or for SONY (hereinafter referred to as the "PRODUCTS"); and

        WHEREAS, PDF has substantial expertise and skill in yield improvement

for semiconductor manufacturing; and

        WHEREAS, SONY desires that PDF render certain services for SONY for
purposes of improving the yield of the Products manufactured at SONY's
subsidiary located in ************* (hereinafter referred to as the "SONY
SUBSIDIARY"); and

        WHEREAS, PDF is willing to render such services to SONY under the terms
and conditions hereinafter set forth.

        NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, it is mutually covenanted and agreed as follows:


<PAGE>   2


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

1.      SERVICES

1.1       PDF shall, at its cost and expense, render the following services
          (hereinafter referred to as the "SERVICES") for SONY, which are more
          fully described in Exhibit A:

          1.1.1     To provide SONY with certain characterization vehicles to
                    assist in enhancing the yield in the fabrication of the
                    Products manufactured at SONY Subsidiary (the
                    "CHARACTERIZATION VEHICLES").

          1.1.2     To provide certain consulting services in connection with
                    such yield enhancement activities of SONY ("YIELD RAMP
                    SERVICES").

          1.1.3     To provide certain software to be used at the Sony
                    Subsidiary (THE "SOFTWARE DELIVERABLE").

1.2       For purposes of rendering the Services, PDF shall assign appropriate
          number of its employees and have at least ***** of them devote their
          full-time to render the Services. PDF shall ensure that such employees
          are fully qualified personnel with enough experience and expertise to
          render the Services.


2.        SCHEDULES AND DELIVERABLES

2.1       The Services shall be rendered by PDF ******************** and shall
          continue to be rendered until
          ***********************************************************
          Characterization Vehicle Deliverables (as defined below) pursuant to
          Section 2.5 (THE "SERVICE PERIOD"). Upon five (5) working days prior
          written notice by SONY to PDF, SONY may change, if needed, the time
          schedule for the provision of the Services so long as the total period
          of time for the Services to be rendered after the acceptance by SONY
          of the last Characterization Vehicle Deliverables shall not exceed
          ************** *********************************************. If any
          such change significantly affects the costs or efforts required to
          render the Services, the parties shall work together to agree upon an
          equitable adjustment to the Service Fees.

2.2       PDF shall prepare and deliver to SONY the "Characterization Vehicle
          Deliverables", the "Yield Ramp Status Report Deliverables" and the
          "Software Deliverables" described under "Deliverables" in Exhibit A
          (hereinafter collectively referred to as the "DELIVERABLES").
          Characterization Vehicle Deliverables shall be delivered by PDF to
          SONY in accordance with the schedule as described in EXHIBIT A. Upon
          delivery and acceptance of all Characterization Vehicle Deliverables,
          PDF will begin performing Yield Ramp Services for which Yield Ramp
          Status Report Deliverables will be generated and submitted to SONY by
          the end of each month.

                                      -2-

<PAGE>   3


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

2.3       SONY shall prepare and provide PDF with such design data, process data
          and other data and information as is reasonably deemed necessary by
          SONY or as is reasonably requested by PDF and agreed by SONY for PDF
          to render the Services and deliver the Deliverables (hereinafter
          referred to as the "TECHNICAL DATA"). In addition, SONY shall at its
          cost and expense prepare and make available to the employees of PDF
          stationed at SONY Subsidiary, office space, equipment and services as
          PDF shall reasonably request including secure office space for use as
          a team office, appropriate equipment such as workstations, telephones,
          facsimile machines, a photocopier, printers and a removable data
          storage device, such as tape drives, and services such as
          international access telephone lines, and email access to the
          internet; provided that the costs for office supplies and telephone
          charges used by employees of PDF shall be borne by PDF, however, such
          costs shall constitute additional out-of-pocket expenses to be
          reimbursed by SONY to PDF under, and subject to the limitations set
          forth in, Section 3.3. The bearing of such costs by PDF and the
          reimbursement thereof by SONY shall be accomplished by offsets of one
          against the other to the extent reasonably practicable.

2.4       In addition to the provisions of Section 2.1 above, SONY may, if
          needed, upon written notice to PDF, make changes to Exhibit A relating
          to Deliverables which have not been delivered or actions which have
          not been taken as of the time of such change; provided that if any
          such change significantly affects the scope or timing of the Services
          rendered or any Deliverables to be delivered or changes the costs and
          efforts required to render the Services or deliver the Deliverables,
          the parties shall work together to agree upon an additional amount to
          be paid for such Services, Deliverables, costs or efforts, and upon an
          appropriate time schedule.

2.5       Upon receipt of each Deliverable, SONY shall inspect such Deliverable
          to determine whether such Deliverable conforms to the description
          thereof contained in Exhibit A. Should any Deliverable not reasonably
          conform to such description, SONY shall, within ten (10) days after
          receipt of such Deliverable, so notify PDF in writing specifying the
          variance from the description, and PDF shall promptly correct and
          deliver the Deliverable to SONY again. Such Deliverable, as so
          corrected, shall be redelivered in accordance with this Section 2.5.
          If no notification is made by SONY to PDF within such ten (10) day
          period, such Deliverable shall be deemed accepted by SONY.

2.6       For a period of ten (10) days following the end of the Service Period,
          PDF shall, upon the request of SONY, assist SONY by answering SONY's
          questions through telephone, facsimile or e-mail communications
          ("VERBAL SUPPORT"); provided that any such Verbal Support shall relate
          only to the Services specified to be performed with respect to the
          Products under this Agreement and not to other products, projects or
          work SONY wishes to have PDF perform.

                                      -3-

<PAGE>   4



                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

2.7       The Services shall be deemed completed at the time when all the
          Deliverables are delivered by PDF to, and accepted by, SONY. PDF
          shall, upon the written request of SONY, render for SONY additional
          services of providing additional Yield Ramp Status Report Deliverables
          following the Service Period defined in Section 2.1 above ("FOLLOW-UP
          SERVICES)"; provided that SONY shall pay as consideration the Yield
          Ramp Status Report Deliverable Fee specified in Section 3.1 for each
          such additional Yield Ramp Status Report Deliverable.


3.        CONSIDERATION

3.1       In full and complete consideration for the Services rendered by PDF to
          SONY (including the delivery of the Deliverables), SONY shall pay to
          PDF an aggregate amount equal to
          ***************************************** in total (hereinafter
          referred to as the "SERVICE FEE"). Such Service Fee shall be payable
          by SONY to PDF in ******* installments as follows:

          3.1.1    Upon acceptance of each Characterization Vehicle Deliverable,
                    SONY shall pay the amount of
                    ************************************************
                    *************** as the "Characterization Vehicle
                    Deliverables Fee"; and

          3.1.2     Upon acceptance of each Yield Ramp Status Report
                    Deliverable, SONY shall pay the amount of
                    ************************************************
                    *************** as the "Yield Ramp Status Report
                    Deliverables Fee".

3.2       Upon SONY's acceptance of each of the Deliverables pursuant to Section
          2.5, PDF shall issue to SONY an invoice for the payment in United
          States Dollars of the applicable installment of the Service Fee
          payable by SONY to PDF under Section 3.1 above. SONY shall make
          payment of such installment in United States Dollars by making a
          telegraphic transfer remittance to the bank account of PDF within
          thirty (30) days following the date of receipt of the invoice by SONY
          from PDF.

3.3       In addition to the Service Fee payable under Section 3.1 above, SONY
          shall pay to PDF travel and other reasonable out of pocket expenses
          actually incurred by PDF in rendering the Services, including the
          economy class air fares, domestic travel expenses in the U.S.A. and
          Japan, hotel accommodation expenses and meal expenses for the
          employees and consultants of PDF engaged in the Services; provided,
          however, that in no event shall the expenses to be paid by SONY to PDF
          hereunder exceed *******************
          *************************************************. The costs and
          expenses reimbursable under this Section 3.3 are referred to as
          "EXPENSES."

                                      -4-

<PAGE>   5



                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

3.4       Within thirty (30) days after close of each calendar month, PDF shall
          issue an invoice for the payment in United States Dollars of the
          Expenses payable by SONY to PDF under Section 3.3 above together with
          a detailed listing of such Expenses. SONY shall make payment of such
          Expenses in United States Dollars by making a telegraphic transfer
          remittance to the bank account of PDF within thirty (30) days
          following the date of receipt of the invoice by SONY from PDF. SONY
          shall have the right at SONY's expense to have such Expenses audited 
          by independent accountants of recognized standing.

3.5       All amounts which SONY does not pay on a timely basis as required by
          this Agreement shall be subject to a late charge equal to
          ***************** (or, if less, the maximum allowed by applicable
          law). In the event that any payment due hereunder is overdue, PDF
          reserves the right to suspend performance until such delinquency is
          corrected.


4.      OWNERSHIP AND RIGHTS

4.1       Each party shall solely own any Intellectual Property (as defined
          below) developed solely by the employee(s) or agents of such party
          irrespective of the Services before or after the term of this
          Agreement.

4.2       SONY and PDF agree that the Deliverables shall become the sole and
          exclusive property of SONY.

4.3       PDF and SONY agree that the ownership of the inventions and the
          intellectual property rights thereon, including, without limitation,
          patents and patent applications, copyrights, mask works, trade
          secrets, know how, industrial design rights, rights of authorship, and
          other intellectual property rights or rights protecting intangible
          property or information recognized by the law of any country or
          jurisdiction of the world (hereinafter collectively referred to as the
          "INTELLECTUAL PROPERTY") generated during the course of the Services,
          shall be determined as follows:

          4.3.1. ***

          4.3.2. ***

          4.3.3. ***

          4.3.4. ***

          4.3.5. ***



                                      -5-

<PAGE>   6

          *******************************************************************
          *******************************************************************
          *******************************************************************
          *******************************************************************

4.4       SONY hereby grants to PDF a ************************************
          ******************************************************* license;
          provided that *** shall be bound by the confidentiality obligations
          contained in this Agreement.

4.5       PDF hereby grants to SONY a ***********************************
          *************************************************************
          ******************************************************* license;
          provided, further, that SONY shall be bound by and shall cause its
          sublicensees to be bound by the confidentiality obligations contained
          in this Agreement.

4.6       Except as otherwise set forth in this Section 4, neither this
          Agreement nor the performance of the Services shall give either PDF or
          SONY any ownership, interest in or rights to the Intellectual Property
          owned by the other party.

                                      -6-

<PAGE>   7



                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

5.        DURATION AND TERMINATION OF AGREEMENT

5.1       This Agreement shall become effective as of the date first above
          written and shall continue in full force and effect until the payment
          of the Service Fees shall have been completed in accordance with the
          terms and conditions of this Agreement.

5.2       Either party shall have the right to terminate this Agreement at any
          time if:

          5.2.1     the other party is in breach of any term, condition or
                    covenant of this Agreement and fails to cure that breach
                    within thirty (30) days after receiving written notice of
                    that breach, which notice must state that failure to cure
                    such breach will result in termination of this Agreement.

          5.2.2     the other party (i) becomes insolvent, (ii) admits in
                    writing its insolvency or inability to pay its debts or
                    perform its obligations as they mature, or (iii) becomes the
                    subject to any voluntary or involuntary proceeding in
                    bankruptcy, liquidation, dissolution, receivership,
                    attachment or composition or general assignment for the
                    benefit of creditors.

          5.2.3     More than ten percent (10%) of the other party's outstanding
                    stock or equity interests is acquired by, or the other party
                    is merged with, any competitor of such terminating party.

          5.3       In addition to the provisions of Section 5.2, SONY may
                    terminate this Agreement at any time prior to the completion
                    of the Services by giving a written notice to PDF. In such
                    case, SONY shall pay to PDF ***********************
                    ***********************************************************
                    **********.

5.4       The provisions of Sections 2.6, 2.7, 3 (to the extent Service Fees,
          Expenses or any portion thereof are payable), 4, 6, 7 and 8 of this
          Agreement shall survive the expiration and termination of this
          Agreement.

                                      -7-

<PAGE>   8


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

6.      CONFIDENTIALITY

6.1       Each party (the "RECEIVING PARTY") hereto agrees to maintain as
          confidential and to use only for the purposes permitted under this
          Agreement, during the term of this Agreement and for ***************
          thereafter, all confidential and proprietary information and materials
          received from the other party (the "DISCLOSING PARTY") under this
          Agreement ("CONFIDENTIAL INFORMATION"); provided that to be protected
          as Confidential Information, information and materials shall be (a)
          physically marked as confidential or proprietary, or (b) if disclosed
          orally or visually, identified as confidential at the time of
          disclosure and be reduced to writing with confidential or proprietary
          marking, which shall be delivered to the Receiving Party within thirty
          (30) days after the oral or visual disclosure. Notwithstanding the
          immediate foregoing, (i) the Deliverables, (ii) the Technical Data and
          (iii) any and all the information and materials provided to or
          acquired by the employees of PDF at SONY Subsidiary shall be deemed
          Confidential Information of SONY even without marking or designation
          of confidentiality.

6.2       Notwithstanding the provisions of Section 6.1 above, a Receiving Party
          shall have no obligation to maintain the confidentiality of any
          information or material that:

          6.2.1     was in the Receiving Party's lawful possession prior to the
                    disclosure as supported by satisfactory evidence of such
                    possession;

          6.2.2     becomes publicly known through no wrongful act or omission
                    of the Receiving Party;

          6.2.3     is lawfully received by the Receiving Party from a third
                    party without breach of any confidentiality obligation or
                    other restriction on disclosure;

          6.2.4     is independently ascertainable or developed by the Receiving
                    Party or its employees who have not had access to the
                    Confidential Information.

          6.2.5     is required to be disclosed to a court or government agency,
                    provided that prompt prior written notice of such intended
                    disclosure is given to the Disclosing Party sufficient to
                    enable it to acquire a protective order.

6.3       Confidential Information of each party shall be and remain the
          property of such party. Upon request by the Disclosing Party or upon
          expiration or termination of this Agreement, whichever is earlier, the
          Receiving Party shall return all Confidential Information received
          from the Disclosing Party together with all copies thereof or destroy
          them, if so requested by the Disclosing Party.


                                      -8-

<PAGE>   9

7.        WARRANTIES AND INDEMNIFICATION

7.1       PDF warrants that the Services shall be rendered in a professional
          manner consistent with the quality of PDF's performance of services
          for other similarly situated clients. PDF also warrants that the
          Services shall be rendered in compliance with all relevant Japanese
          and United States (federal and state) laws, ordinances, rules and
          regulations and shall not constitute any breach of contractual
          obligations of PDF with third parties. PDF further warrants that the
          Deliverables are free from infringement of any patent, copyright,
          trade secret right or, to PDF's actual knowledge, other Intellectual
          Property of any third party; provided that such warranty shall not
          extend (a) to any infringement that are caused by or results from (i)
          any modifications recommended to be made to SONY's designs or
          products, or (ii) other suggestions, recommendations or other matters
          made or provided by PDF contained in such Deliverables or the
          application or implementation of any of the foregoing unless such
          recommendations, suggestions, Deliverables, applications, and
          implementations considered alone (and not in conjunction with
          Technical Data, Intellectual Property or other reports or information
          provided by SONY or any third party other than consultants or
          subcontractors of PDF) would constitute such an infringement; or (b)
          to the extent any infringement results from any infringement contained
          in any Technical Data, Intellectual Property or other reports or
          information provided by SONY or any third party other than consultants
          or subcontractors of PDF.

7.2       THE WARRANTY IN THIS SECTION 7 IS EXCLUSIVE AND IN LIEU OF ALL OTHER
          WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED
          WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
          NON-INFRINGEMENT, WHICH ARE EXPRESSLY DISCLAIMED. NOTHING UNDER THIS
          AGREEMENT, OR THE STATEMENT OF WORK OR PROJECT SHALL BE DEEMED TO BE A
          WARRANTY AS TO THE OUTCOME OF ANY PROJECT OR THE EFFICACY OF ANY
          RECOMMENDATIONS MADE BY PDF. EXCEPT AS EXPRESSLY PROVIDED IN SECTION
          7.1 ABOVE, NOTHING UNDER THIS AGREEMENT OR THE STATEMENT OF WORK SHALL
          BE DEEMED TO CREATE ANY LIABILITY ON THE PART OF PDF WITH RESPECT TO
          THE RESULTS OF ANY ACTIONS TAKEN BY SONY AS A CONSEQUENCE OF PDF'S
          RECOMMENDATIONS OR THE OUTCOME ON A PRODUCT FROM FOLLOWING ANY
          SUGGESTIONS OR RECOMMENDATIONS CONTAINED IN THE DELIVERABLES.

7.3       EXCEPT AS SPECIFICALLY PROVIDED FOR IN SECTION 7.4, IN NO EVENT SHALL
          EITHER PARTY BE LIABLE TO THE OTHER FOR SPECIAL, CONSEQUENTIAL,
          INCIDENTAL, INDIRECT, PUNITIVE OR EXEMPLARY DAMAGES, HOWEVER CAUSED,
          WHETHER FOR BREACH OF WARRANTY, CONTRACT, TORT NEGLIGENCE, STRICT
          LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
          POSSIBILITY OF SUCH DAMAGES.


                                      -9-

<PAGE>   10


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

7.4       PDF hereby agrees to indemnify and hold SONY, its affiliates, and
          their respective officers, directors, employees, and agents ("SONY
          INDEMNITEES") harmless from and against any and all liabilities,
          losses, damages, costs, and expenses ("LOSSES"), and any attorney's
          fees and expenses relating to its defense, resulting directly from any
          claim or action brought against the SONY Indemnitees resulting from
          any breach by PDF of the foregoing warranties (a "CLAIM") and defend
          the SONY Indemnitees against such Claims, provided that the SONY
          Indemnitees shall follow the indemnification procedure as set forth in
          this Agreement. *** The indemnification contained in this Section 7.4
          shall be the sole and exclusive remedy for any breach of warranty
          contained in this Agreement.

7.5       If any Claim is commenced against a party entitled to indemnification
          under this Section 7 , such party shall give written notice to the
          other party within ten (10) days of notice of such Claim. If such
          party receiving notice is obligated under this Section 7 to defend the
          party against such Claim, then the indemnifying party shall take
          control of the defense and investigation of the Claim, using such
          attorneys and other assistance as it selects in its discretion. The
          indemnified party shall cooperate in all reasonable respects in such
          investigation and defense, including trial and any appeals, provided
          that such party may also participate, at its own expense, in such
          defense. No settlement of a Claim that involves a remedy other than
          payment of money by indemnifying party shall be agreed to and entered
          without the consent of the indemnified party, which consent shall not
          be unreasonably withheld.

7.6       No action, regardless of form, arising from this Agreement may be
          brought by either party more than one (1) year after the cause of
          action actually is discovered by that party (but in no event later
          than as otherwise provided by law), except that an action for
          non-payment may be brought within one (1) year after the later of the
          date of last payment or the date such unpaid amount should have been
          paid.

8.      APPLICABLE LAW; JURISDICTION

8.1       This Agreement shall be governed by and construed in accordance with
          the laws of the State of California without reference to choice or
          conflicts of laws. This Agreement is prepared and executed and shall
          be interpreted in the English language only, and no translation of the
          Agreement into another language shall have any effect. The parties
          agree that the United Nations Convention on Contracts for the
          International Sale of Goods (1980) is specifically excluded from and
          shall not apply to this Agreement.

8.2       Any controversies and disputes arising out of or relating to this
          Agreement shall be submitted to: (i) the Tokyo District Court in Japan
          in case the action is instituted by PDF; and (ii) the United States
          District Court for the Northern District of California in case the

                                      -10-

<PAGE>   11

          action is instituted by SONY; as the Court of first instance. The
          parties hereto agree that the judgment, degree, or order rendered by a
          Court of last resort or a Court of lower jurisdiction from which no
          appeal has been taken in Japan or the United States shall be final and
          binding upon both parties.


9.        WORKING INDEPENDENTLY OR WITH OTHERS.

9.1       Subject to SONY's compliance with the confidentiality and other
          provisions stated herein and in any existing agreement between the
          parties, nothing in this Agreement shall be construed to preclude SONY
          from independently performing or acquiring from other parties the same
          or similar services as the Services provided by PDF hereunder.

9.2       SONY acknowledges that PDF has extensive expertise, experience, and
          proprietary products and tools in the area of electronic design and
          yield improvement and that PDF intends to utilize such expertise,
          experience, products and tools in providing consulting services and
          other services to other clients. Subject to PDF's compliance with the
          confidentiality and other provisions stated herein and in any existing
          agreement between the parties, nothing in this Agreement shall
          restrict or limit PDF from performing such design consulting or other
          services to any other entity in any industry, including the
          semiconductor and electronics industries. SONY agrees that, except as
          otherwise agreed in this Agreement, PDF and its employees may provide
          design consulting services similar in nature to the Services for any
          third parties both during and after the term of this Agreement.
          Subject to the limitations placed on PDF by the confidentiality and
          other provisions of this Agreement or by any existing agreement
          between PDF and SONY, PDF may in its sole discretion develop, use,
          market, license, offer for sale, or sell any software, application or
          product that is similar or related to that which was developed by PDF
          for SONY hereunder.


10.       GENERAL

10.1      PDF shall not disclose or publicize the existence and terms of this
          Agreement to any third party without the prior written consent of
          SONY. In particular, no press releases shall be made by PDF without
          prior written consent of SONY.

10.2      The relationship of PDF and SONY established by this Agreement is that
          of independent contractors, and nothing contained in this Agreement
          shall be construed to (i) give either party the power to direct or
          control the day-to-day activities of the other, (ii) constitute the
          parties as agents, partners, joint venturers, co-owners or otherwise
          as participants in a joint or common undertaking, or (iii) allow
          either party to create or assume any obligation on behalf of the other
          or bind the other for any purpose whatsoever nor shall either party
          represent to anyone that it has such power or authority.


                                      -11-

<PAGE>   12


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

10.3      Neither party may assign or transfer any of the rights and
          responsibilities under this Agreement without written consent of the
          other party and any purported attempt to do so shall be deemed void.

10.4      This Agreement expresses the entire understanding and agreement
          between SONY and PDF with regard to the subject matter hereof and,
          except for any confidentiality or nondisclosure agreements between the
          parties, supersedes any and all agreements previously entered into
          between the parties hereto with regard to the subject matter hereof.

10.5      For purposes of this Agreement, "Subsidiary" shall mean any
          corporation or other entity, in which more than fifty percent (50%) of
          the stocks or other equity interest entitled to vote for the election
          of directors of such entity shall be owned or controlled by PDF or
          SONY directly or indirectly; provided that such corporation or entity
          shall be deemed to be a "Subsidiary" only so long as such ownership or
          control exists.

10.6      This Agreement shall not be subject to change or modification except
          by the execution of an instrument in writing subscribed by the parties
          hereto.

10.7      If one or more provisions of this Agreement are held to be
          unenforceable under applicable law, the parties agree to renegotiate
          such provision in good faith. In the event that the parties cannot
          reach a mutually agreeable and enforceable replacement for such
          provision, then (i) such provision shall be excluded from this
          Agreement, (ii) the balance of this Agreement shall be interpreted as
          if such provision were so excluded and (iii) the balance of this
          Agreement shall be enforceable in accordance with its other terms.

10.8      This Agreement may be executed in counterparts, each of which shall be
          deemed an original, but all of which together will constitute one and
          the same instrument.

10.9      Either PDF or SONY shall not be liable for any loss, damage, or
          penalty arising from delay due to causes beyond its reasonable
          control.

10.10     Neither party shall, directly or indirectly export or re-export any
          technical data or information or data received from the other party
          hereunder or the direct products thereof to any destination prohibited
          or restricted by export control regulations of Japan and the United
          States, including U.S. Export Administration Regulations, without
          proper authorization from the appropriate governmental authorities. In
          addition, the parties agree that no technology furnished to the other
          will be used for any purpose to develop and/or manufacture nuclear,
          chemical or biological weapons and/or missiles.

10.11     In rendering the Services hereunder, PDF may use consultants and other
          subcontractors upon obtaining prior consent of SONY, which consent
          shall not be unreasonably

                                      -12-

<PAGE>   13

          withheld. PDF shall cause such consultants and subcontractors to be
          subject to and bound by the confidentiality obligations set forth in
          Section 6 of the Agreement and agree to SONY's and PDF's ownership of
          the Intellectual Property as described in Section 4 of the Agreement.
          Failure by such consultants and subcontractors to observe any
          provisions of this Agreement shall constitute a breach of this
          Agreement by PDF.

10.12     All notices required or permitted to be given under this Agreement
          must be in writing and will be effective when delivered personally or
          sent by registered mail, postage prepaid, and addressed to the parties
          at their respective address set forth below or new address or
          addresses subsequently designated in writing by either party to the
          other:

          SONY                                    PDF
          Legal & Intellectual Property Dept.     Chief Financial Officer
          Core Technology & Network Company
          Sony Corporation                        PDF Solutions, Inc.
          1-11-1, Osaki, Shinagawa-ku, Tokyo      333 West San Carlos Street,
          141-0032, Japan                         Suite 625
                                                San Jose, California 95110 USA

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.


SONY CORPORATION                    PDF SOLUTIONS, INC.


By: /s/ Norikazu Ouchi              By /s/ John K. Kibarian
      Norikazu Ouchi                       John K. Kibarian
      General Manager                      President
      Device Development Dept.-1
      LSI Development Div.
        LSI Business & Technology
      Development Group
      Core Technology &
        Network Company


                                      -13-

<PAGE>   14

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

                                                                       EXHIBIT A


                                STATEMENT OF WORK


                                SONY CORPORATION
                                  **************

          This Statement of Work is made between PDF Solutions, Inc. ("PDF") and
SONY Corporation ("SONY") pursuant to and attached as an exhibit to that certain
Yield Improvement Agreement dated as of January 1, 2000 (the "AGREEMENT")
between PDF and SONY. All terms and conditions contained in the Statement of
Work are subject to the terms and conditions set forth in the Agreement.

SERVICES

          PDF will provide SONY with characterization vehicles and other
Deliverables resulting from consulting services relating to assisting SONY in
***************** of the ********************************************** Product
designed by or for SONY ************* (the "PRODUCTS").

COMMENCEMENT

          The engagement will commence with a kick-off meeting on or before
********** (the "KICK-OFF MEETING"). At this meeting PDF and SONY
representatives will meet to commence the project. Prior to the kickoff meeting,
PDF managers and engineers will have met with SONY managers and engineers to
assess availability of data and design a specific work plan for delivery of the
Deliverables based upon available data and resources. This assessment will be
presented at the kickoff meeting along with the first Characterization Vehicle.

DELIVERABLES

        The objective of the Project and the result of the above activities will
be to deliver the following Deliverables (which shall be the "DELIVERABLES" as
defined in the Agreement):

(1)     CHARACTERIZATION VEHICLE DELIVERABLES. The following four items shall
        collectively be referred to as the ************************
        ************** The following ************************ will be delivered
        by **********:

               (a) ********** data and documentation
               (b) ********** data and documentation
               (c) ********** data and documentation
               (d) ********** data and documentation


                                     ExA-1


<PAGE>   15

        NOTE:  Mask data is defined to be an electronic GDS-II file and will be
               delivered either on 8mm tape or through network TCP/IP FTP.

        *********************** DOCUMENTATION:

        As part of the ************************ portion of the project, the
        following documentation will be provided:

        (A)    Summary. *****************************************************.

        (B)    ***********************************************************.

        (C)    *********************************************
               ***************************************************************
               ******************************************* will be provided to
               SONY by **********.

        (D)    **********************************************************
               **************************************************************
               *****************************. One or more status report(s) will
               be generated for *********** ************************ data
               containing the following information and these reports will be
               provided to SONY by **********:

               (i)    ****************************************
                      ********************

               (ii)   **************************************
                      **************************************

               (iii)  *******************************************
                      ******

        (E)    *************************Report.
               *****************************************************************
               *********** **************************will be generated for the
               ************* ********This report will contain the following
               information and will be provided to SONY by **********:

               (i)    **********************************************
                      ***************************************

                                     ExA-2



<PAGE>   16


                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

               (ii)   *********************************

               (iii)  ********************************************************
                      *********************

(2)     **********************************************************************


        (A)    ***************************************************************


        (B)    ***************************************************************


        (C)    ***************************************************************


                                     ExA-3

<PAGE>   17

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

                (i)   ***

               (ii)   ********** of yield with ********** data;

               (iii)  ********** assessment; and

               (iv)   ********** results  necessary to **********.

        (D)    Quantification of **********

(3)     SOFTWARE DELIVERABLE. PDF will grant SONY a ********** **********
        software license for use solely in the SONY Subsidiary.  PDF will, upon
        SONY's timely execution of PDF's applicable license agreement, deliver
        and install such software by **********.

TEAM STRUCTURE

        Sony will establish a Steering Committee (the "STEERING COMMITTEE")
which will consist of (a) **********, and (b) **********. ********** will make
all such personnel available for performance under the Agreement and this
Statement of Work. The Steering Committee will be limited to ********** in order
to allow decisions to be reached in a timely fashion. The Steering Committee is
responsible for giving the team its charter, deciding which yield improvement
actions to take and who in the Sony organization will be responsible for
carrying out the improvement. At the quarterly Steering Committee Review
Meetings, PDF will provide a summary of the monthly engineering meetings
********** to assist the Steering Committee in its charter.

        The day-to-day analyses will be conducted by a ********** of engineers
from SONY and PDF. A PDF Engagement Manager will manage the activities of
**********. The PDF Engagement Manager will be responsible for directing all
team members in their analyses as well as aggregating and synthesizing the
results of all the analyses conducted by the entire team. The PDF Engagement
Manager will be available for all communications at reasonable times with the
********** members and the Steering Committee. In addition, the PDF Engagement
Manager will be the principal point of contact for any questions that Sony
personnel not on the ********** or Steering Committee may have during the course
of the engagement.


                                     ExA-4

<PAGE>   18

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION

        In addition to the PDF Engagement Manager, PDF will make a total of **
engineers and managers available to this engagement. PDF may staff additional
engineers during critical points during the term of this Agreement.

TOOLS


     SONY will provide PDF with office space in *********** and other typical
business resources reasonably requested from time to time by PDF. In 
particular, SONY will provide PDF with secure office space large enough to 
accommodate up to ****** PDF personnel in addition to the SONY engineers 
assigned to work on the ********. SONY will provide PDF with office equipment 
reasonably requested by PDF from time to time including ******* international 
access telephones (including such analog lines as PDF shall request), an 
international access Facsimile machine and line, and a photocopier. SONY will 
provide PDF with 24-hour access to the team office so work can continue at 
night and on weekends.

     SONY will provide PDF with computing resources that PDF reasonably deems 
necessary to conduct data analysis and simulations. The details of such request 
will be sent in a separate document to the SONY project leader but in general, 
SONY will provide ****** engineering workstations connected to **************
the Internet. SONY will also provide such other accessories as PDF shall 
reasonably request including a removable data storage device, such as a tape 
drive, and a printer.

LOCATION

        The Project will be conducted by SONY's and PDF's personnel at SONY's
Subsidiary , and by PDF's personnel at PDF's facilities. In certain cases, PDF
may require SONY engineers to work at the PDF facility in San Jose, California.
PDF engineers may also work in SONY's Subsidiary when the engagement manager
believes this is necessary to achieve progress. If SONY shall provide PDF
employees with an English version of the employee rules and regulations in force
at the SONY facilities, then PDF employees shall comply with such rules and
regulations in all material respects in an equivalent manner as other SONY
employees generally. PDF shall take all reasonable steps necessary to ensure
that all employees resident at or visiting a SONY facility shall treat as
confidential in accordance with Section 6 all material information of a
proprietary nature observed by or disclosed to such employee, and shall comply
in all material respects with all export control obligations contained in
Section 8.

DURATION

The Project will proceed for a period of *********** following the acceptance of
the last Characterization Vehicle Deliverables unless earlier terminated
pursuant to the Agreement.


                                     ExA-5


<PAGE>   19

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                                   Appendix A


**********


                                     APP-1



<PAGE>   1
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.

                                                                    EXHIBIT 10.6



                             CONFIDENTIAL TREATMENT
                        PDF SOLUTIONS, INC. HAS REQUESTED
                        THAT THE MARKED PORTIONS OF THIS
                        DOCUMENT BE ACCORDED CONFIDENTIAL
                      TREATMENT PURSUANT TO RULE 406 UNDER
                     THE SECURITIES ACT OF 1933, AS AMENDED.



                                                           PROJECT: TOSHIBA -
                                                           *********************
                                                           *********************


                        TECHNOLOGY COOPERATION AGREEMENT


        This Technology Cooperation Agreement dated as of *****************
(this "AGREEMENT") is entered into by and between Toshiba Corporation, a
corporation organized under the laws of Japan ("TOSHIBA") having its principal
place of business at 1-1 Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, and
PDF Solutions, Inc., a corporation organized under the laws of California
("PDF") having its principal place of business at 333 West San Carlos Street,
Suite 1200, San Jose, California, U.S.A..

1.      YIELD IMPROVEMENT SERVICES.

        1.1 PROVISION OF SERVICES. During the term of this Agreement, PDF will
provide to Toshiba development work and services with respect to integrated
circuit yield management issues. The services and the Deliverables to be
delivered as a result thereof (the "PROJECT") are described in detail on a
statement of work (the "STATEMENT
 OF WORK") attached hereto as Exhibit A. The
Statement of Work shall be governed by the terms of this Agreement, and
specifies:

        (a)     Deliverables. The specific deliverables (the "DELIVERABLES") to
                be delivered under the Project and relevant milestones for
                delivering the Deliverables;

        (b)     Team Structure. The team members from PDF and Toshiba who are to
                work on the Project and the expected time contributions for each
                such member;

        (c)     Tools. The required data, tools, hardware, software, materials,
                access to personnel and facilities, and other materials required
                for



                                      -1-

<PAGE>   2

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                effectively completing the Project;

        (d)     Location. The geographic location where each component of the
                Project will be completed;

        (e)     Fees and Expenses. The amount and structure of PDF's Fees (as
                defined below) payable upon delivery of the Deliverables and
                Expenses (as defined below).

        1.2 TOSHIBA INTELLECTUAL PROPERTY. Toshiba will provide PDF on a timely
basis with such Intellectual Property (as defined in Section 3.1) and such other
data and materials as PDF shall reasonably require in order to perform the
Project and/or prepare the Deliverables as defined in the Statement of Work.

        1.3 DELIVERABLES. In performing the Project, PDF shall develop and/or
make for Toshiba the Deliverables in accordance with any schedules set forth in
the Statement of Work. The Deliverables shall meet in all material respects the
description of the Deliverable (the "DELIVERABLE DESCRIPTION") set forth in the
Statement of Work.

        1.4 ACCEPTANCE. Upon delivery of any Deliverable by PDF to Toshiba,
Toshiba shall examine the Deliverable to determine whether it reasonably
conforms to the Deliverable Description. If the Deliverable does not reasonably
conform to such Deliverable Description, Toshiba shall have fifteen (15) days
from the date of delivery thereof to reject such Deliverable and specify in
writing why it does not reasonably conform to such Deliverable Description. Upon
such rejection the parties shall work together to determine what needs to be
done to bring such Deliverable up to such Deliverable Description. If the
Deliverable does not meet the Deliverable Description, PDF shall exercise
reasonable efforts to correct promptly such nonconformity of the Deliverable
with the Deliverable Description and redeliver the Deliverable to Toshiba upon
completion of such correction within one month following the parties' agreement
referenced in the preceding sentence but only if there are no limitations
outside of PDF's control. If there are limitations outside PDF's control, PDF
and Toshiba will negotiate in good faith a time for delivery of the Deliverable.
If a rejection of the Deliverable is not received by PDF within fifteen (15)
days after any delivery or redelivery of a Deliverable under this Section 1.4,
the Deliverable shall be deemed accepted. "ACCEPTANCE" (including with
correlative meaning the term "ACCEPT") shall mean any acceptance under this
Section 1.4. Toshiba agrees to deliver a notice of Acceptance (the "NOTICE OF
ACCEPTANCE") upon its decision to Accept any Deliverable hereunder within such
fifteen (15) days following such delivery or redelivery.

2.      FEES AND EXPENSES.

        2.1 SERVICES FEES AND EXPENSES. Upon delivery of each of the respective
Deliverables provided by PDF hereunder, Toshiba shall pay to PDF the fees
specified to the extent and in the manner set forth in the Statement of Work
("FEES"), and shall reimburse PDF for its out-of-pocket expenses incurred in
carrying out its obligations under this Agreement including, but not limited to,
travel, hotel, meal, document



                                       -2-

<PAGE>   3

production, equipment and other expenses directly related to the services
performed hereunder further subject to the terms and conditions set forth in the
Statement of Work ("EXPENSES"). In no event shall the Expenses for which Toshiba
shall be liable hereunder exceed any limitation on Expenses specified in the
Statement of Work without written agreement from Toshiba. PDF shall use
reasonable and diligent efforts to deliver the Deliverables hereunder within the
estimated expenses and time schedule specified in the Statement of Work.

        2.2 PAYMENTS. All payments by Toshiba hereunder shall be made by wire
transfer to the bank account to be designated by PDF. If required by applicable
law, Toshiba shall withhold and pay any taxes and assessments levied or imposed
by any Japanese tax or other governmental body resulting from the services or
the Deliverables to be provided by PDF to Toshiba and the payment to be made by
Toshiba to PDF hereunder, including without limitation all personal property
taxes on any of the foregoing and any taxes or amounts in lieu of any of the
foregoing paid or payable by PDF, other than taxes based on PDF's net income.
Toshiba shall promptly and timely effect the payment of any such taxes so
withheld to the appropriate tax or other governmental authorities. Upon payment
of such taxes so withheld, Toshiba shall, as promptly as possible, send to PDF
an official tax receipt, tax payment certificate or other evidence issued by the
applicable tax or governmental authorities. The parties acknowledge that PDF
shall be obligated to pay any such tax at the reduced withholding income tax
rate rather than the ordinary rate by filing "Application Form for Income Tax
Convention between the United States and Japan" with the Japanese tax
authorities. If applicable, Toshiba shall send PDF the application form
immediately after the execution of this Agreement for PDF's signature and PDF
shall promptly sign it and return it to Toshiba so that Toshiba may file it with
the applicable Japanese tax authorities on behalf of PDF.

3.      OWNERSHIP.

        3.1 SOLELY DEVELOPED INTELLECTUAL PROPERTY. Each party shall solely own
any Intellectual Property solely developed by such party or the employee(s) of
such party, whether before, during or after the term of this Agreement. For the
purposes of this Agreement, "INTELLECTUAL PROPERTY" shall mean the Confidential
Information (as defined in Section 6), patent and patent applications,
copyrights, trade secrets, know how, rights of authorship, and any other
intellectual property rights recognized by the law of any country or
jurisdiction of the world.

        3.2 JOINTLY DEVELOPED INTELLECTUAL PROPERTY. Any Intellectual Property
jointly developed by the employees of both parties in connection with or as a
result of the services provided by PDF hereunder shall be jointly-owned by PDF
and Toshiba; provided, however, that any such Intellectual Property so jointly
developed by PDF and Toshiba which consists of, effects or results in any
improvement, enhancement or derivative work of PDF's software and methodologies
including problem solving processes and practices shall be solely owned by PDF
but subject to the license provided in Section 3.4; provided, further, that any
such Intellectual Property so jointly developed by PDF and Toshiba in the manner
embodied in Toshiba's product designs, products,



                                      -3-

<PAGE>   4

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


fabrication facilities or fabrication processes shall be owned solely by
Toshiba. Each party shall have the right to use, exercise, disclose and license
to third parties such jointly developed Intellectual Property that is not solely
owned by the other party without accounting to or the consent of the other
party.

        3.3 TOSHIBA LICENSE. Toshiba hereby grants to PDF a ****, *************
license to use and practice the Intellectual Property provided by Toshiba
hereunder, in order for PDF to perform the Project and develop or prepare the
Deliverables solely during the term of this Agreement.

        3.4 PDF LICENSE. PDF shall grant to Toshiba and its Subsidiaries
******** ****************************************** license to use, have used
for Toshiba and/or its Subsidiaries ("HAVE-USED RIGHTS"), copy for internal use,
modify and/or enhance the Deliverables as set forth in the Statement of Work and
any PDF-owned methodologies or practices that Toshiba shall observe in the
ordinary course of the provision of services by PDF under this Agreement
(collectively, the "LICENSED PROPERTY") which license, sublicense, have-used
rights or other rights shall only be for any purpose in connection with sales,
development, manufacture, fabrication, and/or use of products of Toshiba and/or
its Subsidiaries, but only to the extent PDF has the right to grant such
license; provided that such have-used rights with respect to any Specified
Deliverable (as defined in Paragraph (a) of the Statement of Work) shall only be
permitted (a) if the have-used rights are solely for the purpose of establishing
Toshiba's Products on the applicable process at the fabrication facility of the
partner of Toshiba which is granted such have-used rights and for no other
purpose or use, and (b) once the Product on the applicable process is
established at such partner's fabrication facility, such partner must return or
destroy all copies of the Deliverables and have an appropriate officer of such
partner certify that all copies of such Specified Deliverable have been returned
or destroyed; provided, further, that such license shall not extend to any
software or tools used by PDF in connection with or during the course of such
services or to any software manuals or documents relating to such software or
tools; provided, further, that Toshiba shall be bound by and shall cause its
Subsidiaries, sublicensees or have-used or other partners to be bound by the
confidentiality obligations contained in Section 6; provided, further, that
Toshiba shall not disclose, license, sublicense or make available on a have-used
basis any such Licensed Property to any third party other than as a part of the
third party's sale, development, manufacturing, fabrication and/or use of
semiconductor products in connection with Toshiba technology or Toshiba
products. Toshiba understands that PDF will not disclose to Toshiba certain
proprietary methods or trade secrets in connection with the services to be
rendered by PDF hereunder. To this end, PDF retains the right to take industry
standard measures to keep such proprietary methods or trade secrets from
Toshiba.

        3.5 NO OTHER OWNERSHIP. Except as otherwise set forth in this Section 3,
neither this Agreement nor performance of the Project shall give either PDF or
Toshiba any ownership, interest in or rights to the Intellectual Property owned
or provided by the other party.



                                      -4-

<PAGE>   5

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        3.6 DEFINITION OF SUBSIDIARY. For the purpose of this Agreement and the
Statement of Work, the term "SUBSIDIARY" of any party shall mean any corporation
or other entity more than fifty percent (50%) of the Voting Stock of which is
beneficially owned or controlled, directly or indirectly, by such party;
provided that such corporation, company or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists. "VOTING STOCK" of
any entity shall mean any stock or other equity interest entitled to vote for
the election of directors or any equivalent governing body of such entity.
Notwithstanding the above, ******************** ****************************
shall be deemed a Subsidiary of Toshiba under this Agreement for so long as
Toshiba continues to hold **************** of the voting stock of
*******************.

4.      TERM AND TERMINATION.

        4.1 COMMENCEMENT. This Agreement shall commence as of the date first set
forth above and shall continue in force until completion of the Project, unless
sooner terminated as provided in this Section 4.

        4.2 TERMINATION.

            (a) If either party defaults in the performance of any material
obligation hereunder the non-defaulting party may give the defaulting party
written notice of such default within twenty (20) days following the
non-defaulting party's discovery of such default. If the defaulting party fails
to cure such default within forty-five (45) days (or such other time period as
the parties shall mutually agree) after the defaulting party's receipt of such
notice of default, then the non-defaulting party, at its option, may, terminate
this Agreement by giving the defaulting party written notice of termination of
this Agreement within ten days following the end of such 45 day period. If such
notice of default or notice of termination is not given within such period, then
the default shall no longer constitute cause for termination of this Agreement.

            (b) Either party may terminate this Agreement effective upon written
notice to the other party in the event the other party becomes the subject of a
voluntary or involuntary petition in bankruptcy or any proceeding relating to
insolvency, or assignment for the benefit creditors, if that petition or
proceeding is not dismissed within sixty (60) days after filing. Such written
notice of termination must be delivered no later than ten (10) days following
the expiration of such 60-day period. If such notice of termination is not given
within such 10-day period, then the default shall no longer constitute cause for
termination of this Agreement.

            (c) Either party may terminate this Agreement effective upon written
notice to the other party in the event that the other party is merged with or
into, or all or substantially all or the other party's assets are sold to, a
third party corporation or other entity, unless such acquiring corporation or
entity expressly agrees to assume the other party's obligations under this
Agreement. Such written notice of termination must be delivered no later than
ten (10) days following the consummation of such transaction. If



                                      -5-

<PAGE>   6

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


such notice of termination is not given within such 10-day period, then the
default shall no longer constitute cause for termination of this Agreement.

            (d) Toshiba shall be entitled to terminate this Agreement upon
forty-five (45) days prior written notice if (i) Toshiba reasonably rejects the
Deliverables due to their material nonconformity with the Deliverable
Description set forth in the Statement of Work (and clearly and properly
specifies the reason for such nonconformity), the Acceptance procedure set forth
in Section 1.4 shall have been exhausted without an Acceptance, and PDF does not
reasonably cure such material nonconformity within forty-five (45) days
following the final written rejection of such Deliverable, or (ii) Toshiba
reasonably and in good faith judges that the expected progress for the services
to be performed by PDF necessary to deliver the Deliverables hereunder cannot be
achieved within the mutually agreed time frame, and within ten (10) days
following such notice PDF cannot reasonably establish that such progress can be
achieved. This Agreement may then be terminated by a written notice of
termination delivered within ten (10) days following the applicable foregoing
forty-five (45) day period. If such written notice of termination is not given
within such 10-day period, then the default under this Section 4.2(d) shall no
longer constitute cause for termination of this Agreement.

        4.3 TERMINATION OF RIGHTS. Upon expiration or termination of this
Agreement, all rights and licenses granted and all obligations undertaken
hereunder shall forthwith terminate except the following:

            (a) Any and all licenses granted by PDF to Toshiba and its
Subsidiaries under this Agreement as to previously delivered, Accepted and paid
for Deliverables shall survive the expiration or termination of this Agreement
unless this Agreement is terminated by PDF in accordance with the provisions of
Section 4.2(a), (b) or (c) in which case none of such licenses shall survive and
all copies of such Deliverables shall be returned to PDF.

            (b) If Toshiba terminates this Agreement for the reason as stated in
Section 4.2, Toshiba shall pay to PDF, within thirty (30) days after the date of
termination, (i) the actual amount of unreimbursed Expenses incurred by PDF
through the date of termination by Toshiba, (ii) the amount of the Deliverables
Fees with respect to Deliverables delivered or otherwise accrued, and unpaid
through the date of termination, (iii) the Incentive Fee if the Incentive Fee
remains unpaid; provided that payment of such Fees and Expenses shall be subject
to the provisions of Section 2.

            (c) If Toshiba terminates this Agreement for the reason specified in
Section 4.2, Toshiba shall pay to PDF:

                  (i) the amount of any unpaid Product Fees accrued prior to the
date of termination; and

                  (ii) the amount of any future Product Fees in accordance with
Paragraph (e)(iii) of the Statement of Work with respect to any Product that
incorporates



                                      -6-

<PAGE>   7

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


any Deliverable delivered by PDF to Toshiba which Product Fees shall be payable
through the term of payment specified in such Paragraph (e)(iii); provided that
Product Fees to be accrued and paid following a date of termination shall
terminate only if the basis for termination of this Agreement shall be (A) an
involuntary bankruptcy under Section 4.2(b) or (B) the material default under
PDF's confidentiality obligations under Section 6 of this Agreement;

provided that payment of such Product Fees under this Section 4.3(c) shall be
subject to the provisions of Section 2.

                  (d) The provisions of Sections 2 (including by reference
Toshiba's obligations to pay Fees and Expenses set forth in the Statement of
Work but subject to Section 4.3(b) and (c)), 3.1, 3.2, 3.4 (with respect to
Deliverables delivered by PDF to Toshiba and Accepted and paid for by Toshiba),
4, 6, 7, 8.4, 8.7 and 8.8 shall survive any expiration or termination of this
Agreement.

5.      INDEPENDENT CONTRACTORS. The relationship of PDF and Toshiba established
by this Agreement is that of independent contractors, and nothing contained in
this Agreement shall be construed to (i) give either party the power to direct
or control the day-to-day activities of the other, (ii) constitute the parties
as agents, partners, joint venturers, co-owners or otherwise as participants in
a joint or common undertaking, or (iii) allow either party to create or assume
any obligation on behalf of the other for any purpose whatsoever.

6.      CONFIDENTIALITY. Except as otherwise provided herein, each party agrees,
at all times during the term of this Agreement and for 5 years after receipt of
Confidential Information, to hold in strictest confidence (and to cause its
Subsidiaries to hold in strictest confidence), and not to use, except for the
purposes contemplated herein, or to disclose to any person, firm or corporation
without written authorization of the other party, any Confidential Information
of the disclosing party. As used in this Agreement, "CONFIDENTIAL INFORMATION"
means any proprietary information, technical data, trade secrets or know-how,
including, but not limited to, research, software, developments, inventions,
processes, formulas, technology, designs, drawings, engineering, hardware
configuration information, yield data or other information disclosed by one
party to the other, which is marked as "Confidential," and/or orally or in other
tangible form identified as confidential at the time of disclosure and confirmed
as Confidential Information in writing within thirty (30) days of its initial
disclosure, provided that any methodologies, practices or procedures used by PDF
and observed by Toshiba shall constitute "Confidential Information" within the
meaning of this Agreement without any such notification. Confidential
Information does not include any of the foregoing items which have become
publicly known and made generally available through no wrongful act of the
receiving party, or which is already known by the receiving party as evidenced
by the receiving party's files immediately prior to such disclosure, or which
the receiving party proves was independently developed, prior to the receiving
party's receipt of such Confidential Information, by employees or other
representatives of such receiving party who have not had access to such
information or the ideas or theories underlying such Confidential Information.
Except as otherwise agreed by both parties, PDF shall return to



                                      -7-

<PAGE>   8

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


Toshiba all Confidential Information of Toshiba owned by Toshiba and not
licensed to PDF or jointly owned by PDF and Toshiba and copies thereof, within
thirty (30) days after completion of the Project or after expiration or
termination of this Agreement. Except as otherwise agreed by both parties,
Toshiba shall return to PDF all Confidential Information of PDF owned by PDF and
not licensed to Toshiba or jointly owned by PDF and Toshiba and copies thereof,
within thirty (30) days after completion of the Project or after expiration or
termination of this Agreement.

7.      WARRANTY. PDF warrants to Toshiba that PDF's Intellectual Property
utilized by PDF in performing the Project does not infringe any patent,
copyright, trade secret, and any other proprietary rights of any third party.
EXCEPT FOR THE FOREGOING, NOTHING UNDER THIS AGREEMENT, OR THE STATEMENT OF WORK
OR PROJECT SHALL BE DEEMED TO BE A WARRANTY OR REPRESENTATION AS TO THE OUTCOME
OF ANY PROJECT OR THE EFFICACY OF ANY RECOMMENDATIONS MADE BY PDF. NOTHING UNDER
THIS AGREEMENT OR THE STATEMENT OF WORK SHALL BE DEEMED TO CREATE ANY LIABILITY
ON THE PART OF PDF WITH RESPECT TO THE OUTCOME OF A PROJECT OR ANY ACTIONS TAKEN
BY TOSHIBA AS A CONSEQUENCE OF PDF'S RECOMMENDATIONS.

8.      MISCELLANEOUS.

        8.1 AMENDMENTS AND WAIVERS. Any term of this Agreement or any Statement
of Work may be amended or waived only with the written consent by the
representatives of the parties.

        8.2 SOLE AGREEMENT. This Agreement and the Statement of Work constitute
the sole agreement of the parties and supersede all oral negotiations and prior
writings with respect to the subject matter hereof.

        8.3 NOTICES. Any notice required or permitted by this Agreement shall be
in writing and shall be deemed sufficient upon receipt, when delivered
personally or by an internationally-recognized delivery service (such as Federal
Express or DHL), or after being deposited in the U.S. mail as certified or
registered mail with postage prepaid, if such notice is addressed to the party
to be notified at such party's address as set forth above or as subsequently
modified by written notice.

        8.4 CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.

        8.5 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of this
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of this Agreement shall be enforceable in



                                      -8-

<PAGE>   9

accordance with its other terms.

        8.6 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.

        8.7 ARBITRATION. The parties shall attempt in good faith to resolve any
dispute arising under this Agreement. If the parties are unable to resolve
dispute within a reasonable period then the dispute shall be finally settled by
binding arbitration (a) if brought by Toshiba, in San Jose, California, in
accordance with the Commercial Rules of the American Arbitration Association
and, (b) if brought by PDF, in Tokyo, Japan in accordance with the rules of the
International Chamber of Commerce. In either case such arbitration shall be
conducted by one arbitrator appointed in accordance with said rules. The
arbitrator shall apply California law, without reference to rules of conflicts
of law or rules of statutory arbitration, to the resolution of any dispute.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Notwithstanding the foregoing, the parties may
apply to any court of competent jurisdiction for preliminary or interim
equitable relief, or to compel arbitration in accordance with this paragraph,
without breach of this arbitration provision.

        8.8 EXPORT CONTROL. Neither party shall, directly or indirectly export
or re-export any technical data or information or data received from the other
party hereunder or the direct products thereof to any destination prohibited or
restricted by export control regulations of Japan and the United States,
including U.S. Export Administration Regulations, without proper authorization
from the appropriate governmental authorities. In addition, the parties agree
that no technology furnished to the other will be used for any purpose to
develop and/or manufacture nuclear, chemical or biological weapons and/or
missiles.

        8.9 NON-SOLICITATION. Toshiba shall not solicit or influence or attempt
to influence any person employed by PDF to terminate or otherwise cease his or
her employment with PDF or become an employee of Toshiba or any competitor of
PDF. A company's status as a competitor of PDF shall be determined by PDF in its
sole discretion.




                                      -9-

<PAGE>   10


        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.


PDF SOLUTIONS, INC.                            TOSHIBA CORPORATION


By: /s/ P. Steven Melman                       By: /s/ Koichi Suzuki
   -------------------------------                 ----------------------------
        P. Steven Melman                               Koichi Suzuki, VP

Title: Chief Financial Officer                 Title:  Group Executive
       ---------------------------                     ------------------------
                                                       Semiconductor Group






                                      -10-

<PAGE>   11

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                                STATEMENT OF WORK


                               *******************
                                       ***
                ************************************************

        This Statement of Work is made between PDF Solutions, Inc. ("PDF") and
Toshiba Corporation ("TOSHIBA") pursuant to and attached as an exhibit to that
certain Technology Cooperation Agreement dated as of **************** (the
"AGREEMENT") between PDF and Toshiba. All terms and conditions contained in this
Statement of Work are subject to the terms and conditions set forth in the
Agreement. The date of commencement of services under this Agreement was
**************** (the "ENGAGEMENT COMMENCEMENT DATE").

        (a)     DELIVERABLES

        PDF will provide Toshiba with development work and other consulting
services to assist Toshiba in (a) **************************** of Toshiba's
************* processes referred to as **************** (and derivatives
thereof) for use with the specific ************* ("***********") or any other
device that Toshiba selects to use to verify the **************** and
**************** Processes (a "****************"), (b) effecting the transfer of
the ************** and ************ **************** from Toshiba's *****
facility to its **************** facility, and (c) improving the *************
***** of ****** manufactured utilizing the **************** (the
"****************"), ****** manufactured utilizing the **************** (the
"****************"), and any other devices manufactured utilizing the
**************** or the **************** such as **************** manufactured
utilizing the **************** (the "****************"), ****************
manufactured utilizing the **************** (the "****************"),
**************** manufactured utilizing the **************** (the
"****************"), ****************manufactured utilizing the ****************
(the "****************"). The ****************, the ****************, the
****************, the ****************, the ****************, the
****************, and each other Toshiba product manufactured utilizing the
**************** and the **************** are each individually referred to as a
"PRODUCT" and are collectively referred to as the "PRODUCTS". The parties
acknowledge and agree that a device (such as ****************) manufactured on
**************** is a different product than such device (****************,
respectively) manufactured on the ****************. During the engagement
Toshiba engineers will be invited to be part of the team and work at the
direction of the PDF engineers in conducting the data gathering and analyses
necessary to carry out PDF's holistic yield improvement methodology.

        In order to ensure that the work of the team will result in actions and
subsequent measurable improvements in *******************, the team will report
its recommendations directly to a management steering committee consisting of
the set of Toshiba managers who are necessary to make all decisions regarding
the Product (the "TOSHIBA MANAGEMENT GROUP").



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                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        In providing the Services to Toshiba, PDF, working with Toshiba
engineers, will recommend specific actions to be taken to improve *************
***** of each Product. Where determined by PDF to be necessary, PDF will present
a business case stating the expected size of the potential yield improvements,
the likely cost of making the improvements and the relative likelihood of
success.

        The objective of the Project and the result of the activities above will
be to deliver the following Deliverables: 

                                  DELIVERABLES
                                  DELIVERABLES

<TABLE>
<CAPTION>
                                                                                                   Anticipated
   No.      Description                                                       Payment             Delivery Date
   ---      -----------                                                       -------             -------------
<S>        <C>                                                              <C>                 <C> 
    1.      Detailed Project Plan and Schedule.                              $********           ****************
                                                                                              
    2.      *************************************************                $********           ****************
            ********.                                                                         
                                                                                              
    3.      *************************************************                $********           ****************
            *************************************************                                                 
                                                                                              
    4.      ***************************************.                         $********           ****************
                                                                                              
    5.      *************************************************               $********           ****************
            *****************************                                                     
                                                                                              
    6.      ****************************************.                        $********           ****************
                                                                                              
    7.      ******************************************************           $********           ****************
            ********************************.                                                 
                                                                                              
    8.      ********************************************************         $********           ****************
            *********************************** 
</TABLE>




                                     SOW-2

<PAGE>   13
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.



<TABLE>
<S>                                                                              <C>               <C>    
            ************************************************************ in      
            **********************************************************           
            ********************                                                 
                                                                                                  
    9.      ********************************************************             $********           ****************
            ********************************************************                              
            ****************************************************                                  
            ************************************************                                  
            ********************                                                              
</TABLE>


        For the purpose of this Agreement, "SPECIFIED DELIVERABLES" (for
example, as used in Section 3.4 of the Agreement) shall mean Deliverable Numbers
2, 3, 4, 5, 6 and 7.

        The parties acknowledge that the Analysis Software comprising a part of
the Deliverables requires the use of pdFab, pdEx and/or other PDF software
products that PDF separately sells or licenses (the "UNDERLYING SOFTWARE"). This
Analysis Software consists solely of the specifically and custom designed
Analysis Software applicable to Toshiba, and specifically excludes any of the
Underlying Software. Any licensee , sublicensee or other user of the Analysis
Software must have appropriate licenses to use such Underlying Software. No
license, sublicense or other right to use or other right in any Underlying
Software is granted under this Agreement and Statement of Work.

               PDF will present the findings to the Toshiba Management Group
during pre-arranged review meetings. The purpose of these review meetings will
be for the Toshiba Management Group to review recommendations, seek
clarifications where necessary and decide which yield improvement actions to
take.

        Within ******** following the delivery of any Deliverable listed above,
Toshiba will deliver to PDF such test data and other data and materials as shall
be reasonably necessary to enable PDF to prepare and deliver the next
Deliverable (the "TOSHIBA DELIVERABLES").

        (b)     TEAM STRUCTURE

        The team is structured to divide the decision-making, project leadership
and analysis management between three bodies in the form of "TEAM STRUCTURE" in
the form attached to this Statement of Work as Exhibit C.



                                     SOW-3

<PAGE>   14

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        Toshiba will establish a Steering Committee (the "STEERING COMMITTEE")
which will consist of (a) *************** and any other Toshiba manager who is
necessary in order for yield improvement decisions to be made, and (b)
***************** or another senior executive of PDF. Toshiba and PDF will make
all such personnel available for performance under the Agreement and this
Statement of Work. The Steering Committee will be limited to four
representatives of Toshiba and one representative of PDF in order to allow
decisions to be reached in a timely fashion but will have sufficient authority
to make the relevant decisions. The Steering Committee is responsible for giving
the team its charter, deciding which yield improvement actions to take and who
in the Toshiba organization will be responsible for carrying out the
improvement.

        Project leadership responsibility will be shared by ******** (the
"TOSHIBA PROJECT LEADER"), on behalf of Toshiba, and ************* (the "PDF
PROJECT LEADER"), on behalf of PDF. The Toshiba Project Leader and the PDF
Project Manager will consult with ************ of PDF as they together shall
deem necessary and appropriate. Their primary responsibility will be to ensure
that the team is making good progress toward delivery of the work chartered by
the Steering Committee. In order to maximize the likelihood that the team is
making good progress, the Toshiba Project Leader and the PDF Project Leader will
monitor the team's work on a weekly basis and help reduce any organizational
obstacles which may impede the team's progress.

        The day-to-day analyses will be conducted by a ********************Team
******** of engineers from Toshiba and PDF. A PDF Engagement Manager will manage
the activities of the ****. The PDF Engagement Manager will be responsible for
directing all team members in their analyses as well as aggregating and
synthesizing the results of all the analyses conducted by the entire team. The
PDF Engagement Manager will be available for all communications at reasonable
times with the project leaders. In addition, the PDF Engagement Manager will be
the principal point of contact for any questions that Toshiba personnel not on
the **** may have during the course of the engagement.

        In addition to the PDF Engagement Manager, PDF will make a total of
************** available to this engagement. PDF may staff additional engineers
during critical points during the term of this Agreement.

        Also, ************** Toshiba engineers will be asked to participate
actively with the ****. Toshiba team members should be assigned to one of the
Subgroups and be skilled at one of the principal analytical streams of the PDF
yield improvement methodology. They will be placed on the Team and Subgroups
after approval by PDF for the purpose of gathering data and conducting analyses
to improve yield on the Product. The Toshiba team members will work at the
direction of a PDF engineer responsible for one of the Subgroups and principal
analytical streams of the engagement.

        (c)     TOOLS

        Toshiba will provide PDF with office space and other typical business
resources reasonably requested from time to time by PDF. In particular, Toshiba
will provide PDF with secure office space large enough to accommodate up to **
PDF personnel in addition to Toshiba engineers assigned to work on the ****.
Toshiba will provide PDF with office equipment reasonably requested by PDF from
time to time including **** international access Facsimile machine and line and
a photo copier. Toshiba will provide PDF with 24-hour access to the team office
so work can continue at night and on weekends.



                                     SOW-4

<PAGE>   15

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


*************************************************************************

        Toshiba will provide PDF with computing resources that PDF reasonably
deems necessary to *************************************. The details of such
request will be sent in a separate document to the Toshiba Project Leader but in
general, Toshiba will provide **** engineering workstations connected to both
the Toshiba network and the Internet. Toshiba will also provide such other
accessories as PDF shall reasonably request including a removable data storage
device, such as a tape drive, and a printer.

        (d)     LOCATION

        The Project will be conducted by Toshiba's and PDF's personnel at
Toshiba's ****** ******** in *************** and Toshiba's *******************
in ************, and by PDF's personnel at PDF's facilities. In certain cases,
PDF may require Toshiba engineers to work at the PDF facility in San Jose,
California. PDF engineers may also work in ******** and ******** factory when
the engagement manager believes this is necessary to achieve progress. If
Toshiba shall provide PDF employees with an English version of the employee
rules and regulations in force at the Toshiba facilities, then PDF employees
shall comply with such rules and regulations in all material respects in an
equivalent manner as other Toshiba employees generally. Any failure to comply
with such rules and regulations shall not constitute a default of a material
obligation constituting a basis for termination of this Agreement unless (A)
Toshiba has repeatedly given notices of such failure to PDF and PDF has
repeatedly failed to remedy such noncompliance as specified in such notices, (B)
Toshiba shall notify PDF in writing that failure to cure such repeated non
compliance within ******** shall constitute a basis for termination of the
Agreement and PDF shall fail to remedy such non compliance, and (C) Toshiba
gives final notice of termination within ************** following such ********
period. PDF shall take all reasonable steps necessary to ensure that all
employees resident at or visiting a Toshiba facility shall treat as confidential
in accordance with Section 6 all material information of a proprietary nature
observed by or disclosed to such employee, and shall comply in all material
respects with the all export control obligations contained in Section 8.8.

        (e)     FEES AND EXPENSES.

        Toshiba will pay PDF Fees consisting of three components: (1) the
Deliverables Fees, (2) the Incentive Fee and (3) the Product Fees, each as
defined below:

                  (i) DELIVERABLES FEES. Toshiba will pay PDF a fixed fee upon
delivery of each of the Deliverables equal to the "Payment" with respect to each
such Deliverable specified under (a) above (the "DELIVERABLES FEES"). Toshiba
acknowledges that PDF delivered Deliverable No. 1 to Toshiba on *************
and hereby Accepts Deliverable No. 1. Upon Acceptance by Toshiba of each other
Deliverable, PDF will submit to Toshiba an invoice specifying the



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                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


Deliverable delivered and the Deliverable Fee due. Toshiba shall pay the
Deliverable Fees within ***** days following the date of the invoice. Payment
shall be made in accordance with the provisions of Section 2.2 of the Agreement.
If Toshiba shall fail to deliver a Toshiba Deliverable with respect to a PDF
Deliverable within the time period specified in the last paragraph of Paragraph
(a) of this Statement of Work and as a result, the delivery of the Deliverable
by PDF is delayed by more than six weeks after the "Anticipated Delivery Date"
referenced in the table in Paragraph (a) of this Statement of Work above, then
the parties hereby agree that such Deliverable shall be deemed to have been
delivered by PDF upon PDF's delivery of such Deliverable to the extent developed
through such date, Toshiba shall be obligated to deliver the respective
Deliverable Fee, and upon payment of such Deliverable Fee and delivery of the
applicable Toshiba Deliverable, PDF shall complete delivery of the Deliverable;
provided that if Toshiba shall wish to modify or alter the Toshiba Deliverable,
then the parties shall work together in good faith to mutually agree upon a
substitute Toshiba Deliverable in which case, if appropriate, the Deliverable
specifications, the Deliverable Fees, time for delivery of Deliverables and due
date for completion of Deliverables necessary to satisfy the requirements to
receive the Incentive Fee, and the Product Fees applicable to such altered
Deliverables shall be appropriately adjusted as well.

                  (ii) INCENTIVE FEE. PDF shall deliver to Toshiba an analysis
report and shall work with Toshiba with the objective of enabling Toshiba to
achieve an average yield of ***** shippable die per wafer (based on a die size
of ***** square millimeters or smaller), over all lots (excluding lots deemed
adversely affected by material operational errors such as equipment
malfunctions, misprocessing (such as operating the recipe not in accordance with
the specifications) and other similar reasons) of the ************** meeting the
Functional Tests and Specifications (as defined below) for which production is
completed during any two-week period of Mass Production commencing on or prior
to ************* (the last date that two weeks of Mass Production can be
completed to achieve the Incentive Fee is referred to as the "INCENTIVE FEE
DATE"). Such average number of shippable die per wafer referenced in the
preceding sentence, as adjusted pursuant to the last sentence of this Paragraph
(e)(ii), shall be referred to as the (the "INCENTIVE TARGET YIELD"). Upon
Toshiba achieving the Incentive Target Yield on or prior to the Incentive Fee
Date as described above, Toshiba shall be obligated to pay PDF an incentive fee
equal to ******** (the "INCENTIVE FEE"); provided, however, that the Incentive
Target Yield shall not be considered achieved and Toshiba shall have no
obligation to pay the Incentive Fee unless Toshiba shall have achieved (in the
manner provided above) the Incentive Target Yield on or prior to the Incentive
Fee Date. In the event the Functional Tests and Specifications for the
*************** change then the Incentive Target Yield will be appropriately
adjusted to account for the change in specifications.

        Upon commencement of Mass Production of the **************** Toshiba
will provide PDF with regular, ongoing data as to the yield on the wafers for
such Product to enable PDF to assess the average yield on the wafers for such
Product for any two-week period commencing on or prior to ***************** and
will provide PDF with such average yield every two-weeks. Upon achievement of
the Incentive Target Yield, Toshiba will notify PDF and PDF will submit to
Toshiba an invoice for the Incentive Fee. Toshiba shall pay the Incentive Fee
within thirty (30) days following the date of the invoice. Payment shall be made
in accordance with the provisions of Section 2.2 of the Agreement.



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                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        PDF's failure to deliver the materials necessary to enable Toshiba to
achieve the Incentive Target Yield referenced above on or prior to the Incentive
Fee Date shall not constitute a basis for termination of the Agreement under
Section 4 of the Agreement.

                  (iii) PRODUCT FEES. Toshiba will pay PDF a separate Quarterly
fee with respect to each separate Product (as defined in the first paragraph in
Paragraph (a) of this Statement of Work above) manufactured ** **** ******* ***
**** ***** ************ ******** ** ***** **** ******* is manufactured (the
"PRODUCT FEES"). If Toshiba determines to ******** * ******* ** *******
*********** ******** ******** ***** ** ******* ** ****, upon Toshiba's request
PDF shall assist in assessing such facility's yield ramp methodologies and
process transfer data if such facility is to receive ***** of the scheduled
production of such Product. If PDF's services in designing new procedures
(including without limitation development of test structures, TEGs, analysis
models, or other similar services) are necessary to help achieve the targeted
yield ** **** ***** *********** ******** ********* ******** shall not be covered
by this Agreement but shall be provided pursuant to a separate agreement to be
agreed upon between PDF and either Toshiba or the owner of such other facility.
The Product Fees shall be calculated separately *** **** *********** ******** **
***** **** Product is produced, provided that all *********** ********** with
respect to which PDF provides services or advice under an agreement with PDF
(including this Agreement) shall ************ ** ********** *** ******** ****
******** ********** for purposes of such calculation so long as PDF agrees to
include such ******** as a part of such ****************. No Product Fees shall
be payable with respect to any ******** ***** ** ** ************ ***** *****
***** ******** ******** *** **** **** ***** ** *** ***** ****** ** ***** ** ****
Product produced. In making such calculations and paying such amounts, the
foregoing terms (and certain other terms) are defined as follows:

                  "AVERAGE UNIT SALES PRICE" for any Product during any Quarter
                  shall mean the Net Sales of such Product during such Quarter
                  divided by the total number of units of such Product sold
                  during such Quarter which comprise such Net Sales.

                  "BASE NUMBER OF SHIPPABLE DIE PER WAFER" for any Product
                  during any Quarter shall mean a number of die per wafer to be
                  determined by agreement between PDF and Toshiba. With respect
                  to the **************, Base Number of Shippable Die Per Wafer
                  shall initially be **** shippable die per wafer (based on a
                  die size of ***** square millimeters or smaller), subject to
                  adjustment pursuant to a ramp schedule to be mutually agreed
                  upon in writing between Toshiba and PDF before *************.
                  Such ramp schedule shall adjust the Base Number of Shippable
                  Die per Wafer no more frequently than quarterly. For each
                  other Product, within 30 days following the first tape out of
                  such Product, PDF and Toshiba shall meet and agree upon what
                  shall constitute such Base Number of Shippable Die per Wafer
                  for such Product. The adjustments to the Base Number of
                  Shippable Die per Wafer established in the ramp schedule for
                  the ******** Product and with respect to any other Product
                  shall be mutually agreed upon and shall be based upon analysis
                  of the following factors: (a) the defect limited yield used
                  from Toshiba's targets; (b) an estimation of the parametric
                  yield based on static timing analysis and other design
                  factors; (c) an estimation of the typical



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<PAGE>   18
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                  systematic yield based on Toshiba and industry typical yield
                  improvement rates for systematic yield; and (d) the
                  profitability of the Product. The Base Number of Shippable Die
                  Per Wafer for any Product shall be the same for all
                  fabrication facilities.

                  "FIRST QUALIFYING MONTH" for any Product shall mean the
                  calendar month beginning on the later of (a) the first day of
                  the calendar month immediately following the calendar month in
                  which Mass Production units of such Product are first sold to
                  Customers (unless such first sale occurs on the first day of a
                  calendar month in which case the First Qualifying Month shall
                  commence on the date of such first sale) or (b)
                  **************.

                  "FUNCTIONAL TESTS AND PERFORMANCE SPECIFICATIONS" for any
                  Product shall mean the functional tests and performance
                  specifications at wafer probe test and at die sort test, as
                  the case may be, as are specified for qualification by the
                  client of Toshiba with respect to such Product, or such other
                  less stringent functional tests and performance specifications
                  that such client shall accept, or such other functional tests
                  and performance specifications as are otherwise mutually
                  agreed upon by Toshiba and PDF.

                  "NET SALES" for any Product during any Quarter shall mean the
                  actual gross sales of such Product (a) by Toshiba to any
                  customer, distributor or other third party; and (b) by any
                  such customer, distributor or other third party which is
                  controlling, controlled by or under common control
                  ("AFFILIATED") with Toshiba to any other person; during such
                  Quarter, less returns of such Product during such Quarter. Any
                  sales by an affiliated customer, distributor or other third
                  party shall be reduced by the amount paid for such product to
                  Toshiba by such affiliated customer, distributor or other
                  third party under clause (a) above so as to avoid double
                  counting of sales by such parties. Such amounts shall be
                  determined in accordance with generally accepted accounting
                  principles consistently applied. All persons to whom sales of
                  Products are made under clauses (a) and (b) above or otherwise
                  are collectively referred to as "CUSTOMERS."

                  "MASS PRODUCTION" units shall mean units of a Product that are
                  sold to Customers in mass commercial quantities for use in
                  commercial systems (and not merely for evaluation) or
                  otherwise than for commercial use.

                  "NUMBER OF QUALIFYING UNITS" for any Product during any
                  Quarter shall mean the amount, if any, by which (a) the total
                  number of units of such Product which are produced during such
                  Quarter which meet the Functional Tests and Performance
                  Specifications for such Product upon completion of the die
                  sort test (hereinafter referred to as "PRODUCED"), exceeds (b)
                  the Base Number of Shippable Die Per Wafer for such Product
                  during such Quarter multiplied by the total number of wafers
                  from which die for such Product are produced during such
                  Quarter. (This explicitly excludes zero-yielding wafers since
                  zero-yielding wafers are indicative of operational problems
                  like equipment malfunctions or



                                     SOW-8

<PAGE>   19

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                  misprocessing; not process or design related problems which
                  PDF has the ability to affect.)

                  "QUARTER" with respect to any Product shall mean each
                  successive three month period commencing on the later of
                  *************** or the First Qualifying Month for such
                  Product.

        Amount of Product Fee. The Product Fee for each Product shall be
calculated with respect to each Quarter and shall equal the product of:

                        (a)     the product fee multiplier of ******, multiplied
                                by,

                        (b)     the Average Unit Sales Price for such product in
                                such Quarter, multiplied by,

                        (c)     the Number of Qualifying Units in such Quarter.

        The Product Fee for all Products at all fabrication facilities shall
collectively not exceed *********** in the aggregate.

        Calculation of Product Fee. The Product Fee for each Product (as defined
in the first paragraph in Paragraph (a) of this Statement of Work above) will be
calculated with respect to each such Product for each Quarter commencing with
the First Qualifying Month for such Product, and for each additional Quarter
thereafter for an aggregate of *** consecutive Quarters (or *** months) (each,
the "PRODUCT PAYMENT PERIOD"). The First Qualifying Month and the Product
Payment Period shall be calculated separately for each separate Product (as
defined above). In the event of a suspension in the production of such Product
or the reduction of quantities of production of such Product to less than Mass
Production quantities for any reason, the Product Payment Period for which the
Product Fee is being calculated and the calculation of the Base Number of Die
Per Wafer shall be extended for a period of time equal to the period during
which production is suspended or such commercial quantities are not being
produced. Notwithstanding the foregoing, no Product Payment Period shall extend
beyond, and no Product Fee shall be calculated or payable with respect to any
period after, ****************.

        Payment of Product Fee. The Product Fee will be paid for each Product
with respect to each successive Quarter commencing with the Quarter beginning
with the First Qualifying Month and continuing through the end of the Product
Payment Period. Toshiba will make such payment to PDF within forty-five (45)
days following the last day of each such Quarter with respect to which the
Product Fee is determined. Payment will be delivered in accordance with the
provisions of Section 2.3 of the Agreement.

        Verification. Within thirty (30) days following the end of each Quarter,
Toshiba will provide PDF with a report containing the following information with
respect to each Product during such Quarter:

                        (a)     the "Net Sales";



                                     SOW-9

<PAGE>   20

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                        (b)     the total number of units sold which comprise
                                such Net Sales;

                        (c)     the "Average Sales Price;"

                        (d)     the total number of units which are produced
                during such Quarter which meet the applicable Functional Tests
                and Performance Specifications upon completion of the wafer
                probe test;

                        (e)     the "Base Number of Shippable Die Per Wafer;"

                        (f)     the total number of wafers from which Mass
                Production Units are produced during such Quarter; and

                        (g)     the "Number of Qualifying Units."

        Upon the reasonable request of PDF but no more often than once in any
year, PDF may have its independent auditors inspect the accuracy of Toshiba's
reports. If there are inconsistencies found in PDF's favor, Toshiba agrees to
pay the difference within thirty (30) days of the finding. Any information
contained in the report and the results of the inspection shall be considered
Confidential Information under Section 6 of the Agreement.

        (iv)    EXPENSES.

        Toshiba will reimburse PDF for all Expenses incurred by PDF in
performing the services, delivering the Deliverables and fulfilling its
obligations under the Project. The Expenses will be billed to Toshiba at PDF's
cost and will not exceed an average of ******** per calendar quarter without the
written consent of Toshiba. PDF will submit to Toshiba invoices specifying the
Expenses and Toshiba will pay the Deliverable Fees within thirty (30) days
following the date of the invoice. Invoices will be submitted to Toshiba no more
frequently than a monthly basis. Payments of invoices for PDF's expenses will be
made in accordance with the provisions of Section 2.2 of the Agreement.
Notwithstanding the foregoing if PDF is entitled to receive reimbursement of the
same travel, lodging and other similar expenses from both Toshiba and other
customers, then PDF will allocate any expenses that are for the benefit of both
Toshiba and such other customers, among Toshiba and such other customers on a
basis that PDF shall determine is fair, just and equitable to Toshiba and such
other customers taking into account all relevant factors.

        (v)     VERIFICATION.

        Toshiba will provide PDF access to all other relevant information and
documentation (or will provide PDF with copies of all relevant documentation)
necessary to confirm and verify the Deliverables Fees, the Incentive Fee and
Product Fees payable to PDF hereunder.




                                     SOW-10

<PAGE>   21

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.



                                                              PROJECT: TOSHIBA -
                                                          **********************
                                                          **********************

                                 AMENDMENT NO. 1
                                       TO
                        TECHNOLOGY COOPERATION AGREEMENT


        This Amendment No. 1 to the Technology Cooperation Agreement (the
"AMENDMENT") is made as of the ************************ by and between Toshiba
Corporation, a corporation organized under the laws of Japan ("TOSHIBA") having
its principal place of business at 1-1 Shibaura 1-chome, Minato-ku, Tokyo
105-8001, Japan, and PDF Solutions, Inc., a corporation organized under the laws
of California ("PDF") having its principal place of business at 333 West San
Carlos Street, Suite 1200, San Jose, California, U.S.A.

                                    RECITALS

        WHEREAS, on ****************, Toshiba and PDF entered into a Technology
Cooperation Agreement (the "AGREEMENT") relating to the provision of services by
PDF to Toshiba.

        WHEREAS, the Agreement contained a Statement of Work which detailed the
specific obligations of PDF and Toshiba with respect to the Project; and

        WHEREAS, the schedule for the mass production of the products covered by
the Agreement has been delayed by certain circumstances, and the parties desire
to amend the Statement of Work to change the terms and conditions relating to
the Incentive Fee and the Product Fee sections in the Statement of Work to more
accurately reflect the parties' intentions.

        NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, the adequacy of which is hereby acknowledged, the
parties hereto mutually agree as follows:

        1. Definitions. All capitalized terms unless defined elsewhere in this
Amendment shall have the meanings ascribed to them in the Agreement

        2. Statement of Work. Paragraphs (e)(ii) and e(iii) of the Statement of
Work are hereby amended and restated their entirety as follows:

        "(ii) INCENTIVE FEE. PDF shall deliver to Toshiba analysis reports and
shall work with Toshiba with the objective of enabling Toshiba to achieve the
First, Second and Third Incentive Target Yield (each as defined below)
(collectively, the "INCENTIVE TARGET YIELDS"). Upon Toshiba achieving any of the
First, Second or Third Incentive Target Yields, Toshiba shall pay PDF the First,
Second or Third Incentive Fee (each as defined below), respectively, which Fees
shall total ******** (collectively, the "INCENTIVE FEES"). The Incentive Fees
and Incentive Target Yields shall be determined as follows:


* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
  SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.



                                      -1-

<PAGE>   22

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        (a)     FIRST INCENTIVE FEE. Toshiba shall pay PDF ******** (the "FIRST
                INCENTIVE FEE") upon achieving a yield of *** shippable die
                (based on a die size of **** square millimeters or smaller) on
                any single wafer of the *********** Product produced and meeting
                the Functional Tests and Specifications (as defined below)
                measured at wafer probe test at any time on or prior to
                ************ (the "FIRST INCENTIVE TARGET YIELD");

        (b)     SECOND INCENTIVE FEE. Toshiba shall pay PDF ******** (the
                "SECOND INCENTIVE FEE") upon achieving an average yield of
                ****** shippable die per wafer (based on a die size of ****
                square millimeters or smaller), on any single lot of wafers of
                the ******** Product meeting the Functional Tests and
                Specifications measured at wafer probe test or prior to
                ************* (the "SECOND INCENTIVE TARGET YIELD"); and

        (c)     THIRD INCENTIVE FEE. Toshiba shall pay PDF ******** (the "THIRD
                INCENTIVE FEE") upon achieving an average yield of ****
                shippable die per wafer (based on a die size of **** square
                millimeters or smaller), over all lots (excluding lots deemed
                adversely affected by material operational errors such as
                equipment malfunctions, misprocessing (such as operating the
                recipe not in accordance with the specifications) and other
                similar reasons) of the ************* Product meeting the
                Functional Tests and Specifications measured at final test for
                which production is completed during any two-week period of Mass
                Production commencing on or prior to ************* (the last
                date that two weeks of Mass Production can be completed to
                achieve the Third Incentive Fee is referred to as the "INCENTIVE
                FEE DATE") (the "THIRD INCENTIVE TARGET YIELD");

        provided, however, that no Incentive Target Yield shall be considered
achieved and Toshiba shall have no obligation to pay the Incentive Fee
corresponding to achievement of such Incentive Target Yield unless Toshiba shall
have achieved (in the manner provided above) such Incentive Target Yield on or
prior to the Incentive Fee Date. In the event the Functional Tests and
Specifications for the ************* Product change then the respective
Incentive Target Yields will be appropriately adjusted to account for the change
in specifications.

        Upon commencement of Mass Production of the ************* Product
Toshiba will provide PDF with regular, ongoing data as to the yield on the
wafers for such Product on a periodic basis to enable PDF to assess each
Incentive Target Yield. Upon achievement of each Incentive Target Yield, Toshiba
will notify PDF and PDF will submit to Toshiba an invoice for the respective
Incentive Fee. Toshiba shall pay each Incentive Fee within thirty (30) days
following the date of the invoice. Payment shall be made in accordance with the
provisions of Section 2.2 of the Agreement.

        PDF's failure to deliver the materials necessary to enable Toshiba to
achieve the Incentive Target Yields referenced above on or prior to the
respective Incentive Fee Dates shall not constitute a basis for termination of
the Agreement under Section 4 of the Agreement.



                                      -2-

<PAGE>   23

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


        (iii) PRODUCT FEES. Toshiba will pay PDF a separate Quarterly fee with
respect to each separate Product (as defined in the first paragraph in Paragraph
(a) of this Statement of Work above) manufactured at each Toshiba and each other
fabricator's facility at which such Product is manufactured (the "PRODUCT
FEES"). If Toshiba determines to *****************************************
****************************************************************************
****************************************************************************
****************************************************************************
************. If PDF's services in designing new procedures (including without
limitation development of test structures, TEGs, analysis models, or other
similar services) are necessary to help achieve the targeted yield *************
******************** then such services shall not be covered by this Agreement
but shall be provided pursuant to a separate agreement to be agreed upon between
PDF and **************************************************. The Product Fees
shall be calculated separately for ************************* at which such
Product is produced, provided that all fabrication facilities with respect to
which PDF provides services or advice under an agreement with PDF (including
this Agreement) shall collectively be considered one facility (the "PRIMARY
FACILITY") for purposes of such calculation so long as PDF agrees to include
such facility as a part of such Primary Facility. No Product Fees shall be
payable with respect to any facility owned by an unaffiliated third party which
facility accounts for less than 25% of the total number of units of such Product
produced. In making such calculations and paying such amounts, the foregoing
terms (and certain other terms) are defined as follows:

                "AVERAGE NUMBER OF SHIPPABLE DIE PER WAFER" for any Product
        during any Quarter shall mean the average number of shippable die per
        wafer (based on a die size of **** square millimeters or smaller), over
        all lots (excluding engineering lots and lots deemed adversely affected
        by material operational errors such as equipment malfunctions,
        misprocessing (such as operating the recipe not in accordance with the
        specifications) and other similar reasons) of such Product during such
        Quarter meeting the Functional Tests and Specifications measured at
        final test for which production is completed during such Quarter.

                "BASE NUMBER OF SHIPPABLE DIE PER WAFER" for any Product during
        any Quarter shall mean a number of die per wafer to be determined by
        agreement between PDF and Toshiba.

        (a)     With respect to the ******** Product, Base Number of Shippable
                Die Per Wafer shall initially be **** shippable die per wafer in
                the Quarter commencing ******** through **************, ***
                shippable die per wafer in the Quarter commencing
                *************** through ****************** and *** shippable die
                per wafer in the Quarter commencing ************* through
                ************** and thereafter (based on a die size of ****
                square millimeters or smaller).

        (b)     With respect to the Base Number of Shippable Die Per Wafer for
                the ******* Product, the Base Number of Shippable Die per Wafer
                shall be



                                      -3-

<PAGE>   24

                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                mutually agreed upon by the parties within *** days of the date
                of execution of the Amendment.

        (c)     For each other Product, within *** days following the first tape
                out of such Product, PDF and Toshiba shall meet and agree upon
                what shall constitute such Base Number of Shippable Die per
                Wafer for such Product. The adjustments to the Base Number of
                Shippable Die per Wafer established in the ramp schedule for the
                ************ Product and with respect to any other Product shall
                be mutually agreed upon and shall be based upon analysis of the
                following factors: **************************************
                ************************************************************
                ************************************************************
                ************************************************************
                ************************************************************
                ************************************************************
                ************************************************************
                ************************************************************

                 "CURRENT WAFER PRICE" shall mean the following:

        (a)     With respect to ************* Products, the "Current Wafer
                Price" in the Quarter commencing ************ though
                ************** shall be ********. Such price shall be reduced by
                ******** percent in the Quarter commencing ************* through
                ***********. On a quarterly basis thereafter determined one week
                prior to the commencement of such Quarter, the price will be
                adjusted to reflect then current market prices for such wafers
                and other relevant market conditions, provided that such
                reductions shall not exceed ************ percent in any
                consecutive 12-month period. If market prices for such wafers
                vary more than plus or minus ************ in any consecutive
                12-month period, the parties agree to re-examine the prices and
                to make alterations accordingly, as mutually agreed upon.

        (b)     With respect to ******** Products, the "Current Wafer Price" in
                the Quarter commencing ******** though ******** shall be
                ********. Such price shall be reduced by ******** percent in the
                Quarter commencing ************ through **************. On a
                quarterly basis thereafter determined one week prior to the
                commencement of such Quarter, the price will be adjusted to
                reflect then current market prices for such wafers and other
                relevant market conditions, provided that such reductions shall
                not exceed ************ percent in any consecutive 12-month
                period. If market prices for such wafers vary more than
                plus or minus ************ in any consecutive 12-month period,
                the parties agree to re-examine the prices and to make
                alterations accordingly, as mutually agreed upon.



                                      -4-

<PAGE>   25
                              CONFIDENTIAL MATERIAL
                        OMITTED AND FILED SEPARATELY WITH
                     THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


                        "FIRST QUALIFYING MONTH" for any Product shall mean the
                calendar month beginning on the later of (a) the first day of
                the calendar month immediately following the calendar month in
                which Mass Production units of such Product are first sold to
                Customers (unless such first sale occurs on the first day of a
                calendar month, the First Qualifying Month shall commence on the
                date of such first sale) or (b) ************.

                        "FUNCTIONAL TESTS AND PERFORMANCE SPECIFICATIONS" for
                any Product shall mean the functional tests and performance
                specifications at wafer probe test, at die sort test and at
                final test, as the case may be, as are specified for
                qualification by the client of Toshiba with respect to such
                Product, or such other less stringent functional tests and
                performance specifications that such client shall accept, or
                such other functional tests and performance specifications as
                are otherwise mutually agreed upon by Toshiba and PDF.

                        "MASS PRODUCTION" units shall mean units of a Product
                that are sold to Customers in mass commercial quantities for use
                in commercial systems (and not merely for evaluation) or
                otherwise than for commercial use, and/or when the final mark
                set has been approved for mass production.

                        "QUARTER" with respect to any Product shall mean each
                successive three month period commencing on the later of
                ************* or the First Qualifying Month for such Product.

        Amount of Product Fee. The Product Fee for each Product shall be
calculated with respect to each Quarter and shall equal the product of:

                        (a)     the Current Wafer Price for such Product during
                                such Quarter multiplied by *****;

                        (b)     multiplied by *****;

                        (c)     multiplied by the difference determined by (x)
                                the quotient of the Average Number of Shippable
                                Die per Wafer divided by the Base Number of
                                Shippable Die per Wafer for such Product during
                                such Quarter minus (y) one (1);

                        (d)     multiplied by the number of Mass Production
                                wafers for such Product during such Quarter.

        The Product Fee for all Products at all fabrication facilities shall
collectively not exceed ******** in the aggregate.

        Calculation of Product Fee. The Product Fee for each Product (as defined
in the first paragraph in Paragraph (a) of this Statement of Work above) will be
calculated with respect to each such Product for each Quarter commencing with
the First Qualifying Month for such



                                      -5-

<PAGE>   26
                             CONFIDENTIAL MATERIAL
                       OMITTED AND FILED SEPARATELY WITH
                    THE SECURITIES AND EXCHANGE COMMISSION.
                        ASTERISKS DENOTE SUCH OMISSIONS.


Product, and for each additional Quarter thereafter for an aggregate of 8
consecutive Quarters (or 24 months) (each, the "PRODUCT PAYMENT PERIOD"). The
First Qualifying Month and the Product Payment Period shall be calculated
separately for each separate Product (as defined above). In the event of a
suspension in the production of such Product or the reduction of quantities of
production of such Product to less than Mass Production quantities for any
reason, the Product Payment Period for which the Product Fee is being calculated
and the calculation of the Base Number of Die Per Wafer shall be extended for a
period of time equal to the period during which production is suspended or such
commercial quantities are not being produced. Notwithstanding the foregoing, no
Product Payment Period shall extend beyond, and no Product Fee shall be
calculated or payable with respect to any period after, ************.

        Payment of Product Fee. The Product Fee will be paid for each Product
with respect to each successive Quarter commencing with the Quarter beginning
with the First Qualifying Month and continuing through the end of the Product
Payment Period. Toshiba will make such payment to PDF within *** days following
the last day of each such Quarter with respect to which the Product Fee is
determined. Payment will be delivered in accordance with the provisions of
Section 2.3 of the Agreement.

        Verification. Within thirty (30) days following the end of each Quarter,
Toshiba will provide PDF with a report containing the following information with
respect to each Product during such Quarter:

                (a) the Average Number of Shippable Die per Wafer (including
        method of calculating such number);

                (b) the total number of units which are produced which meet the
        applicable Functional Tests and Performance Specifications upon
        completion of the wafer probe test; and

                (c) the total number of Mass Production wafers produced.

        Upon the reasonable request of PDF but no more often than once in any
year, PDF may have its independent auditors inspect the accuracy of Toshiba's
reports and the underlying data. If there are inconsistencies found in PDF's
favor, Toshiba agrees to pay the difference within thirty (30) days of the
finding. Any information contained in the report and the results of the
inspection shall be considered Confidential Information under Section 6 of the
Agreement.

        3. Counterparts. This Amendment may be executed in any number of
counterparts, all of which together shall constitute one instrument. 

                            [SIGNATURE PAGE FOLLOWS]




                                      -6-

<PAGE>   27

        The parties hereto have executed this Amendment as of the date first set
forth above.



PDF SOLUTIONS, INC.                          TOSHIBHA



By: /s/ John K. Kibarian                     By:    /s/ Shigen Komats
    -----------------------------                   ---------------------------
    Title:  President & CEO                  Title: Vice President
                                                    Micro & Custom LSI Division
                                                    Semiconductor Company




                                      -7-



<PAGE>   1
                                                                    EXHIBIT 10.7



                            INDEMNIFICATION AGREEMENT


        This Indemnification Agreement (the "Agreement") is made as of
_______________, by and between PDF Solutions, Inc., a Delaware corporation (the
"Company"), and <<IndemniteeName>> (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


<PAGE>   2

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.

               (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 



                                       2

<PAGE>   3

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
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



                                       3

<PAGE>   4

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 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 



                                       4

<PAGE>   5

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;

               (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;



                                       5

<PAGE>   6

               (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 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.



                                       6

<PAGE>   7

        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.



                            [Signature Page Follows]



                                       7

<PAGE>   8

        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:


<<IndemniteeName>>


----------------------------------------
(Signature)

Address: <<IndemniteeAddress1>>
         <<IndemniteeAddress2>>



                                       8



<PAGE>   1
                                                                    EXHIBIT 10.8



                               PDF SOLUTIONS, INC.

                             1996 STOCK OPTION PLAN

                   (AS AMENDED AND RESTATED ON JUNE 30, 2000)

        1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.

        2. Definitions. As used herein, the following definitions shall apply:

               (a) "Administrator" means the Board or any of its Committees
appointed pursuant to paragraph (a) of Section 4 of the Plan.

               (b) "Affiliate" means any entity which has a business
relationship with the Company.

               (c) "Board" means the Board of Directors of the Company.

               (d) "Code" means the Internal Revenue Code of 1986, as amended.

               (e) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph
 (a) of Section 4 of the Plan.

               (f) "Common Stock" means the Common Stock of the Company.

               (g) "Company" means PDF Solutions, Inc., a California
corporation.

               (h) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent, Subsidiary or Affiliate to render
consulting services and is compensated for such services, and any director of
the Company whether compensated for such services or not, provided that if and
in the event the Company registers any class of any equity security pursuant to
the Exchange Act, the term Consultant shall thereafter not include directors who
are not compensated for their services or are paid only a director's fee by the
Company.

               (i) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Emp