|
|

**UNITED
STATES****SECURITIES AND
EXCHANGE COMMISSION**Washington, D.C.
20549 _________________________

**FORM 10-K**
**_________________________**



|x |  | **ANNUAL REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE** ACT OF
      1934
|- |  | ----------------------------------------------------------------------------------------------------

For the fiscal year ended December
31, 2008

OR



|o |  | **TRANSITION REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES** **EXCHANGE
      ACT OF 1934**
|- |  | ------------------------------------------------------------------------------------------------------------

For the transition period from
________________ to ________________

Commission File Number: 0-31773

**LOGICVISION,
INC.**(Exact name of registrant as
specified in its charter)



|Delaware                                       | 94-3166964                     
|---------------------------------------------- | -------------------------------
|(State or
      other jurisdiction of          | (IRS
      Employer            
|incorporation or organization)                 | Identification No.)            
|                                              
|25 Metro
      Drive, Third Floor              |                                
|San Jose,
      California 95110               | (408)
      453-0146           
|(Address of
      principal executive offices) | (Registrants telephone number,
|                                               | including
      area code)     

|Securities registered pursuant to Section 12(b) of the
      Act:
|-----------------------------------------------------------------
|Title of each class                                              
|Common
      Stock, par value $0.0001 per share                  
|**Series A Participating Preferred Stock Purchase
      Rights** 

Securities registered pursuant to
Section 12(g) of the Act:None

Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes oNo x

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Exchange Act. Yes oNo x



Indicate by check mark
whether the registrant (1) has filed all reports required by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes xNoo

Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|Large
      accelerated filero | Accelerated
      filero | Non-accelerated filero                              | Smaller
      reporting companyx
|------------------------------ | ------------------------ | --------------------------------------------------- | --------------------------------
|                               |                          | (Do
      not check if a smaller reporting company) |                                 

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x

The
aggregate market value of Common Stock held by non-affiliates of the registrant
(based upon the closing sale price on The Nasdaq Global Market on June 30, 2008)
was approximately $7.5 million. Shares held by each executive officer, director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of March 17, 2009, there were
9,473,572 shares of Common Stock, $0.0001 per share par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10
(as to directors and Section 16(a) Beneficial Ownership Reporting Compliance),
11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by
reference information from the registrants proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrants 2009 Annual Meeting of Stockholders scheduled to be
held on June 11, 2009.

|
|

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LOGICVISION, INC.

TABLE OF CONTENTS

2008 FORM 10-K

|                                           |                                                                                                                          | Page
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ----
|PART I                                     |                                                                                                                          |     
|Item 1.                                    | Business                                                                                                                 | 4   
|Item 1A.                                   | Risk Factors                                                                                                             | 11  
|Item 1B.                                   | Unresolved Staff
      Comments                                                                                          | 19  
|Item 2.                                    | Properties                                                                                                               | 20  
|Item 3.                                    | Legal
      Proceedings                                                                                                  | 20  
|Item 4.                                    | Submission of Matters to a Vote of Security Holders                                                                      | 20  
|Executive Officers of the
      Registrant | 20                                                                                                                      
|                                          
|PART II                                    |                                                                                                                          |     
|Item 5.                                    | Market for
      Registrants Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities | 21  
|Item 6.                                    | Selected Financial Data                                                                                                  | 22  
|Item 7.                                    | Managements
      Discussion and Analysis of Financial Condition and Results of
      Operations                        | 23  
|Item 7A.                                   | Quantitative and Qualitative Disclosures About Market Risk                                                               | 34  
|Item 8.                                    | Financial
      Statements and Supplementary Data                                                                        | 35  
|Item 9.                                    | Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure                               | 58  
|Item
      9A(T).                          | Controls and
      Procedures                                                                                            | 58  
|Item 9B.                                   | Other Information                                                                                                        | 58  
|                                          
|PART III                                   |                                                                                                                          |     
|Item 10.                                   | Directors,
      Executive Officers and Corporate Governance                                                             | 59  
|Item 11.                                   | Executive Compensation                                                                                                   | 59  
|Item 12.                                   | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters               | 59  
|Item 13.                                   | Certain Relationships and Related Transactions, and Director
      Independence                                          | 60  
|Item 14.                                   | Principal
      Accountant Fees and Services                                                                             | 60  
|                                          
|PART IV                                    |                                                                                                                          |     
|Item 15.                                   | Exhibits
      and Financial Statement Schedules                                                                         | 61  
|                                          
|Signatures                                 |                                                                                                                          | 64  

---

PART I

Item 1. Business

When
used in this Report, the words expects, anticipates, intends, estimates,
plans, believes, and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include statements about the features, benefits and performance of our
current and future products, services and technology, plans for future products
and services and for enhancements of existing products and services, our
expectations regarding future operating results, including backlog, revenues,
sources of revenues and expenses, net losses, fluctuations in future operating
results, our estimates regarding the adequacy of our capital resources, our
capital requirements and our needs for additional financing, planned capital
expenditures, use of our working capital, our critical accounting policies and
estimates, our internal control over financial reporting, our patent
applications and licensed technology, our efforts to protect intellectual
property, expectations regarding dividends, our ability to attract customers,
establish license agreements and obtain orders, the impact of economic and
industry conditions on our customers, customer demand, our growth strategy, our
marketing efforts, our business development efforts, future acquisitions or
investments, our focus on larger orders with major customers, our employee
matters, our competitive position, our foreign currency risk strategy, and the
impact of recent accounting pronouncements. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, the possibility that orders could be modified, cancelled or not
renewed, our ability to negotiate and obtain customer agreements and orders,
lengthening sales cycles, the concentration of sales to large customers and our
reliance on a limited number of customers for a substantial portion of revenues,
dependence upon and trends in capital spending budgets in the semiconductor
industry and fluctuations in general economic conditions, our ability to rapidly
develop new technology and introduce new products, our ability to safeguard our
intellectual property and the risks set forth below under Part I, Item 1A, Risk
Factors. These forward-looking statements speak only as of the date hereof. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Companys expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.

In
this report, all references to LogicVision, we, us, our or the Company
mean LogicVision, Inc. and its subsidiaries, except where it is made clear that
the term means only the parent company.

LogicVision and the LogicVision logo are our registered trademarks. We
also refer to trademarks of other corporations and organizations in this
document.

Overview

We are a
test and yield learning company in the semiconductor design-for-test (DFT)
sector. Our proprietary technologies for embedded test and diagnostics enable
more efficient test of complex semiconductor devices. Our technology allows
semiconductor designers to insert test structures inside semiconductor
integrated circuits. These test structures allow designers and engineers to test
the functionality and performance of their devices throughout each key stage of
a complex semiconductors life cycle. The most complex of these circuits are
called System-on-a-Chip, or SoC, semiconductors. Our embedded test solutions
have been successfully deployed in SoCs found in digital consumer products,
medical products, automotive electronics, networking and wireless communications
devices, computers and satellite systems.

Our
solutions also allow testing of integrated circuits after they have been
assembled onto boards and systems, enabling diagnostic test throughout the
semiconductors life cycle. Our analysis software aggregates and analyzes data
from various semiconductor test sources to identify whether silicon behavior
meets design criteria across varying manufacturing and operating conditions. Our
embedded test products generate proprietary circuit structures that are
incorporated into an integrated circuit to test and diagnose the chip at full
speed, without the signal delay or degradation experienced by external testers.
Our proprietary circuits are designed to be modular and reusable, to enable more
efficient design and to address time-to-market and manufacturing yield
issues.

We
believe our products can reduce semiconductor manufacturing test costs,
accelerate silicon bring-up times, provide for yield learning, improve
time-to-yield and result in less field returns. The target market for our
technology is SoC designs with feature widths of 130 nanometers, 90 nanometers,
65 nanometers, 45 nanometers and smaller. A nanometer is one billionth of a
meter.

We
incorporated as LV Software in July 1992 in California and engaged principally
in research and development activities through 1994. We first generated
meaningful commercial revenues from the license of our initial embedded test
product in 1995. In June 1996, we changed our corporate name to LogicVision,
Inc. We reincorporated in Delaware in September 2000.

4

---

Technology

*Embedded test*

We
believe that embedded test technology provides significant benefits for the new
and complex SoC semiconductor devices being designed and manufactured today.
Conventional test is performed with external equipment, while embedded test is
performed primarily using circuitry resident in the semiconductor design. By
embedding test circuit structures on the semiconductor itself, our embedded test
solutions eliminate many of the key limitations associated with conventional
external testing. Our embedded test design software automatically analyzes the
structure of complex circuits to determine requirements for at-speed testing and
diagnostics, and creates and integrates our proprietary embedded test circuits
with the existing design functions to address these requirements. Our embedded
test manufacturing software allows external test equipment to easily operate our
proprietary embedded test circuits for pass-fail testing, chip debug or
manufacturing datalogging. Our technology also enables board and system level
diagnostics, system bring-up and in-field testing and diagnostics.

*Design phase*

Our
embedded test technology is incorporated into integrated circuits in the form of
user-configurable circuit structures that provide four functions:

- access
  managementnecessary scan chains, shared
  isolation collars, boundary scan and test points to enable access to any point
  within complex designs;
- timing managementproprietary functionality for clock skew management, multiple cycle
  paths and multiple frequencies;
- test data generation and
  analysisproprietary functionality created
  for each design block to generate circuit test data and analyze circuit
  responses;
- external controlstandard IEEE 1149.1 and IEEE 1149.6 compliant test access ports for
  access and control of all embedded test circuits.

*Manufacturing phase*

Because
our embedded test circuits are incorporated in semiconductor designs, they are
manufactured as part of the semiconductor devices. When the prototypes of a new
integrated circuit arrive from fabrication for initial device bring-up, debug
and characterization, our embedded test circuits and embedded test manufacturing
software can be used to accelerate this process and allow lower cost equipment
to be utilized. Our embedded test circuit structures and embedded test
manufacturing software also facilitate at-speed test during wafer probe and
allow lower-cost test equipment to be used at wafer probe. Semiconductor devices
that pass wafer probe test are then packaged, and our embedded test circuits and
embedded test manufacturing software are used again during final test. Our
embedded test circuits are designed to be activated with simple external test
signals applied through the industry standard IEEE 1149.1 and IEEE 1149.6 test
access ports. Our analysis software aggregates and analyzes data from various
test sources to identify whether silicon behavior meets design criteria across
varying manufacturing and operating conditions.

Test
Development Functions. Using our technology,
the bulk of the patterns applied to test the integrated circuit are created
on-chip, with only minimal external control needed to achieve a pass-fail test.
Our embedded test design and manufacturing software provides the engineer with
the ability to easily create pass-fail test patterns, and then optimize them for
speed, execution time, accuracy, power and results.

Debug
and Diagnostic Functions. Our embedded test
provides a number of debug and diagnostic modes to facilitate debug, diagnosis
and datalogging. These are leveraged using our embedded test manufacturing
software.

5

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*Implementation technologies*

We have
developed several technologies to facilitate the mainstream design and
manufacturing use of embedded test technology. These include:

- design automation algorithms and implementation
  for embedded test;
- hierarchical isolation, access and assembly
  technologies;
- embedded test design verification
  technologies;
- high-performance circuit fault simulation
  algorithms and automation technologies;
- capture-by-domain for multiple-clock
  timing;
- at-speed, multi-frequency, multi-clock logic
  embedded test technology;
- fault-insertion technology for system
  diagnostics;
- at-speed, embedded and external memory test
  technologies;
- at-speed interconnect test
  technology;
- test and measurement technologies for embedded
  phase-locked-loops;
- test and measurement technologies for high-speed
  serial I/O (SerDes I/O);
- manufacturing automation for simplified access and
  control of embedded test circuits on test equipment;
- accurate real-time identification of open
  connection lines between interconnects on a circuit;
- analysis algorithms to facilitate the
  identification of parametric yield limiters;
- signoff process and handoff database for robust
  transfer of embedded test information to manufacturing; and
- parametric and input/output test technology to
  facilitate multi-site and reduced pin-count test, debug and
  datalogging.

Products

We offer a portfolio of products for
the automated development, integration, and deployment of embedded test
technology:

*Technology products*

Embedded Circuit Structures. Our
embedded test technology enables our customers to design and manufacture our
embedded test circuit structures for a specific design. For a typical design of
1 million gates and above, our embedded testers are less than a few thousand
gates and represent only 1% to 2% of chip area. Our user-configurable embedded
test circuit structures are designed to test memory, logic, high-speed
input/outputs, phased-locked-loops, cores, hierarchical blocks and
interconnect.

*Design Software*

We
provide a suite of highly integrated embedded test design software tools for
embedded test implementation on application specific integrated circuits, or
ASIC, and SoC designs. We provide design software that automatically analyzes
the structure of complex circuits to determine requirements for at-speed testing
and diagnostics. Our software creates and integrates our proprietary circuits
with the existing design circuits to address these requirements. It also assists
with the timing analysis and simulation processes necessary for proper
verification by providing timing analysis scripts and simulation test
benches.

*Manufacturing Software products*

We
provide embedded test manufacturing software for access and control of embedded
test during chip and system test program development, debug, manufacturing test
and datalogging. This enables user interaction with the embedded test circuits
to evaluate and diagnose chip-level and board-level failures during
manufacturing. This includes pass-fail testing, debug and basic failure
diagnostics and datalogging. We support a wide set of third-party industry
standard test equipment.

6

---

*Product offerings*

We
currently offer our embedded test circuits, design software and manufacturing
software in a variety of product bundles under the product family name Dragonfly
Test PlatformTM with the product sub-families named
ETCreateTM, Silicon Insight®, and Yield
InsightTM.

The
ETCreate product sub-family consists of embedded test intellectual property and
corresponding design automation software that provide embedded test solutions
for different components of an ASIC or SoC design. The individual embedded test
products within this sub-family and their underlying capabilities are described
below.

|**Products**    | **Applications**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ETMemory       | Provides intellectual property for flexible,
        area-optimized, at-speed, memory embedded test functionality.Supports single and multiport embedded
        memories such as SRAMs, DRAMs andROMs.Supports any size
        memory manufacturable in given technology.Provides
        manufacturing tools for integrated circuit and system test and diagnosis
        ofembedded
        memories.Provides repair
        analysis for memories with redundancy.Provides on-chip
        analysis and self-repair of memories with redundancy.Supports both
        standard and user-programmable memory test algorithms.Supports run-time
        programmable memory test algorithms.                                                                                                             
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|ETLogic        | Provides intellectual property for at-speed,
        multi-frequency logic self-test and scan test functionality.Includes intellectual property for direct
        test access and isolation of legacy cores.Automates analysis, generation, assembly and
        verification of logic test intellectual property.Supports high-speed multiple asynchronous
        clock domains, pipelining and multi-cycle paths.Automates a complete, hierarchical
        methodology for system-on-a-chip design and test.Supports design partitioning and core reuse
        for concurrent engineering.Facilitates transportable embedded test for
        functional block re-use.                                                                                                                                
|               
|ETPLL          | Provides embedded test intellectual property
        for accurate, specification-driven test of Phase-Locked-Loop (PLL)
        functionality.Automates generation, assembly and
        verification of embedded test circuitry for phase-locked-loops.Supports measurement-based tests of jitter,
        loop-gain and lock-range specifications.Measurement resolution to 0.125 of a gate
        delay.                                                                                                                                                                                                                                                                                                                                                                                              
|               
|ETSerdes       | Provides embedded test intellectual property
        for accurate structural test that measure most SerDes performance
        characteristics.Automates generation, assembly and
        verification of embedded test circuitry for high speed I/O.Measured parameters include signal
        transition times, logic levels, jitter (various types, and Root Mean
        Square (RMS) or histogram), and jitter tolerance-related timing
        parameters.Measurement resolution at sub-picosecond
        accuracy.                                                                                                                                                                                                                                                                                
|               
|ETSystemMemory | Provides intellectual property for runtime
        programmable, high-speed, board-level memory module test
        functionality.Supports timing and algorithms for use with
        SRAMs, DRAMs, SDRAMs and others.Automates generation, assembly and
        verification of programmable external memory embedded test
        controller.Includes manufacturing tools for
        system-level test and diagnosis of board-level memories.                                                                                                                                                                                                                                                                                                                                                            
|               
|ScanBurst      | A DFT tool developed in partnership with
        Mentor Graphics for improved at-speed logic test of high-speed nanometer
        SoC designs.Provides comprehensive design automation for
        generating and integrating the on-chip distributed clock and scan
        control logic, which enables the application of BurstMode Timing in
        conjunction with Mentors FastScan and TestKompress Automated Test
        Pattern Generation (ATPG) products.Complements existing ATPG based DFT
        techniques by providing an environment to easily insert scan and clock
        control structures for at-speed testing based on LogicVisions patented
        BurstMode Timing technology.Provides intellectual property for direct
        test access and isolation of legacy
cores.

7

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The Silicon Insight product sub-family provides automated
interactive graphical environments for test bring-up and silicon
characterization of devices containing our embedded test capabilities. The
Silicon Insight products can greatly increase productivity for chip designers
and test engineers during the critical phase of silicon validation and debug,
speeding time-to-market and yield improvement. Silicon Insight Automatic Test
Equipment (ATE) is a version of the Silicon Insight software that interfaces
to most commercial tester platforms while Silicon Insight Desktop is a version
of the Silicon Insight software that runs on any Linux PC or laptop. The
individual products within this sub-family and their underlying capabilities are
described below.

|**Products**                 | **Applications**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Silicon Insight
      Logic  | Embedded Test Diagnostics software package
        for interactive debug and diagnosis of embedded logic equipped with
        LogicVisions ETLogic Intellectual Property.Supports interactive pass-fail testing and
        debug of logic in the design.Automates the creation, modification and
        application of test and debug patterns on specified LVReady automated
        test equipment.Provides manufacturing tools that reduce
        time-to-market for prototype integrated circuits.Works on an engineers desktop using a Linux
        PC or with all popular automatic test equipment.     
|                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Silicon Insight
      Memory | Embedded Test Diagnostics software for
        interactive debug and diagnosis of embedded memories equipped with our
        Embedded ETMemory Intellectual Property.Supports interactive pass-fail testing and
        debug of only the memory in the design.Automates the creation, modification and
        application of test and debug patterns on specified LVReady automated
        test equipment.Provides manufacturing tools that reduce
        time-to-market for prototype integrated circuits.Works on an engineers desktop using a Linux
        PC or with all popular automatic test equipment.
|                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Silicon
      Insight Mixed  | Embedded Test Diagnostics software for
        interactive debug and diagnosis of embedded mixed signal circuits
        equipped with LogicVisions Embedded SerDes Test or Embedded PLL Test
        IP.Supports interactive pass-fail testing and
        debug of PLLs and SerDes in the designAutomates the
        creation, modification and application of test and debug patterns on
        specified LVReady automated test equipment.Provides
        manufacturing tools that reduce time-to-market for prototype integrated
        circuits.Works on an engineers desktop using a Linux
        PC   

The Yield
Insight product provides automated yield learning capabilities based on
embedded test failure and diagnostic data obtained during production test. Yield
Insight and its underlying capabilities are described below.

|**Products**            | **Applications**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**Yield
      Insight** | Addresses memory-related yield issues by
        leveraging customer investment in our ETMemory Built-In Self-Test
        (BIST) Intellectual property.Allows user to analyze yield issues down to
        individual memories, rows, columns and bits and correlate failures to
        different environmental conditions.Allows user to create data-mining rules that
        sift through the memory test data to automatically identify potential
        yield limiting issues.Enables users to analyze and optimize memory
        redundancy schemes by analyzing redundancy element utilization,
        resulting in higher yields and better yield-redundancy tradeoffs.Provides graphical analysis and scripting
        capabilities that allow users to automate and standardize their yield
        analysis processes.

Services

Maintenance. We assist our customers
with telephone and on-line support, bug fixes and upgrade privileges on a when
and if available basis.

8

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Design
Services. We assist our customers with the
design and manufacturing deployment of embedded test. Our design services help
our customers analyze, generate, assemble and verify embedded test circuits, and
help our customers and partners rapidly adopt our technologies.

Technology Development Contracts. As a
part of our strategy to make embedded test technology more applicable to custom
designs, we enter into development contracts with industry leaders for specific
projects. Our development contracts include developing new embedded test
capabilities and appropriate modifications to our standard automation software.
These contracts help our customers and partners to rapidly adopt our
technologies.

Customers

We
license our proprietary technologies and software products to companies in key
markets within the semiconductor, semiconductor diagnostics and systems
industries. Our customers include application specific integrated circuit or
system-on-a-chip designers in systems companies, fabless companies and
integrated device manufacturers. Customers accounting for more than 10 percent
of revenue are as follows:

Year Ended December 31,**2008**
    
    2007
    
    **2006**LSI Corporation
    16%
    
    21%
    
    26%Broadcom
      Corporation
    18%
    
    19%
    
    18%


Timing of Orders

Our past
operating results have been, and we expect that our future operating results
will be, subject to fluctuations due to a number of factors, including
unpredictability of the buying patterns of our customers, the concentration of
orders with large customers, dependence upon capital spending budgets and
fluctuations in general economic conditions.

Research and Development

Our
ability to meet customer needs for improved technology, and maintain our
technology leadership, depends largely on whether we can continue to rapidly
develop and deploy new technology and introduce new products. We have made, and
intend to continue to make, significant investments in research and development.
In addition to an overall knowledge of test methodologies, embedded test
requires an expertise in four diverse areas: integrated circuit design and
verification, electronic design automation algorithms and software development,
software development for manufacturing test and test equipment, and software
development for analysis of yield issues. We have assembled a highly skilled and
multi-disciplinary team for this purpose.

As of
December 31, 2008 our engineering team comprised 22 employees, 12 of whom have
advanced degrees, and most of whom have extensive industry experience in one or
more of the aforementioned areas of expertise. Our engineering team is organized
into four development groups, each focusing on one of these four areas of
expertise, and each contributing the related portion to the bundled product
offerings. The development groups are:

- Integrated
  Circuit DesignOur integrated circuit
  design team focuses on the overall embedded test intellectual property
  architecture and its implementation and verification.
- Design SoftwareOur design software team focuses on developing the software that
  analyzes, generates, assembles, and verifies an integrated circuit design with
  embedded test.
- Manufacturing SoftwareOur manufacturing software team focuses on developing
  software for enabling test and diagnostic in manufacturing.
- Analysis SoftwareOur analysis software team focuses on developing software to analyze
  integrated circuit test and foundry data to identify and diagnose yield
  issues.

In
addition to the four development groups, we have product engineering teams
focused on software builds and release, documentation and quality
assurance.

Research
and development expenses were $3.2 million, $3.6 million and $4.1 million during
the years ended December 31, 2008, 2007 and 2006, respectively.

9

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Sales and Marketing

The
majority of our revenues are generated by our direct sales force. In the United
States, we have sales and service personnel located in northern and southern
California, Massachusetts, Pennsylvania and Texas. We also use independent sales
representatives in the United States. Internationally, we have sales and service
personnel located in Japan; sales in China, France, Germany, India, Israel,
Japan, Korea, the United Kingdom (UK) and Sweden are handled by distributors
or independent sales representatives. Information regarding geographic areas is
included in Note 12 to the Consolidated Financial Statements in Item8. Sales and service personnel consist of sales
directors who are responsible for all business aspects of the customer
relationship and application engineers who manage the technical pre-sales as
well as the post-sales customer support issues. As of December 31, 2008, we had
22 employees involved in sales, marketing, application engineering and customer
service.

The main
goal of our sales force is to work with major systems, consumer electronics and
semiconductor companies who have the expertise to implement our technology
today. We focus on leading companies because they are influential in setting
standards. We focus on developing customer relationships with companies in the
areas of networking and wireless communications, medical products, computer
servers and graphics, and consumer electronics. Additionally, as systems
companies use our technology, they often require their component suppliers to
supply semiconductors with our embedded test technology already designed-in for
their system use. In this way we are able to create both push and pull demand
for our technology.

Our
marketing efforts include product and technical marketing, public relations,
corporate communications and business development functions. We strive to
develop relationships with industry partners such as application specific
integrated circuit suppliers, silicon foundries, electronic design automation
tool suppliers, hardware tester manufacturers and intellectual property
providers.

Sales and
marketing expenses are allocated between cost of revenues and sales and
marketing expenses. Application engineering efforts devoted to
revenue-generating design and technology development projects and post-contract
customer support activities are recorded as cost of revenues. Sales and
marketing expenses incurred for general selling and marketing activities are
recorded as sales and marketing expenses.

Sales and
marketing expenses were $5.3 million, $5.1 million and $7.0 million during the
years ended December 31, 2008, 2007 and 2006, respectively.

Intellectual Property

We have a
portfolio of intellectual property covering the areas of test and diagnosis of
logic, memory and mixed-signal circuits with focus on embedded, at-speed and
parametric aspects. Both design and manufacturing methods are covered. As of
December 31, 2008, our intellectual property portfolio consisted of 50 issued
U.S. patents and 3 pending U.S. patent applications. Generally, the term of
patent protection is 20 years from the earliest effective filing date of the
patent application. Our issued patents expire at various times between June 2016
and December 2024. Our patents cover technology intended to address problems we
consider fundamental to embedded test, such as timing, power consumption and
parametric testing.

Our
existing and future patents may be circumvented, blocked, licensed to others or
challenged as to inventorship, ownership, scope, validity or enforceability. We
may not receive competitive advantages from the rights granted under our
patents. Furthermore, our current or future patent applications may not be
issued with the scope of the claims sought by us, if at all. In addition, others
may develop technologies that are similar or superior to our proprietary
technologies, duplicate our proprietary technologies or design around the
patents owned or licensed by us. If our products, patents or patent applications
are found to conflict with any patents held by third parties, we could be
prevented from selling our products, our patents may be declared invalid or our
patent applications may not result in issued patents. In addition, in foreign
counties, we may not receive effective patent and trademark protection. We
cannot be sure that steps we take to protect our proprietary technologies will
prevent misappropriation of our technologies.

The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions. There are numerous patents in the
semiconductor industry and new patents are being issued at a rapid rate. This
often results in significant and often protracted and expensive litigation.
Litigation may be necessary to enforce our intellectual property rights or to
determine the validity or scope of the proprietary rights of
others.Litigation could cause us to incur significant expenses, harm our sales
of the challenged technologies or products and divert the efforts of our
technical and management personnel, whether or not a court decides in our favor.
From time to time third parties may notify us of intellectual property
infringement claims. If it is necessary or desirable, we may seek licenses under
these third party patents or intellectual property rights. However, we cannot be
sure that third parties will offer licenses to us on acceptable terms or at
all.

If we
fail to obtain a license from a third party for proprietary technologies that we
use, or receive an adverse result in any litigation,we could incur substantial
liabilities, or be compelled to suspend sales of our products or our use of
processes requiring the technologies or expend significant resources to develop
or acquire non-infringing technology. We may not be successful in the
development or acquisition of intellectual property. To date, we have had no
such litigation matters concerning intellectual property.

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We
generally enter into confidentiality agreements with our employees, industry
partners and customers, as well as generally control access to and distribution
of our documentation and other proprietary information. Despite this protection,
unauthorized parties may copy aspects of our current or future software products
or obtain and use information that we regard as proprietary.

Competition

The
semiconductor and systems industries are highly competitive and characterized by
rapidly changing technology. The market for embedded test is still evolving, and
we expect competition to continue to emerge and become more intense in the
future.

*Design*

In the
design phase of product development, we face competition from traditional broad
line electronic design automation providers such as Cadence Design Systems,
Inc., Magma Design Automation Inc., Mentor Graphics Corporation and Synopsys,
Inc. and from smaller test tool providers. These companies provide competing
design-for-test technologies and some level of built-in self-test capability. We
also face competition from methodologies developed internally at large
integrated device manufacturers, systems companies and electronic design
automation providers.

*Manufacturing*

Because
embedded test has the potential to impact the external test market, we believe
traditional hardware tester manufacturers such as Advantest Corporation,
LTX-Credence Corporation, Teradyne, Inc. and Verigy Ltd. all view embedded test
and LogicVision as competition. Many of these companies are devoting significant
resources to developing external solutions to testing complex integrated
circuits, including working closely with some of our current and potential
customers. Their efforts may result in the development of solutions that compete
with our embedded test solution. In addition, all of the tester manufacturers
above participate in our LVReady partner program through which our embedded test
access software is integrated into their test platform, which may provide them
with additional insight into our business and technology.

Most of
the companies with whom we compete are significantly larger than we are and have
greater financial resources. As embedded test is more broadly adopted in the
market, we face the potential of one or more larger companies appearing as
direct competition. We believe that the principal competitive factors in our
market include proven technology, effective intellectual property, deployment
automation, comprehensive manufacturing control and customer service. We believe
we compete favorably with respect to all these factors.

Employees

As of
December 31, 2008, we employed 51 total employees including 48 full-time
employees worldwide, of which 30 employees were located in the United States, 17
employees were located in Canada, and 4 employees were located in Asia and
Europe. This included 22 in sales and marketing, 22 in research and development,
and 7 in finance, information technology and administration. Our employees are
not covered by any collective bargaining agreements, and we consider our
relations with our employees to be good.

Available Information

Our
website ishttp://www.logicvision.com. We make
available free of charge, on or through our website, our annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission, or SEC. Information contained on our website is not part of
this report.

Item 1A. Risk Factors

If the semiconductor industry does
not adopt embedded test technology on a widespread basis, our revenues could
decline and our stock price could fall.

To date,
the semiconductor industry has not adopted embedded test technology as an
alternative to current testing methods on a widespread basis. If the
semiconductor industry does not adopt embedded test technology widely and in the
near future, our growth will be limited, our revenues could decline, and our
stock price could fall. We cannot provide assurance that integrated circuit
designers and design companies customers will accept embedded test technology
as an alternative to current testing methods in the time frame we anticipate, or
at all. The industry may fail to adopt embedded test technology for many
reasons, including the following:

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- our current and potential customers may not accept
  or embrace our Dragonfly Test PlatformTMintegrated family of
  products;
- potential customers may determine that existing
  solutions adequately address their testing needs, or the industry may
  develop alternative technologies to address their
  testing needs;
- potential customers may not be willing to accept
  the perceived delays in the early design stages associated with implementing embedded test technology in order to achieve
  potential time and cost savings at later stages of silicon debugging and production testing;
- potential customers may have concerns over the
  reliability of embedded testing methods relative to existing test methods;
- our existing and potential customers may react to
  declines in demand for semiconductors by curtailing or delaying new
  initiatives for new complex semiconductors or by
  extending the approval process for new projects, thereby lengthening
  our sales cycles; and
- designers may be reluctant to take on the added
  responsibility of incorporating embedded test technology as part of
  their design process, or to learn how to
  implement embedded test technology.

The current economic downturn and
uncertainty in the global economy and effects on the industries into which we
sell our products impacted our customers research and development budgets and
harmed our business and operating results.

The
worldwide economy is currently undergoing significant turmoil, which together
with uncertainty about future economic conditions, has negatively impacted our
customers, and can cause our customers to postpone their decision making and
decrease their spending. Our sales are dependent upon capital spending trends
and new design projects, and a substantial portion of our costs are fixed in the
near term. The demand from our customers is uncertain and difficult to predict.
Slower growth in the semiconductor and systems markets such as postponed or
canceled capital expenditures for previously planned expansions or new
fabrication facility construction projects, a reduced number of design starts,
reduction of design and test budgets or continued consolidation among our
customers would harm our business and financial condition.

The
primary customers for semiconductors that incorporate our embedded test
technology are companies in the automotive, consumer, communications, medical
products, networking and server products industries. The current economic
downturn and a downturn in these particular markets or in general economic
conditions could result in the cutback of research and development budgets or
capital expenditures, which would likely result in a reduction in demand for our
products and services and could harm our business. If the economy declines as a
result of economic, political or social turmoil, existing and prospective
customers may further reduce their design budgets or delay implementation of our
products, which could harm our business and operating results.

We are subject to the cyclical
nature of the semiconductor and electronics industries, and any downturn in
these industries could harm our business, operating results and financial
condition.

In
addition to the effects of macroeconomic factors, the markets for semiconductor
products are cyclical. In recent years, most countries have experienced
significant economic difficulties. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced budgets for chip
design tools. In addition, the electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its products, and
this trend may continue in the future. These industry downturns have been, and
may continue to be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices. As a
result, our future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. Any
negative factors affecting the semiconductor industry, including the downturns
described here, could significantly harm our business, financial condition and
results of operations.

We have a history of losses and an
accumulated deficit of approximately $103.3 million as of December 31, 2008. If
we do not generate sufficient net revenue in the future to achieve or sustain
profitability, our stock price could decline.

We have
incurred significant net losses since our inception, including losses of $3.5
million, $3.7 million and $7.1 million for the years ended December 31, 2008,
2007 and 2006, respectively. At December 31, 2008, we had an accumulated deficit
of approximately $103.3 million. We expect our future revenues to be impacted by
our long sales cycle and our revenue recognition policies, and we expect to
continue to invest in our research and development projects as well as service
operations required to support our business development activities. These
product and business development expenditures as well as other operating
expenses could continue to exceed our revenues, thus preventing us from
achieving and maintaining profitability. To achieve and maintain profitability,
we will need to generate and sustain substantially higher revenues while
maintaining reasonable cost and expense levels. If we fail to achieve
profitability within the time frame expected by securities analysts or investors
and our cash balances continue to decline, the market price of our common stock
will likely decline. We may not achieve profitability if our revenues do not
increase or if they increase more slowly than we expect. In addition, our
operating expenses are largely fixed, and any shortfall in anticipated revenues
in any given period could harm our operating results.

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The sales and implementation cycles
for our products are typically long and unpredictable, taking from three months
to one year or longer for sales and an additional one to six months for
implementation. As a result, we may have difficulty predicting future revenues
and our revenues and operating results may fluctuate significantly, which could
cause our stock price to fluctuate.

Our sales
cycle has ranged from three months to one year or longer and our customers
implementation cycle has been approximately an additional one to six months. We
believe that convincing a potential customer to integrate our technology into an
integrated circuit at the design stage, which we refer to as a design win, is
critical to retaining existing customers and to obtaining new customers.
However, acceptance of our embedded test technology generally involves a
significant commitment of resources by prospective customers and a fundamental
change in their method of designing and testing integrated circuits. Many of our
potential customers are large enterprises that generally do not adopt new design
methodologies quickly. Also, we may have limited access to the key
decision-makers of potential customers who can authorize the adoption of our
technology. As a result, the period between our initial contact with a potential
customer and the sale of our products to that customer, if any, is often lengthy
and may include delays associated with our customers budgeting and approval
processes, as well as a substantial investment of our time and resources. We
have incurred high customer engagement and support costs, including sales
commissions, and the failure to manage these costs could harm our operating
results.

If we
fail to achieve a design win with a potential customer early in a given product
cycle, it is unlikely that the potential customer will become a customer before
its next product cycle, if at all. Because of the length of our sales cycle, our
failure to achieve design wins could have a material and prolonged adverse
effect on our sales and revenue growth. Our revenue streams may fluctuate
significantly due to the length of our sales cycle, which may make our future
revenues difficult to project and may cause our stock price to
fluctuate.

If a customer cancels its order or
defaults on payment or if we renegotiate an existing order, we may be unable to
recognize revenue from backlog, which could have a material adverse effect on
our financial condition and results of operations.

A
significant portion of the orders in our backlog provides customers with
cancellation rights or is recognized as revenue when payment is due. In
addition, some orders extend over periods ranging up to thirty-six months. If a
customer cancels its order or delays its contractual payments we may not be able
to realize revenue from backlog in the time frame expected or at all. Also, it
is possible that customers from whom we expect to derive revenue from backlog
will default, and as a result we may not be able to recognize expected revenue
from backlog. If a customer defaults or fails to pay amounts owed, or if the
level of defaults increases, our bad debt expense is likely to increase.
Additionally, our customers may seek to renegotiate pre-existing contractual
commitments. If the current economic downturn is prolonged, our customers
financial condition and, in turn, their ability or willingness to fulfill their
contractual obligations to us could be adversely affected. Any material payment
default by our customers would harm our financial condition and results of
operations.

Fluctuations in our revenues and
operating results could cause the market price of our common stock to decline.

Our
revenues and operating results have fluctuated from quarter to quarter in the
past and may do so in the future, which could cause the market price of our
common stock to decline. Accordingly, quarter-to-quarter comparisons of our
results of operations may not be an indication of our future performance. In
future periods, our revenues and results of operations may be below the
estimates of public market analysts and investors. This discrepancy could cause
the market price of our common stock to decline.

Fluctuations in our revenues and
operating results may be caused by:

- timing, terms and conditions of customer
  agreements;
- customers placing orders at the end of the
  quarter;
- the mix of our license and service
  revenues;
- timing of customer usage of our technology in
  their product designs and the recognition of revenues therefrom when
  amounts are due based on design
  usage;
- timing of sales commission expenses and the
  recognition of license revenues from related customer
  agreements;
- changes in our and our customers development
  schedules and levels of expenditures on research and
  development;
- industry patterns and changes or cyclical and
  seasonal fluctuations in the markets we target;
- timing and acceptance of new technologies, product
  releases or enhancements by us, our competitors or our
  customers;
- timing and completion of milestones under customer
  agreements; and
- market and general economic
  conditions.

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Delays or
deferrals in purchasing decisions by our customers may increase as we develop
new or enhanced products. Our current dependence on a small number of customers
increases the revenue impact of each customers actions relative to these
factors. Our expense levels are based, in large part, on our expectations
regarding future revenues, and as a result net income (loss) for any quarterly
period in which material customer agreements are delayed could vary
significantly from our budget projections.

The accounting rules regarding
revenue recognition may cause fluctuations in our revenues independent of our
order position.

The
accounting rules we are required to follow require us to recognize revenues only
when certain criteria are met. As a result, for a given quarter it is possible
for us to fall short in our revenues and/or earnings estimates even though total
orders are according to our plan or, conversely, to meet our revenues and/or
earnings estimates even though total orders fall short of our plan, due to
revenues resulting from the recognition of previously deferred revenues. Orders
for software support and consulting services yield revenues over multiple
quarters, rather than at the time of sale. The specific terms agreed to with a
customer and/or any changes to the rules interpreting such terms may have the
effect of requiring deferral of product revenues in whole or in part or,
alternatively, of requiring us to accelerate the recognition of such revenues
for products to be used over multiple years.

Intense competition in the
semiconductor and systems industries, particularly in the design and test of
semiconductors, could prevent us from increasing or sustaining our revenues and
prevent us from achieving or sustaining profitability.

The
semiconductor and systems industries are extremely competitive and characterized
by rapidly changing technology. The market for embedded test solutions is still
evolving, and we expect competition to become more intense in the future. Our
current principal competitors in the design phase of product development
include:

- electronic design automation providers such as
  Cadence Design Systems, Inc., Magma Design Automation Inc., Mentor
  Graphics Corporation and Synopsys, Inc., all of which
  offer basic built-in self-test capability;
- smaller test tool providers;
- potential customers that develop test solutions
  internally; and
- integrated device manufacturers, such as
  International Business Machines Corporation, that use their own test
  solutions in chips manufactured for and sold to
  others.

Our
embedded test technology also has the potential to impact the automated test
equipment market, which may place us in competition with traditional hardware
tester manufacturers such as Advantest Corporation, LTX-Credence Corporation,
Teradyne, Inc. and Verigy Ltd. As embedded test becomes adopted more widely in
the market, any of these automated test equipment companies, or others, may
offer their own embedded test solutions. Most of our competitors in electronic
design automation and external test equipment businesses are significantly
larger than we are and have greater financial resources, greater name
recognition and longer operating histories than we have. Some of our competitors
offer a more comprehensive range of products covering the entire design flow and
complete external test flow, and they may be able to respond more quickly or
adjust prices more effectively to take advantage of new opportunities or
customer requirements. In addition, all of the tester manufacturers listed above
participate in our LVReady partner program through which our embedded test
access software is integrated into their test platform, which may provide them
with additional insight into our business and technology. Increased competition
in the semiconductor industry could result in pricing pressures, reduced sales,
reduced margins or failure to achieve or maintain widespread market acceptance,
any of which could prevent us from increasing or sustaining our revenues and
achieving or sustaining profitability.

Our target markets are comprised of
a limited number of customers. If we fail to obtain or retain customer
relationships, our revenues could decline.

We derive
a significant portion of our revenues from a relatively small number of
customers. Two customers accounted for approximately 18% and 16%, respectively,
of total revenues in the year ended December 31, 2008; these customers accounted
for approximately 21% and 19%, respectively, of total revenues in the year ended
December 31, 2007, and 26% and 18%, respectively, of total revenues for the year
ended December 31, 2006. We anticipate that we will continue to rely on a
limited number of customers for a substantial portion of our future revenues and
we must obtain additional large orders from customers on an ongoing basis to
increase our revenues and grow our business. In addition, the loss of any
significant or well-known customer could harm our operating results or our
reputation. In particular, a loss of a significant customer could cause
fluctuations in our results of operations because our expenses are fixed in the
short term, it takes us a long time to replace customers and, because of
required methods of revenue recognition, any offsetting license revenues may
need to be recognized over a period of time.

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We have relied and expect to
continue to rely on our ETCreate products for a significant portion of our
revenues.

Revenues
from sales of our ETCreate products and related maintenance and training
services accounted for 79%, 87% and 79% of our total revenues for the years
ended December 31, 2008, 2007 and 2006, respectively. We currently expect that
revenues from our ETCreate products will continue to account for a substantial
percentage of our revenues in the foreseeable future and thereafter. Our future
operating results are significantly dependent upon the continued market
acceptance of our products. Our business will be harmed if our products do not
continue to achieve market acceptance or if we fail to develop and market
improvements to our products or enhancements thereof. A decline in demand for
our ETCreate products as a result of competition, technological change or other
factors could harm our business.

Our products incorporate technology
licensed from third parties. If any of these licenses are terminated, our
ability to develop and license our products could be delayed or
reduced.

We use
technology, including software, which we license from third parties. If we do
not maintain our existing third party technology licenses or enter into licenses
for alternative technologies, we could be required to cease or delay product
shipments while we seek to develop alternative technologies.

We depend on third parties to
provide electronic design automation software that is compatible with our
solution. If these third parties do not continue to provide compatible design
products, we would need to develop alternatives, which could delay product
introductions and cause our revenues and operating results to decline.

Our
customers depend on electronic design automation software to design their
products using our solution. We depend on the same software to develop our
products. Although we have established relationships with a variety of
electronic design automation vendors to gain access to this software and to
assure compatibility, these relationships may be terminated with limited notice.
If any of these relationships were terminated and we were unable to obtain
alternative software in a timely manner, our customers could be unable to use
our solution. In addition, we could experience a significant increase in
development costs, our development process could take longer, product
introductions could be delayed and our revenues and operating results could
decline.

If automated test equipment
companies are unwilling to work with us to make our technology compatible with
theirs, we may need to pursue alternatives, which could increase the time it
takes us to bring our solution to market and decrease customer acceptance of our
technology.

Although
we are presently working with a number of automated test equipment companies to
achieve optimal compatibility of our technologies, these companies may elect not
to work with us in the future. If automated test equipment companies are
unwilling to incorporate modifications into their equipment and operating
systems to allow them to work with our technology, we may need to seek
alternatives. These alternatives might not provide optimal levels of test
function, and pursuing these alternatives could increase the time and expense it
takes us to bring our technology to market, either of which could decrease
customer acceptance of our technology and cause our revenues and margins to
decline.

Our future success will depend on
our ability to keep pace with rapid technological advancements in the
semiconductor industry. If we fail to develop and introduce new products and
enhancements on a timely basis, our ability to attract and retain customers
could be impaired, which would cause our operating results to decline.

The
semiconductor industry is characterized by rapidly changing technology, evolving
industry standards, rapid changes in customer requirements, frequent product
introductions and ongoing demands for greater speed and functionality. We must
continually design, develop and introduce new products with improved features to
be competitive. Our products may not achieve market acceptance or adequately
address the changing needs of the marketplace, and we may not be successful in
developing and marketing new products or enhancements to our existing products
on a timely basis. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. We may not have the
financial resources necessary to fund future innovations. If we are unable, for
technical, legal, financial or other reasons, to respond in a timely manner to
changing market conditions or customer requirements, our business and operating
results could be seriously harmed.

Future changes in financial
accounting standards, including pronouncements and interpretations of accounting
pronouncements on software revenue recognition and stock-based compensation, may
cause adverse unexpected revenue and expense fluctuations and affect our
reported results of operations.

A change in accounting policies can
have a significant effect on our reported results and may even affect our
reporting of transactions completed before a change is announced. In particular,
new pronouncements and varying interpretations of pronouncements on software
revenue recognition and stock-based compensation have occurred with frequency,
may occur in the future and could impact our revenues, expenses and results of
operations. Required changes in our methods of revenue recognition could result
in deferral of revenues recognized in current periods to subsequent periods or
accelerated recognition of deferred revenues to current periods, each of which
could cause shortfalls in meeting the expectations of investors and securities
analysts. Our stock price could decline as a result of any shortfall.

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For
example, the adoption of SFAS 123(R), Share-Based Payment, which requires
compensation costs relating to share-based payment transactions to be recognized
in financial statements beginning in January 2006, had a negative impact on our
results of operations and loss per share.

Accounting policies affecting many other aspects of our business,
including rules relating to revenue recognition and purchase accounting for
business combinations have recently been revised or are under review. Changes to
those rules or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.

We are exposed to risks from
legislation requiring companies to evaluate their internal control over
financial reporting.

Section
404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the
effectiveness of our internal control over financial reporting. Our independent
registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting beginning as
early as fiscal 2009. We have an ongoing program to perform the system and
process evaluation and testing necessary to comply with these requirements. We
expect to incur increased expense and to devote additional management resources
to Section 404 compliance. In the event our chief executive officer, chief
financial officer or independent registered public accounting firm determine
that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may be adversely affected
and could cause a decline in the market price of our stock.

Compliance with changing regulation
of corporate governance and public disclosure may result in additional
costs.

Changes in the laws and regulations
affecting public companies, including the provisions of the Sarbanes-Oxley Act
of 2002 and recent SEC and Nasdaq rules and regulations, are creating new duties
and requirements for us and our executives, directors, attorneys and our
independent registered public accounting firm. In order to comply with these
rules, we will have to incur additional costs for personnel and use additional
outside legal, accounting and advisory services, which will increase our
operating expenses. Management time associated with these compliance efforts
necessarily reduces time available for other operating activities, which could
adversely affect operating results. To date, our costs to comply with these
rules have not been significant; however, we cannot predict or estimate the
amount of future additional costs we may incur or the timing of such costs.

Our products may have errors or
defects that users identify after deployment, which could harm our reputation
and our business.

Our
products may contain undetected errors when first introduced or when new
versions or enhancements are released. We have from time to time found errors in
versions of our products, and we may find errors in our products in the future.
The occurrence of errors could cause sales of our products to decline, divert
the attention of management and engineering personnel from our product
development efforts and cause significant customer relations problems. Customer
relations problems could damage our reputation, hinder market acceptance of our
products and result in loss of future revenues.

We must continually attract and
retain engineering personnel, or we will be unable to execute our business
strategy.

Our strategy for encouraging the
adoption of our technology requires that we employ highly skilled engineers to
develop our products and work with our customers. In the past, we have
experienced difficulty in hiring and retaining highly skilled engineers with
appropriate qualifications to support our business. As a result, our future
success depends in part on our ability to identify, attract, retain and motivate
qualified engineering personnel. Competition for qualified engineers is intense,
especially in the Silicon Valley where our headquarters are located. If we lose
the services of a significant number of our engineers and we cannot hire and
integrate additional engineers, it could disrupt our ability to develop our
products and implement our business strategy.

We may be unable to replace the
technical, sales, marketing and managerial contributions of key
individuals.

We depend
on our senior executives, our research and development personnel and our sales
and marketing personnel, all of whom are critical to our business. We do not
have long-term employment agreements with our key employees nor do we maintain a
key person life insurance policy on any of our key employees. If we lose the
services of any of these key executives, our product development processes and
sales efforts could be slowed. We may also incur increased operating expenses
and be required to divert the attention of other senior executives to search for
their replacements. The integration of any executives or new personnel could
disrupt our ongoing operations.

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If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.

Our
success and ability to compete depend largely upon the protection of our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights. Our pending patent applications
may not result in issued patents, and our existing and future patents may not be
sufficiently broad to protect our proprietary technologies. Policing
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as U.S. laws. Any patents we obtain or license
may not be adequate to protect our proprietary rights. Our competitors may
independently develop similar technology, duplicate our products or design
around any patents issued to us or our other intellectual property
rights.

Litigation may be necessary to enforce our intellectual property rights
or to determine the validity or 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. We may need to take legal action to
enforce our proprietary rights in the future. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.

Any dispute involving our patents or
other intellectual property could include our industry partners and customers,
which could trigger our indemnification obligations to them and result in
substantial expense to us.

In any
dispute involving our patents or other intellectual property, our licensees
could also become the target of litigation. This could trigger technical support
and indemnification obligations in some of our license agreements which could
result in substantial expenses. In addition to the time and expense required for
us to support or indemnify our licensees, any such litigation could severely
disrupt or shut down the business of our licensees, which in turn could hurt our
relations with our customers and cause our revenues to decrease.

Failure to obtain export licenses
could harm our business.

We must
comply with U.S. Department of Commerce regulations in shipping our software and
hardware products and other technologies outside the United States. Although we
have not had any significant difficulty complying with these regulations to
date, any significant future difficulty in complying could harm our business,
operating results and financial condition.

We have limited control over
third-party representatives who market, sell and support our products in foreign
markets. Loss of these relationships could decrease our revenues and harm our
business.

We offer
our products and services for sale through distributors and sales
representatives in China, France, Germany, India, Israel, Japan, Korea, the UK
and Sweden. We anticipate that sales in these markets will account for a portion
of our total revenues in future periods. In 2005, we appointed a sales
representative in Israel and distributors in France and the UK. In 2006, we
appointed a sales representative in India. In 2007, we appointed a new
distributor in Japan, augmenting our direct sales organization. In 2008, we
appointed a new distributor in China, and two new sales representatives in
Europe. Our third-party representatives are not obligated to continue selling
our products, and they may terminate their arrangements with limited prior
notice. Growing our relationship with these new distributors and sales
representatives, or establishing alternative distribution channels in these
markets could consume substantial management time and resources, decrease our
revenues and increase our expenses.

We face business, political and
economic risks because a portion of our revenues and operations are outside of
the United States.

International revenues accounted for 30%, 25% and 16% of our total
revenues for the years ended December 31, 2008, 2007 and 2006, respectively. In
addition to our international sales, we have operations in Canada, Japan and the
UK. Our success depends upon continued expansion of our international
operations, and we expect that international revenues will continue to be an
important component of our total future revenues. Our international business
involves a number of risks, including:

- our ability to adapt our products to foreign
  design methods and practices;
- the uncertainty of international orders due to
  typically lengthy international selling cycles;
- cultural differences in the conduct of
  business;
- difficulty in attracting qualified
  personnel;
- managing foreign branch offices and
  subsidiaries;
- longer payment cycles for and greater difficulty
  collecting accounts receivable;

17

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- unexpected changes in regulatory requirements,
  royalties and withholding taxes that restrict the repatriation of
  earnings;
- tariffs and other trade barriers;
- the burden of complying with a wide variety of
  foreign laws; and
- political, economic, health or military conditions
  associated with worldwide conflicts and events.

As a
result of our direct selling activities in Japan, a portion of our international
revenues is denominated in Japanese yen, which is subject to exposure from
movements in foreign currency exchange rates. In addition, most of our remaining
international revenues are denominated in U.S. dollars, creating a risk that
fluctuation in currency exchange rates will make our prices uncompetitive. To
the extent that profit is generated or losses are incurred in foreign countries,
our effective income tax rate may be significantly affected. Any of these
factors could significantly harm our future international sales and,
consequently, our revenues and overall results of operations and business and
financial condition.

We may be unable to consummate
future potential acquisitions or investments or successfully integrate acquired
businesses or investments or foreign operations with our business, which may
disrupt our business, divert managements attention and slow our ability to
expand the range of our proprietary technologies and products.

We may
expand the range of our proprietary technologies and products, acquire or make
investments in additional complementary businesses, technologies or products, if
appropriate opportunities arise. For example, in 2004, we completed the
acquisition of SiVerion, Inc. 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. Our acquisition of SiVerion, Inc. and any future acquisitions
may involve risks such as the following:

- we may not achieve the anticipated benefits of the
  acquisitions;
- our acquisition and integration costs may be
  higher than we anticipated and may cause our quarterly and annual operating
  results to fluctuate;
- we may be unable to retain key employees, such as
  management, technical or sales personnel, of the acquired
  businesses;
- we may experience difficulty and expense in
  assimilating the operations and personnel of the acquired businesses, which
  could be further affected by the acquired businesses not being located near
  our existing sites;
- we may incur amortization or impairment expenses
  if an acquisition results in significant goodwill or other intangible
  assets;
- we may be unable to complete the development and
  application of the acquired technology or products or integrate the technology
  or products with our own;
- we may be exposed to unknown liabilities of
  acquired companies;
- we may experience difficulties in establishing and
  maintaining uniform standards, controls, procedures and
  policies;
- our relationships with key customers of acquired
  businesses may be impaired, due to changes in management and ownership of the
  acquired businesses; or
- our stockholders may be diluted if we pay for the
  acquisition with equity securities.

These
factors could disrupt our ongoing business, distract our management and
employees and increase our expenses or otherwise harm our operating
results.

Intellectual property litigation,
which is common in our industry, could be costly, harm our reputation, limit our
ability to license or sell our proprietary technologies or products and divert
the attention of management and technical personnel.

The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. While we have not received formal notice
of any infringement of the rights of any third party, questions of infringement
in the semiconductor field involve highly technical and subjective analyses.
Litigation may be necessary in the future to enforce any patents we may receive
and other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity, and we may not prevail in
any future litigation. Any such litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and could divert
the efforts and attention of our management and technical personnel from normal
business operations. Adverse determinations in litigation could result in the
loss of our proprietary rights, subject us to significant liabilities, require
us to seek licenses from third parties or prevent us from licensing our
technology or selling our products, any of which could harm our
business.

18

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Our stock price may decline
significantly because of stock market fluctuations that affect the prices of
technology stocks. A decline in our stock price could result in securities class
action litigation against us that could divert managements attention and harm
our business.

The stock
market has experienced significant price and trading volume fluctuations that
have adversely affected the market prices of common stock of technology
companies. These broad market fluctuations may reduce the market price of our
common stock. In the past, securities class action litigation has often been
brought against a company after periods of volatility in the market price of
securities. In the future, we may be a target of similar litigation. Securities
litigation could result in substantial costs and divert our managements
attention and resources, which in turn could harm our ability to execute our
business plan.

Our stock may fail to meet the
requirements for continued listing on The Nasdaq Capital Market, in which case
the price and liquidity of our common stock may decline. The reverse stock split
of our common stock may reduce the liquidity of our common stock, and the market
price of our common stock may decline.

We are
subject to the continued listing requirements of The Nasdaq Capital Market,
which include a $1.00 minimum closing bid price requirement. When we transferred
from The Nasdaq Global Market to The Nasdaq Capital Market, we were not in
compliance with this minimum closing bid price requirement. Effective March 12,
2008, we implemented a 1-for-2.5 reverse stock split of our common stock. On
March 31, 2008, we received a notice from The Nasdaq Stock Market stating that,
because the closing bid price of our common stock had been at $1.00 per share or
greater for at least 10 consecutive business days, we had regained compliance.
We cannot assure you, however, that we will be able to continue to maintain
compliance with the minimum bid price requirement. If we fail to maintain
compliance with the minimum bid price requirement and are delisted, our
financial condition could be harmed and our stock price would likely decline.
The reverse stock split reduced the number of shares of our common stock
outstanding, which could adversely affect the liquidity of our common stock,
which could adversely affect the market price of our common stock.

Our ability to raise capital in the
future may be limited and our failure to raise capital when needed could prevent
us from growing.

We
believe that our existing cash resources and available debt financing will be
sufficient to meet our anticipated cash needs for at least the next 12 months.
However, the timing and amount of our working capital and capital expenditure
requirements may vary significantly depending on numerous factors,
including:

- the level and timing of license and service
  revenues;
- the costs and timing of expansion of product
  development efforts and the success of these development
  efforts;
- the extent to which our existing and new products
  gain market acceptance;
- the costs and timing of expansion of sales and
  marketing activities;
- competing technological and marketing
  developments;
- the extent of international
  operations;
- the need to adapt to changing technologies and
  technical requirements;
- the costs involved in maintaining and enforcing
  patent claims and other intellectual property rights;
- the existence of opportunities for expansion and
  for acquisitions of, investments in, complementary businesses, technologies or
  product lines; and
- access to and availability of sufficient
  management, technical, marketing and financial personnel.

If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing. The sale of additional equity securities or debt securities would
result in additional dilution to our stockholders. Additional debt would result
in increased expenses and could result in covenants that would restrict our
operations. If adequate funds are not available or are not available on
acceptable terms, this would significantly limit our ability to hire, train or
retain employees, support our expansion, take advantage of unanticipated
opportunities such as acquisitions of businesses or technologies, develop or
enhance products, or respond to competitive pressures.

Item 1B. Unresolved Staff Comments

None.

19

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Item 2. Properties

Our
principal executive offices are located in San Jose, California, where we lease
approximately 18,000 square feet. We believe that these offices will be adequate
to meet our requirements for the next 12 months. We have a research and
development office in Ottawa, Canada. We have domestic sales and service
representatives in Massachusetts, sales representatives in southern California
and Texas, and engineering personnel in Arizona and Oregon. In addition, we have
an international sales and service office in Japan and a customer service office
in the UK. In December 2008, we exited out of our Massachusetts office and
reduced the utilized space leased in San Jose, California.

Item 3. Legal Proceedings

We are not currently a party to any
material legal proceedings.

Item 4. Submission of Matters to a
Vote of Security Holders

None.

Executive Officers of the Registrant

The following table sets forth
information regarding our executive officers as of December 31, 2008:

Name
    
    Age
    
    PositionJames T. Healy
    
    68
    
    President, Chief Executive Officer and a directorFadi
      Maamari
    
    46
    
    Chief Operating
      OfficerMei Song
    
    40
    
    Vice President of Finance and Chief Financial Officer


James
T. Healyhas served as our President and
Chief Executive Officer since December 2003. From July 2002 to November 2003,
Mr. Healy was President of Spirox USA and Executive Vice President of Business
Development and Strategic Marketing for Spirox Corporation, a provider of
semiconductor manufacturing equipment and software. From April 2000 to June
2002, Mr. Healy was President of ASAT, Inc., a provider of semiconductor design,
assembly and test services. From December 1999 to March 2000, Mr. Healy served
as an independent consultant to software companies. He holds a B.S. in Business
and a M.S. in Psychology from California State University, Hayward.

Fadi
Maamarihas served as our Chief Operating
Officer since October 2008. From 2006 to October 2008, he served as our Vice
President of Engineering. From 1996 to 2006, he held senior management positions
in Engineering, Applications Engineering and Marketing at the Company. From 1990
to 1996, Dr. Maamari was a member of Technical Staff at AT&T Bell Labs
Engineering Research Center in Princeton, New Jersey. He holds a Ph.D. in
Electrical Engineering from McGill University, and M.S. and B.S. degrees from
École Polytechnique in Montreal, Canada.

Mei
Songhas served as our Vice President of
Finance and Chief Financial Officer since October 2008. From 2006 to 2008, Ms.
Song served as our Controller. Prior to that, Ms. Song has held various finance
positions at the Company since 2000. Prior to joining the Company, she held
different positions with Communication Power Industries, Inc, Pharsight Corp.,
and Summit Micro Design. Ms. Song holds an M.B.A. from Auburn University and a
B.S. from the Hefei Institute of Economics & Technology.

20

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PART II

Item 5. Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Our common
stock, par value $0.0001 (Common Stock), is currently traded on The Nasdaq
Capital Market under the symbol LGVN. Prior to October 24, 2007, our Common
Stock was traded on The Nasdaq Global Market. The following table sets forth,
for the periods indicated, the range of high and low sales prices for our Common
Stock on Nasdaq, as reported by Nasdaq consolidated transaction reporting
system.

2008
    High
    
    LowFourth Quarter
    $
    1.00
    
    $
    0.35Third Quarter
    $
    1.61
    
    $
    0.24Second Quarter
    $
    2.02
    
    $
    0.99First Quarter
    $
    2.48
    
    $
    1.202007
    High
    
    LowFourth Quarter
    $
    3.00
    
    $
    1.25Third Quarter
    $
    2.43
    
    $
    1.75Second Quarter
    $
    2.45
    
    $
    1.73First Quarter
    $
    3.20
    
    $
    2.03Note: All per share data
      has been adjusted to reflect the 1-for-2.5 reverse stock split of our
      Common Stock which became effective March 12,
2008.


As of
February 27, 2009, our Common Stock was held by 67 stockholders of record.
Because many of the shares of our Common Stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial owners represented by these stockholders of record. We have
never declared or paid dividends on our capital stock and do not currently
intend to pay any cash dividends on our Common Stock in the foreseeable future.
We expect to retain future earnings, if any, to fund the development and growth
of our business. Our board of directors will determine the amount and timing of
future dividends, if any. Our current bank loan agreement prohibits the payment
of cash dividends without the approval of the bank.

Purchases of Equity Securities by
the Issuer and Affiliated Purchasers

|                                     |  |                    |  |            |      |                          | Total
      Number of  |                                 | Approximate
      Dollar
|------------------------------------ |  | ------------------ |  | ---------- | ---- | ------------------------ | ---------------------- | ------------------------------- | ------------------------
|                                     |  |                    |  |            |      |                          | Shares
      Purchased |                                 | Value of
      Shares   
|                                     |  | Total
      Number |  | Average    |      | as Part
      of         |                        | that May
      Yet be          
|                                     |  | of
      Shares    |  | Price Paid |      | Publicly
      Announced |                        | Purchased
      Under          
|Period                               |  | Purchased (1)      |  | per Share  |      | Plans or Programs        |                        | the Plans or Programs
      (2)
|October 1 - October 31, 2008         |  | -                  |  |            | -    |                          | -                      |                                 | -                       
|November 1 -
      November 30, 2008 |  | 91,474             |  | $          | 0.52 |                          | -                      |                                 | -                       
|December 1 - December 31,
      2008 |  | -                  |  |            | -    |                          | -                      |                                 | -                       

|(1) |  | Indicates the number
      of shares of Common Stock purchased by the Company in the corresponding
      period.                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In April and November
      2008, the Board of Directors approved the Companys repurchase of these
      shares of the Companys Common Stock in open market
  transactions.

21

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Item 6. Selected Financial
Data

The
following selected consolidated financial data are 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 related Notes included in Item 8 of this Report. The selected
consolidated balance sheet data as of December 31, 2008 and 2007 and selected
consolidated statements of operations data for the years ended December 31,
2008, 2007 and 2006, are derived from our audited consolidated financial
statements included elsewhere in this Report. The selected consolidated balance
sheet data as of December 31, 2006, 2005 and 2004 and the selected consolidated
statements of operations data for the years ended December 31, 2005 and 2004
were derived from consolidated financial statements not included in this Report.
Our historical results are not necessarily indicative of our future
results.

|                                                           | Years Ended December
    31,               
|---------------------------------------------------------- | -------------------------------------------
|                                                           | 2008                                       
|Consolidated
      statements of operations data           | (in
      thousands, except per share data)
|Revenues:                                                  |                                            
|License                                                    | $                                          
|Service                                                    |                                            
|Product                                                    |                                            
|Total revenues                                             |                                            
|                                                          
|Cost of revenues:                                          |                                            
|License                                                    |                                            
|Service                                                    |                                            
|Product                                                    |                                            
|Total cost of revenues                                     |                                            
|Gross
      profit                                         |                                            
|                                                          
|Operating expenses:                                        |                                            
|Research and
      development                             |                                            
|Sales and
      marketing                                  |                                            
|General and
      administrative                           |                                            
|Restructuring                                              |                                            
|Total operating expenses                                   |                                            
|                                                          
|Loss from operations                                       |                                            
|Interest
      income                                      |                                            
|Other income (expense), net                                |                                            
|                                                          
|Loss before provision (benefit) for income taxes           |                                            
|Provision
      (benefit) for income taxes                 |                                            
|                                                          
|Net loss                                                   | $                                          
|                                                          
|Net loss per share, basic and diluted(1)                   | $                                          
|Weighted average
      common shares, basic and diluted(1) |                                            

Note: All share and per share data has
been adjusted to reflect the 1-for-2.5 reverse stock split which became
effective March 12, 2008.____________________



|(1) |  | The diluted net loss
      per share computation excludes potential shares of common stock (options
      and warrants to purchase common stock), as their effect would be
      antidilutive.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Company adopted
      SFAS 123(R) effective January 1, 2006.                                                                                                                              

22

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|                                                     | December 31,        
|---------------------------------------------------- | --------------------
|                                                     | 2008                
|Consolidated
      balance sheet data                | (in
      thousands)
|Cash and cash equivalents and short-term investments | $                   
|Marketable
      securities                          |                     
|Working capital                                      |                     
|Total
      assets                                   |                     
|Short-term debt                                      |                     
|Total
      stockholders' equity                     |                     

Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations

The
following discussion and analysis of the Companys financial condition and
results of operations should be read in conjunction with Selected Financial
Data and the Consolidated Financial Statements and related Notes included
elsewhere in this Report. All share and per share data has been adjusted to
reflect the 1-for-2.5 reverse stock split of our Common Stock which became
effective March 12, 2008.

Overview

**General**

We are a
test and yield learning company in the semiconductor design-for-test, or DFT,
sector. Our proprietary technologies for embedded test and diagnostics enable
the more efficient test of complex semiconductor devices. Our technology allows
semiconductor designers to insert test structures inside semiconductor
integrated circuits. These test structures allow designers and engineers to test
the functionality and performance of their devices throughout each key stage of
a complex semiconductors life cycle. The most complex of these circuits are
called System-on-a-Chip, or SoC, semiconductors. Our embedded test solution has
been successfully deployed in SoCs found in digital consumer products,
automotive electronics, medical products, networking and wireless communications
devices, computers and satellite systems.

Our
solution also allows testing of integrated circuits after they have been
assembled onto boards and systems, enabling diagnostic test throughout the
semiconductors life cycle. Our analysis software aggregates and analyzes data
from various semiconductor test sources to identify whether silicon behavior
meets design criteria across varying manufacturing and operating conditions. Our
embedded test products generate proprietary circuit structures that are
incorporated into an integrated circuit to test and diagnose the chip at full
speed, without the signal delay or degradation experienced by external testers.
Our proprietary circuits are designed to be modular and reusable, to enable more
efficient design and to address time-to-market and manufacturing yield
issues.

We
believe our products can reduce semiconductor manufacturing and test costs,
accelerate silicon bring-up times, provide for yield learning, improve
time-to-yield and result in less field returns. The target market for our
technology is SoC designs with feature widths of 130 nanometers, 90 nanometers,
65 nanometers, and 45 nanometers and smaller. A nanometer is one billionth of a
meter.

Our
customers include application specific integrated circuit or SoC designers in
systems companies, fabless companies and integrated device manufacturers that
use our technology in their application specific integrated circuits or SoC as
part of systems development and for complex chip development and testing. We
license our intellectual property and software through our direct sales force in
the United States and Japan, and through our distributors or independent sales
representatives in China, Europe, Korea and Japan.

We have
elected to focus our sales and marketing efforts on larger customers with
greater resources. Such large customers generally do not adopt new design
methodologies quickly. Also, we may have limited access to the key
decision-makers of potential customers who can authorize the adoption of our
technology. As a result, the period between our initial contact with a potential
customer and the sale of our products to that customer, if any, is often lengthy
and may include delays associated with our customers budgeting and approval
processes, as well as a substantial investment of our time and
resources.

We
received new orders of $17.9 million in 2008 compared to $12.0 million in 2007.
This increase in new orders was primarily due to the receipt of large renewal
orders in 2008 from domestic customers. We expect receipt of new orders to
fluctuate due to the lengthy sales cycles and our dependence on large orders.
Our backlog of orders, including deferred revenue, at December 31, 2008 which is
expected to be recognized as revenue during 2009 was $9.9 million, compared with
$8.7 million at the end of 2007. Backlog is comprised of deferred revenue
(orders which have been billed but for which revenue has not yet been
recognized) plus written purchase orders which have been accepted but have not
yet been billed and for which no revenue has been recognized. A significant
portion of the orders which have been accepted but have not yet been billed
provides customers with cancellation rights and customers may also renew
contracts before their expiration or modify that portion of their orders which
is cancelable. Therefore, our backlog at any particular date is not necessarily
indicative of revenues to be recognized during any succeeding period.

23

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**Restructuring**

In the
fourth quarter of 2008, we implemented a restructuring plan to reduce operating
costs by consolidating facilities. Accordingly, we recognized a restructuring
charge of approximately $0.3 million for facility abandonment expenses and other
contractual charges associated with these facilities. The restructuring plan
eliminated the Massachusetts facility and reduced the utilized space leased in
San Jose, California. The restructuring plan was substantially completed by the
end of December 2008.

Critical Accounting Policies and
Estimates

We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, investments, impairment of
goodwill and intangible assets, accounting for stock-based compensation and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

*Revenue Recognition*

We
account for our revenue under the provisions of Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions.

We derive
our revenues from three primary sources: license revenues, comprised of fees
associated with the licensing of software; service revenues, from maintenance
and consulting and training services; and product revenues, from the sale of
hardware products. Revenue is recognized when persuasive evidence of an
arrangement exists, all obligations have been performed pursuant to the terms of
such an arrangement, the product has been delivered, the fee is fixed or
determinable and the collection of the resulting receivable is reasonably
assured. If any of these criteria are not met, we defer revenue recognition
until such time as all criteria are met. Payments received in advance of
revenues being recognized are presented as deferred revenue.

*License revenues.*We have three license types:

- Subscription licenses  subscription licenses
  include software licenses and maintenance for a specific time period,
  generally three years or less. Maintenance is bundled into the license
  agreement for the term of the license and is not charged separately. Since
  vendor-specific objective evidence, or VSOE, of fair value does not exist for
  each element of the arrangement, revenues from subscription licenses are
  recognized ratably over the license term commencing upon the effective date of
  the license, if delivery and other revenue recognition criteria are
  met.
- Term licenses  term licenses include software
  licenses for a specific time period, generally three to five years.Revenues associated with term licenses are
  recognized on the effective date of the license, if delivery and other revenue
  recognition criteria are met. Maintenance agreements for term licenses are
  sold separately for a specified period and may continue to be renewed for the
  balance of the license term.
- Perpetual licenses  perpetual licenses consist of
  software licensed on a perpetual basis. Revenues associated with perpetual
  licenses are recognized on the effective date of the license, if delivery has
  occurred and other revenue recognition criteria are met. We no longer offer
  this type of license.

The
timing of revenue recognition for licenses will differ depending on the license
type and on the individual terms and conditions associated with each particular
license agreement. We use VSOE of fair value to allocate the total fee among all
delivered and undelivered elements in those arrangements which contain multiple
elements. If the arrangement includes the future delivery of a specified product
or upgrade, all revenues under the arrangement are deferred until the specified
product or upgrade has been delivered. If VSOE does not exist for one or more
delivered elements, we apply the residual method of accounting to the delivered
elements. Under the residual method, we defer the VSOE of the fair value of the
undelivered elements and recognize revenue on the remaining portion of the
arrangement. VSOE for maintenance is generally based upon the customers annual
renewal rates as set forth in the license agreement. When VSOE for maintenance
cannot be established, we recognize all related revenues ratably over the term
of our maintenance obligation. VSOE for services is generally based on the price
charged when the services are sold separately. The timing of revenue recognition
for both delivered and undelivered elements is in accordance with the relevant
provisions of SOP 97-2.

24

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On
occasion we offer extended payment terms beyond our normal business practice of
between 30 and 60 days to certain customers. We do not have sufficient
experience collecting under these extended payment term arrangements. As a
result, when payment terms are extended, the fee is not considered fixed or
determinable and we recognize revenue when the payment is due.

Service revenues.We recognize
maintenance revenue ratably over the maintenance period. Customers generally
renew maintenance agreements for term and perpetual licenses annually. We
allocate a portion of the subscription license revenue to maintenance revenue
using the estimated fair value of the maintenance, which is based on maintenance
renewals sold separately for similar products.

We
generally recognize consulting service revenues as the services are performed or
when specified milestones are met. Training revenues are recognized when the
training is performed.

Product revenues.Our hardware
products are generally sold together with a subscription license for software;
therefore, we have been unable to establish VSOE for the product when sold
separately. Product revenues are generally recognized ratably over the term of
the subscription license sold together with the product commencing upon delivery
of the product if other revenue recognition criteria are met.

Deferred revenue.Deferred revenue
consists primarily of unearned license revenues and maintenance and support
services under maintenance contracts. Deferred revenue represents the excess of
amounts invoiced or received over the revenue recognized. Deferred revenue
fluctuates at each period end based on invoice terms and the mix of
contracts.

*Allowance for Doubtful Accounts*

We make
ongoing assumptions relating to the credit worthiness of our customers in
estimating our allowance for doubtful accounts. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

*Valuation of Investments*

Statement
of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements,
(SFAS 157)defines fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Our investment portfolio may at any time
contain investments in money market accounts, commercial paper and government
agency securities. In the current market environment, the assessment of the fair
value of the securities can be difficult and subjective. The volume of trading
activity of certain securities has declined, and the rapid changes occurring in
todays financial markets can lead to changes in the fair value of financial
instruments in relatively short periods of time. SFAS 157 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. Each level of input has different
levels of subjectivity and difficulty involved in determining fair value.

Level 1
investments  Inputs used to measure fair value are unadjusted quoted prices
that are available in active markets for the identical assets or liabilities as
of the reporting date. Therefore, determining fair value for Level 1 investments
generally does not require significant judgment, and the estimation is not
difficult.

Level 2
investments  Pricing is provided by third party sources of market information
obtained through our investment advisors. We do not adjust for or apply any
additional assumptions or estimates to the pricing information we receive from
the advisors.

Level 3
investments  Inputs used to measure fair value are unobservable inputs that are
supported by little or no market activity and reflect the use of significant
management judgment. These values are generally determined using pricing models
for which the assumptions utilize managements estimates of market participant
assumptions. The determination of fair value for Level 3 investments involves
the most management judgment and subjectivity.

On
January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No.
115 which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. We did not elect the fair value option for our financial assets
and liabilities existing on January 1, 2008, and did not elect the fair value
option for any financial assets and liabilities transacted during the twelve
months ended December 31, 2008.

25

---

In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active(FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 became effective
immediately, including prior periods for which financial statements have not
been issued. Therefore, we adopted the provisions of FSP 157-3 in our
consolidated financial statements for the year ended December 31, 2008. The
adoption did not have a material impact on the Companys consolidated results of
operations or financial condition.

We
measure our financial assets, specifically our cash equivalents and short-term
investments, at fair value on a recurring basis. We do not have any financial
liabilities that are measured at fair value on a recurring basis.

*Goodwill impairment*

Our
long-lived assets include goodwill and other intangible assets. Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
requires that goodwill be tested for impairment at the reporting unit level
(operating segment or one level below an operating segment) on an annual basis
and between annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value of the reporting unit.
Significant judgments required to estimate the fair value of a reporting unit
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for the reporting unit. Any impairment
losses recorded in the future could have a material adverse impact on our
consolidated financial condition and results of operations.

*Valuation of long-lived intangible
assets*

Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires that we record an impairment charge on
finite-lived intangibles or long-lived assets to be held and used when we
determine that the carrying value of intangible assets and long-lived assets may
not be recoverable. Based on the existence of one or more indicators of
impairment, we measure any impairment of intangibles or long-lived assets based
on a projected discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our business model.
Our estimates of cash flows require significant judgment based on our historical
results and anticipated results and are subject to many factors.

*Accounting for Stock-Based Compensation.*

Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
(SFAS 123(R)) requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including
employee stock options and employee stock purchases under our 2000 Employee
Stock Purchase Plan based on estimated fair values.

Stock-based compensation expense recognized under SFAS 123(R) for the
years ended December 31, 2008, 2007 and 2006 was $513,000, $990,000 and
$376,000, respectively, which consisted of stock-based compensation expense
related to employee stock options and the employee stock purchase
plan.

SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statements of
Operations.

Stock-based compensation expense recognized during the current period is
based on the value of the portion of share-based payment awards that is
ultimately expected to vest during the period. Stock-based compensation expense
recognized in our Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006 include compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31, 2005
based on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123, Accounting for Stock-based Compensation, and
compensation expense for the share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Compensation expense for all share-based
payment awards is recognized using the multiple option approach. As stock-based
compensation expense recognized in the Consolidated Statements of Operations for
the years ended December 31, 2008, 2007 and 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.

26

---

We use the Black-Scholes option-pricing model (Black-Scholes
model) to determine the fair value of share-based awards granted. Our
determination of fair value of share-based payment awards on the date of grant
using an option-pricingmodel is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors. Expected volatilities are based on the historical volatility
of our common stock. We use historical data to estimate option exercise and
employee terminations. The expected term of the options granted represents the
period of time that options are expected to be outstanding, based on historical
information. The risk-free interest rate is based on the U.S. Treasury
zero-coupon issues with remaining terms similar to the expected term of our
equity awards. We do not anticipate paying any cash dividends in the foreseeable
future and therefore used an expected dividend yield of zero.

For further information on
stock-based compensation, see Note 8 of the Notes to the Consolidated Financial
Statements.

*Accounting for Income Taxes*

Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109,
which provisions included a two-step approach to recognizing, de-recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109
(SFAS No. 109), Accounting for Income Taxes. As a result of the
implementation of FIN No. 48, the Company recognized an increase of
approximately $0.6 million in the liability for unrecognized tax benefits and a
decrease in the related reserve of the same amount. Therefore upon
implementation of FIN No. 48, the Company recognized no material adjustment to
the January 1, 2007 balance of accumulated deficit.

The
Company adopted a policy to classify accrued interest and penalties as part of
the accrued FIN No. 48 liability in the provision for income taxes. For the year
ended December 31, 2008, the Company did not recognize interest or penalties
related to unrecognized tax benefits.

Unrecognized
      Tax BenefitsBalance at January 1, 2008
    
    $
    600,000Additions for
      tax positions of prior years
    
    
    -Reductions for tax position of prior years
    
    
    -Additions based
      on tax positions related to the current year
    
    
    -Decreases  Settlements
    
    
    -Reductions 
      Settlements
    
    
    -Balance at December 31, 2008
    
    $
    600,000


None of the $0.6 million of tax
positions would affect our income tax expense if recognized.

Our
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. As of December 31, 2008, the Company had no
accrued interest and penalties related to uncertain tax matters.

By the
end of 2009, the Company expects to have no uncertain tax positions that would
be reduced as a result of a lapse of the applicable statute of limitations. We
do not anticipate the adjustments would result in a material change to our
financial position.

We file
income tax returns in the U.S. federal jurisdictions, and various states and
foreign jurisdictions. The 1991 through 2008 tax years are open and may be
subject to potential examination in one or more jurisdictions. The Company is
not currently under federal, state or foreign income tax
examination.

27

---

Results of Operations

The table
below sets forth the fluctuations in revenues, cost of revenues and gross profit
data from 2008 to 2007 and 2007 to 2006 (in thousands, except percentage data):

|                              |  | Year ended December
31, |        | % change
|----------------------------- |  | ----------------------- | ------ | --------
|                              |  | 2008                    |        | 2007    
|Revenues:                     |  |                         |        |         
|License                       |  | $                       | 5,771  |         
|Service                       |  |                         | 6,402  |         
|Product                       |  |                         | -      |         
|Total revenues                |  |                         | 12,173 |         
|                             
|Cost of
      revenues:       |  |                         |        |         
|License                       |  |                         | 667    |         
|Service                       |  |                         | 2,572  |         
|Total cost of revenues        |  |                         | 3,239  |         
|                             
|Gross profit                  |  | $                       | 8,934  |         
|                             
|Percentage of total revenues: |  |                         |        |         
|Revenues:                     |  |                         |        |         
|License                       |  |                         | 47     | %       
|Service                       |  |                         | 53     | %       
|Product                       |  |                         | 0      | %       
|Total revenues                |  |                         | 100    | %       
|                             
|Cost of
      revenues:       |  |                         |        |         
|License                       |  |                         | 6      | %       
|Service                       |  |                         | 21     | %       
|Total cost of revenues        |  |                         | 27     | %       
|                             
|Gross profit                  |  |                         | 73     | %       

*Total revenues*

Total
revenues increased in 2008 approximately 5% compared to 2007 primarily due to an
increase in new orders received during 2008 and 2007. New orders received in
2008 were $17.9 million, an increase of 49% from $12.0 million in 2007. The new
orders in 2008 generated revenue of $3.3 million. In 2007, revenue recognized
from new orders in 2007 was about $3.1 million.

Total
revenues increased in 2007 nearly 11% compared to 2006 primarily due to an
increase in new orders received during the year. New orders received in 2007
were $12.0 million, an increase of 21% from $9.9 million in 2006. In 2006,
revenue recognized from new orders in 2006 was about $1.1 million.

*Total cost of revenues*

Cost of
license revenues consists of shipping, product packaging, software license and
maintenance costs, materials and labor costs, amortization of developed
technology and royalties paid to third party vendors. Cost of service revenues
consists of compensation and related costs and third-party consultant costs
associated with providing post contract customer support and consulting
services.

Total
cost of revenues in 2008 were approximately equal to 2007 at $3.2 million. Cost
of license revenue decreased primarily due to a decrease in third party software
license fees. Cost of service revenue increased primarily due to an increase in
post-sales customer support.

Total
cost of revenues increased in 2007 compared to 2006 primarily due an increase in
post-sales customer support. Cost of license revenues decreased in 2007 compared
to 2006 primarily due to a decrease in third party software license fees.

28

---

Revenues by product line and country

The table
below sets forth the fluctuations in revenues by product line and geographic
region for the year ended December 31, 2008, 2007 and 2006 (in thousands, except
percentage data):

Year ended December 31,
    
    % change2008
    
    2007
    
    2006
    
    2008/2007
    
    2007/2006Revenue by product
      line:ETCreate
    $
    9,608
    
    
    $
    9,621
    
    
    $
    7,774
    
    
    -0.1
    %
    
    23.8
    %Silicon Insight
    
    1,720
    
    
    
    1,313
    
    
    
    1,759
    
    
    31.0
    %
    
    -25.4
    %Yield Insight
    
    -
    
    
    
    93
    
    
    
    134
    
    
    -100.0
    %
    
    -30.6
    %Consulting & Training
    
    845
    
    
    
    591
    
    
    
    850
    
    
    43.0
    %
    
    -30.5
    %Total
      revenues
    $
    12,173
    
    
    $
    11,618
    
    
    $
    10,517
    
    
    4.8
    %
    
    10.5
    %Revenue by geographic
      region:United States
    $
    8,580
    
    
    $
    8,766
    
    
    $
    8,827
    
    
    -2.1
    %
    
    -0.7
    %Japan
    
    2,118
    
    
    
    1,901
    
    
    
    1,176
    
    
    11.4
    %
    
    61.6
    %Other
    
    1,475
    
    
    
    951
    
    
    
    514
    
    
    55.1
    %
    
    85.0
    %Total
      revenues
    $
    12,173
    
    
    $
    11,618
    
    
    $
    10,517
    
    
    4.8
    %
    
    10.5
    %Percentage of total revenues:Revenue by product line:ETCreate
    
    79
    %
    
    
    83
    %
    
    
    74
    %Silicon Insight
    
    14
    %
    
    
    11
    %
    
    
    17
    %Yield Insight
    
    0
    %
    
    
    1
    %
    
    
    1
    %Consulting & Training
    
    7
    %
    
    
    5
    %
    
    
    8
    %Total
      revenues
    
    100
    %
    
    
    100
    %
    
    
    100
    %Revenue by
      geographic region:United States
    
    71
    %
    
    
    76
    %
    
    
    84
    %Japan
    
    17
    %
    
    
    16
    %
    
    
    11
    %Other
    
    12
    %
    
    
    8
    %
    
    
    5
    %Total
      revenues
    
    100
    %
    
    
    100
    %
    
    
    100
    %


Product line:

**ETCreate**is the product sub-family formerly known as icBIST, which
consists of embedded test intellectual property and corresponding design
automation software that provides embedded test solutions for different
components of an ASIC or SoC design.

ETCreate
revenue in 2008 compared to 2007 was relatively unchanged. ETCreate revenue
increased in 2007 compared to 2006 due to an increase in new orders received in
2007. These new orders generated higher levels of recognizable revenue because
of the license term and the timing of the receipt of the order.

**Silicon Insight**is the product sub-family which consists
of hardware and software products for use with third party test platforms or for
use on an engineers desktop using a Linux PC. Silicon Insight enables faster
time-to-market and lower test costs through the support of interactive or test
program controlled at-speed testing, datalogging, and debug of silicon designed
with LogicVisions embedded test IP.

Silicon
Insight revenue increased in 2008 compared to 2007 due to more customer
adoptions of the product. Silicon Insight revenue decreased in 2007 compared to
2006 due to lower sales of the Validator product.

TheYield Insightproduct sub-family
consists of parametric analysis and visualization software that uses
semiconductor manufacturing process and test data to help assess parametric
yields and identify parametric yield limiters. The Yield Insight product was
derived from technology obtained from the acquisition of SiVerion, Inc. in late
2004. The revenue data was too small to be meaningful in 2008, 2007 and 2006.

29

---

Consulting and Trainingrevenues
fluctuated between 2008 and 2007, and 2007 and 2006 based upon customer
requirements for special work or training needs.

Geographic region:

Revenue in the United States and
Japan remained essentially unchanged in 2008 and 2007. Revenue in other
countries grew primarily due to the increase in business from a large
multinational customer.

Operating Expenses:

The table
below sets forth operating expense data from 2008 to 2007 and 2007 to 2006 (in
thousands, except percentage data):

Year ended December 31,
    
    % change2008
    
    2007
    
    2006
    
    2008/2007
    
    2007/2006Operating expenses:Research and development
    $
    3,246
    
    
    $
    3,637
    
    
    
    4,133
    
    
    -10.8
    %
    
    -12.0
    %Sales and marketing
    
    5,336
    
    
    
    5,090
    
    
    
    7,032
    
    
    4.8
    %
    
    -27.6
    %General and administrative
    
    3,647
    
    
    
    3,787
    
    
    
    3,718
    
    
    -3.7
    %
    
    1.9
    %Restructuring
    
    334
    
    
    
    -
    
    
    
    -
    
    
    100.0
    %
    
    NMTotal operating expenses
    $
    12,563
    
    
    $
    12,514
    
    
    $
    14,883
    
    
    0.4
    %
    
    -15.9
    %Percentage of total revenues:Operating expenses:Research and development
    
    26
    %
    
    
    31
    %
    
    
    39
    %Sales and marketing
    
    44
    %
    
    
    44
    %
    
    
    67
    %General and administrative
    
    30
    %
    
    
    33
    %
    
    
    36
    %Restructuring
    
    3
    %
    
    
    0
    %
    
    
    0
    %Total operating expenses
    
    103
    %
    
    
    108
    %
    
    
    142
    %


*Research and development*

Research
and development expenses consist primarily of compensation and related costs for
personnel. All research and development costs are expensed as
incurred.

Research
and development expenses decreased in 2008 compared with 2007 primarily due to
decreases in compensation related expense of $0.2 million resulting from lower
stock-based compensation expense, and an increase of $0.2 million in allocation
to cost of service revenue resulting from more time spent on customer support.
Research and development expenses decreased in 2007 compared with 2006 primarily
due to decreases in compensation and facility related expense of $0.2 million
and lower third-party software expense of $0.1 million.

*Sales and marketing*

Sales and
marketing expenses consist primarily of compensation and related costs for sales
and marketing personnel, marketing programs, public relations, promotional
materials, travel and related trade show expenses.

Sales and
marketing expenses increased in 2008 compared to 2007 primarily due to increases
in compensation and facility related expenses of $0.3 million. Sales and
marketing expenses decreased in 2007 compared to 2006 primarily due to decreases
in compensation and facility related expenses of $1.6 million and travel
expenses of $0.3 million.

*General and administrative*

General
and administrative expenses consist primarily of compensation and related costs
for general management, information technology, finance and accounting
personnel, insurance, professional services and related fees and expenses.

General and administrative expenses
remained consistent in 2008, 2007 and 2006.

30

---

*Restructuring*

In the
fourth quarter of 2008, we implemented a restructuring plan to reduce operating
costs by consolidating facilities. Accordingly, we recognized a restructuring
charge of approximately $0.3 million for the facilities expenses. The
restructuring plan eliminated the Massachusetts facility and reduced the
utilized space leased in San Jose, California. The restructuring plan was
substantially completed by the end of December 2008.

Other Items:

The table below sets forth other
data from 2008 to 2007 and 2007 to 2006 (in thousands, except percentage data):

Year ended December 31,
    
    % change2008
    
    2007
    
    2006
    
    2008/2007
    
    2007/2006Interest and other income, net
    $
    107
    
    
    $
    349
    
    
    $
    316
    
    
    -69.3
    %
    
    10.4
    %Provision (benefit) for income taxes
    $
    22
    
    
    $
    (37
    )
    
    $
    144
    
    
    NM
    
    NMPercentage of total revenues:Interest and other income, net
    
    1
    %
    
    
    3
    %
    
    
    3
    %Provision (benefit) for income taxes
    
    0
    %
    
    
    0
    %
    
    
    1
    %


*Interest income*

Interest
income decreased in 2008 compared with 2007 primarily due to lower interest
yields on investments. Interest income increased in 2007 compared with 2006
primarily due to higher interest yields on investments.

*Income taxes*

Our net
operating losses are generated domestically, and amounts attributed to our
foreign operations have been insignificant for all periods presented. In 2008
and 2006, we recorded an income tax provision of $22,000 and $144,000,
respectively, and in 2007, we recorded income tax benefits of $37,000 primarily
related to foreign income taxes. No benefit for domestic income taxes has been
recorded due to the uncertainty of the realization of deferred tax assets. From
inception through December 31, 2008, we have incurred net losses for federal and
state tax purposes. As of December 31, 2008, we had federal and California net
operating loss carryforwards of approximately $93.1 million and $33.8 million
available to reduce future federal and California taxable income, respectively.
These federal and California carryforwards begin to expire in 2010 if not
utilized. The extent to which these carryforwards can be used to offset future
taxable income may be limited under Section 382 of the Internal Revenue Code and
applicable state tax law.

Liquidity and Capital Resources

At December 31, 2008, we had cash
and cash equivalents and investments of $9.4 million and working capital of
$318,000.

Net cash
provided by operating activities was $1.6 million in 2008. Net cash used in
operating activities was $1.0 million in 2007, and $4.3 million in 2006. Net
cash provided by operating activities for 2008 was primarily due to an increase
in deferred revenue of $3.1 million, a decrease in accounts receivable $0.5
million and prepaid expenses and other assets of $0.8 million, and non-cash
charges relating to depreciation and amortization of property and equipment,
stock-based compensation and restructuring, totaling $1.2 million. This was
partly offset by our net loss of $3.5 million and a decrease of accrued
liabilities of $0.5 million. Net cash used in operating activities for 2007 was
primarily due to a net loss of $3.7 million, an increase in accounts receivable
of $0.4 million, and an increase in prepaid expenses and other assets of $0.1
million. This was partly offset by increases in deferred revenue of $1.1 million
and accounts payable of $0.1 million, a decrease in other long-term assets of
$0.4 million, and non-cash charges relating to depreciation and amortization of
property and equipment and stock-based compensation totaling $1.6 million. Net
cash used in operating activities for 2006 was primarily due to a net loss of
$7.1 million, a decrease in deferred revenue of $1.3 million and a decrease in
accounts payable of $0.2 million. This was partly offset by a decrease in
accounts receivable of $1.9 million, a decrease in prepaid expenses and other
assets of $0.9 million, an increase in accrued liabilities of $0.3 million, and
non-cash charges relating to depreciation and amortization of property and
equipment and stock-based compensation totaling $1.2 million.

Net cash
provided by investing activities was $1.1 million in 2008, $0.6 million in 2007,
and $4.6 million in 2006. Net cash provided by investing activities for 2008 was
primarily from proceeds from maturities of investments of $3.1 million, partly
offset by purchases of investments of $1.7 million and purchase of property and
equipment of $0.3 million. Net cash provided by investing activities for 2007
was primarily from proceeds from maturities of investments of $3.8 million,
partly offset by purchases of investments of $3.2 million. Net cash provided by
investing activities for 2006 was primarily from proceeds from maturities of
investments of $9.8 million, partly offset by purchases of investments of $4.9
million and purchases of property and equipment of $0.2 million.

31

---

Net cash
used in financing activities was $228,000 in 2008. Net cash provided by
financing activities was $69,000 in 2007 and $3.2 million in 2006. Net cash used
in 2008 was primarily due to the repurchase of treasury stock of $223,000, and
payment for leased equipment of $41,000; partially offset by proceeds from the
issuance of common stock of $36,000. Net cash provided by financing activities
for 2007 was due to the proceeds from issuance of common stock pursuant to
employee stock purchase plan purchases and exercise of employee stock options.
Net cash provided by financing activities for 2006 was primarily from the sale
in a private placement of 1.6 million shares of common stock in December
2006.

We have a
loan agreement with a bank under which we may borrow, on a revolving basis, up
to $1.0 million at an interest rate equal to prime rate, which was equal to an
annual rate of 3.25% at December 31, 2008. The agreement is unsecured and is not
collateralized by our assets. Under the agreement, we must comply with certain
operating and reporting covenants and are not permitted to pay dividends, or
make material investments or dispositions without the prior written consent of
the bank. If we fail to comply with the covenants under the agreement, the bank
can declare any outstanding amounts immediately due and payable and cease
advancing money or extending credit to or for us. There were no borrowings
outstanding under this agreement at December 31, 2008. The agreement was amended
subsequent to the end of the year and will expire on March 27, 2009. We are
currently in the process of renewing the line of credit with the bank.

We intend
to continue to invest in the development of new products and enhancements to our
existing products. Our future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of product development
efforts and the success of these development efforts, the costs and timing of
sales and marketing activities, the extent to which our existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, the level and timing of license and service
revenues, available borrowings under line of credit arrangements and other
factors. In addition, we may utilize cash resources to fund acquisitions of, or
investments in, complementary businesses, technologies or product lines. From
time to time, we may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such funding, if needed, will be available on terms attractive
to us, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require us to relinquish our rights to certain of our technologies or products.
Our failure to raise capital when needed could have a material adverse effect on
our business, operating results and financial condition.

We expect
to finance our future commitments using existing cash resources. We currently
anticipate that our available cash resources will be sufficient to meet our
anticipated operating, capital requirements and business acquisitions for at
least the next 12 months.

*Contractual Obligations and Other Commercial
Commitments*

At
December 31 2008, our contractual obligations and commercial commitments,
primarily under operating lease arrangements for our facilities and for payments
due under a capital lease, were as follows (in thousands):

OperatingYear ending
      December 31,
    
    Leases
    
    Capital Lease2009
    
    
    763
    
    
    472010
    
    
    305
    
    
    652011
    
    
    70
    
    
    -$
    1,138
    
    $
    112


The above include amounts for rent
and estimated operating expenses required under the property leases.

*Indemnification Obligations*

We enter
into standard license agreements in the ordinary course of business. Pursuant to
these agreements, we agree to indemnify our customers for losses suffered or
incurred by them as a result of any patent, copyright, or other intellectual
property infringement claim by any third party with respect to our products.
These indemnification obligations have perpetual terms. Our normal business
practice is to limit the maximum amount of indemnification to the amount
received from the customer. On occasion, the maximum amount of indemnification
we may be required to make may exceed our normal business practices. We estimate
the fair value of our indemnification obligations as insignificant, based upon
historical experience concerning our product and patent infringement claims.
Accordingly, no liabilities have been recorded for indemnification under these
agreements as of December 31, 2008.

32

---

We have
agreements whereby our officers and directors are indemnified for certain events
or occurrences while the officer or director is, or was, serving at
LogicVisions request in such capacity. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have a directors and officers insurance policy that
reduces our exposure and enables us to recover a portion of future amounts paid.
As a result of the insurance policy coverage, it is believed the estimated fair
value of these indemnification agreements is minimal. Accordingly, no
liabilities have been recorded for these agreements as of December 31, 2008.

*Warranties*

We offer
our customers a warranty that our products will conform to the documentation
provided with the products. To date, there have been no payments or material
costs incurred related to fulfilling these warranty obligations. Accordingly, we
have no liabilities recorded for these warranties as of December 31, 2008. We
assess the need for a warranty reserve on a quarterly basis, and there can be no
guarantee that a warranty reserve will not become necessary in the
future.

Recent Accounting Pronouncements

In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), Business Combinations(SFAS 141(R)). SFAS 141(R) changes
accounting for acquisitions that close beginning in 2009. More transactions and
events will qualify as business combinations and will be accounted for at fair
value under the new standard. SFAS 141(R) promotes greater use of fair values in
financial reporting. Some of the changes will introduce more volatility into
earnings. SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008. We are currently assessing the impact that SFAS 141(R) may
have on our financial position, results of operations, and cash
flows.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests in Consolidated Financial Statements  an
Amendment of ARB No. 51 (SFAS 160). SFAS 160 will change the accounting and
reporting for minority interests which will be recharacterized as noncontrolling
interests and classified as a component of equity. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. We are currently assessing the impact that SFAS 160
may have on our financial position, results of operations, and cash flows.

In
December 2007, the FASB issued Emerging Issues Task Force (EITF) Issue 07-1
Accounting for Collaborative Arrangements (EITF 07-1). Collaborative
arrangements are agreements between parties to participate in some type of joint
operating activity. The task force provided indicators to help identify
collaborative arrangements and provides for reporting of such arrangements on a
gross or net basis pursuant to guidance in existing authoritative literature.
The task force also expanded disclosure requirements about collaborative
arrangements. Conclusions within EITF 07-1 are to be applied retrospectively.
EITF 07-1 is applicable for fiscal years beginning after December 15, 2008. We
are currently assessing the impact that EITF 07-1 may have on our financial
position, results of operations, and cash flows.

33

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Item
7A. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Fluctuations

In the
normal course of business, we are exposed to market risk from the effect of
foreign exchange rate fluctuations on the U.S. dollar value from our foreign
operations. A significant portion of our revenues have been denominated in U.S.
dollars; however, as we increase our direct sales activities in Japan, an
increasing portion of our revenues may be denominated in the Japanese yen. In
addition, the operating expenses incurred by our foreign subsidiaries are
denominated in local currencies. Accordingly, we are subject to exposure from
movements in foreign currency exchange rates. To date, the effect of changes in
foreign currency exchange rates on our financial position and operating results
has not been material. Financial instruments are not currently used to hedge
foreign currency risks. We intend to assess the use of financial instruments to
hedge currency exposures on an ongoing basis.

Interest Rate Risk

Exposure
to market risk for changes in interest rates relate primarily to our investment
portfolio. We have not used derivative financial instruments in our investment
portfolio. Excess cash is invested in high-quality corporate issuers and in debt
instruments of the U.S. Government and, by policy, limits the amount of credit
exposure to any one issuer. As stated in our policy, we are averse to principal
loss and seek to preserve our invested funds by limiting default risk, market
risk and reinvestment risk. Default risk is mitigated by investing in high
credit quality securities and by positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only investments with active
secondary or resale markets to ensure portfolio liquidity.

Investments in both fixed and floating rate interest-earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to rising interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates. A hypothetical 100 basis point increase in
interest rates would not result in any significant decline in the fair value of
available-for-sale securities at December 31, 2008.

Investments are classified as available for sale and cost of securities
sold is based on the specific identification method. At December 31, 2008, there
were short-term U.S. government securities of $150,000.

34

---

Item 8. Financial Statements and
Supplementary Data

INDEX

|                                                                                                               | Page
|-------------------------------------------------------------------------------------------------------------- | ----
|Consolidated Financial Statements of LogicVision,
      Inc.                                                   |     
|Report of Independent Registered Public Accounting
      Firm                                                  | 36  
|Consolidated Balance Sheets as of December 31, 2008 and
      2007                                             | 37  
|Consolidated Statements of Operations for the years
      ended December 31, 2008, 2007 and 2006               | 38  
|Consolidated Statements of Stockholders Equity and Comprehensive
      Loss for the years ended December      |     
|31, 2008, 2007 and 2006                                                                                        | 39  
|Consolidated Statements of Cash Flows for the years
      ended December 31, 2008, 2007 and 2006               | 40  
|Notes to Consolidated Financial Statements                                                                     | 41  
|Selected Quarterly Consolidated Financial Data
      (Unaudited)                                               | 56  
|                                                                                                              
|Financial Statement Schedule                                                                                   |     
|                                                                                                              
|IIValuation and Qualifying Accounts                                                                           | 57  
|                                                                                                              
|Financial statement schedules not listed above are
      either omitted because they are not applicable or the |     
|required information is shown in the Consolidated
      Financial Statements or in the Notes thereto.          |     

35

---

Report of Independent Registered
Public Accounting Firm

To the Board of Directors and
Stockholders of LogicVision, Inc.:

We have audited the accompanying
consolidated balance sheets of LogicVision, Inc. and its subsidiaries (the
Company) as of December 31, 2008 and 2007 and the related consolidated
statements of operations, stockholders equity and comprehensive loss, and cash
flows for each of the three years in the period ended December 31, 2008. Our
audits also included the financial statement schedule listed in Item 15(a)(2).
These consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor have we been engaged to
perform, an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. 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, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of LogicVision, Inc. and its subsidiaries as of December
31, 2008 and 2007 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the
consolidated financial statements, on January 1, 2007 the Company adopted
Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation
of FASB Statement 109.

/s/ Burr, Pilger & Mayer
LLPPalo Alto, CaliforniaMarch 18, 2009

36

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LOGICVISION, INC.

CONSOLIDATED BALANCE
SHEETS(in thousands, except per share
data)

|                                                                                              | December 31,
|--------------------------------------------------------------------------------------------- | ------------
|                                                                                              | 2008        
|ASSETS                                                                                        |             
|Current
      Assets:                                                                         |             
|Cash and cash equivalents                                                                     | $           
|Short-term investments                                                                        |             
|Accounts receivable, net of allowance for doubtful
      accounts of $5 and $20, respectively |             
|Prepaid expenses and other current assets                                                     |             
|Total current assets                                                                          |             
|Property and
      equipment, net                                                             |             
|Goodwill                                                                                      |             
|Other long-term
      assets, net                                                             |             
|Total assets                                                                                  | $           
|                                                                                             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                          |             
|Current
      Liabilities:                                                                    |             
|Accounts payable                                                                              | $           
|Accrued liabilities                                                                           |             
|Deferred revenue, current portion                                                             |             
|Total current liabilities                                                                     |             
|Deferred revenue                                                                              |             
|Other long-term
      liabilities                                                             |             
|Total liabilities                                                                             |             
|                                                                                             
|Commitments and contingencies (See Note 5)                                                    |             
|                                                                                             
|Stockholders' Equity:                                                                         |             
|Preferred stock, $0.0001 par value:                                                           |             
|Authorized: 5,000 shares;                                                                     |             
|Issued and outstanding: no shares issued and
      outstanding                                |             
|Common stock, $0.0001 par value:                                                              |             
|Authorized: 50,000 shares;                                                                    |             
|Issued and outstanding: 9,460 shares at December
      31, 2008                               |             
|and 9,666 shares at December 31, 2007                                                         |             
|Additional
      paid-in capital                                                              |             
|Accumulated other comprehensive income (loss)                                                 |             
|Accumulated
      deficit                                                                     |             
|Total stockholders' equity                                                                    |             
|Total liabilities and stockholders' equity                                                    | $           

Note: All share data has been adjusted
to reflect the 1-for-2.5 reverse stock split which became effective March 12,
2008.

The accompanying notes are an integral
part of these consolidated financial statements.

37

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LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS(in thousands, except per
share data)

|                                                                       | Year Ended December 31,
|---------------------------------------------------------------------- | -----------------------
|                                                                       | 2008                   
|Revenues:                                                              |                        
|License                                                                | $                      
|Service                                                                |                        
|Product                                                                |                        
|Total revenues                                                         |                        
|                                                                      
|Cost of revenues:                                                      |                        
|License                                                                |                        
|Service                                                                |                        
|Total cost of revenues                                                 |                        
|Gross profit                                                           |                        
|                                                                      
|Operating expenses:                                                    |                        
|Research and development                                               |                        
|Sales and marketing                                                    |                        
|General and administrative                                             |                        
|Restructuring                                                          |                        
|Total operating expenses                                               |                        
|                                                                      
|Loss from operations                                                   |                        
|Interest
      income                                                  |                        
|                                                                      
|Loss before provision (benefit) for income taxes                       |                        
|Provision
      (benefit) for income taxes                             |                        
|                                                                      
|Net loss                                                               | $                      
|                                                                      
|Net loss per common share, basic and diluted                           | $                      
|Weighted average
      number of shares outstanding, basic and diluted |                        

Note: All share and per share data has
been adjusted to reflect the 1-for-2.5 reverse stock split which became
effective March 12, 2008.

The accompanying notes are an integral
part of these consolidated financial statements.

38

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LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITYAND COMPREHENSIVE
LOSSFor the Years Ended December 31,
2008, 2007 and 2006(in
thousands)

|                                                   |              |   |            |   | Accumulated   |  |               |         |              
|-------------------------------------------------- | ------------ | - | ---------- | - | ------------- |  | ------------- | ------- | -------------
|                                                   |              |   | Additional |   | other         |  |               |         | Total        
|                                                   | Common stock |   | paid-in    |   | comprehensive |  | Accumulated   |         | Stockholders'
|                                                   | Shares       |   | Amount     |   | capital       |  | income (loss) |         | deficit      
|Balances, December 31, 2005                        | 7,557        |   |            | $ | 1             |  | $             | 104,418 |              
|Stock options
      exercised                      | 20           |   |            |   |               |  |               | 39      |              
|Common stock issued under employee                 |              |   |            |   |               |  |               |         |              
|stock purchase plan                                | 28           |   |            |   |               |  |               | 73      |              
|Additional
      common stock and contingent       |              |   |            |   |               |  |               |         |              
|consideration issued in SiVerion
      acquisition | 428          |   |            |   |               |  |               | (148    | )            
|Common stock issued in private placement, net      | 1,600        |   |            |   |               |  |               | 3,103   |              
|Stock-based
      compensation                     |              |   |            |   |               |  |               | 376     |              
|Net loss                                           |              |   |            |   |               |  |               |         |              
|Change in
      unrealized gain on investments     |              |   |            |   |               |  |               |         |              
|Foreign currency translation adjustment            |              |   |            |   |               |  |               |         |              
|Comprehensive
      loss                           |              |   |            |   |               |  |               |         |              
|Balances, December 31, 2006                        | 9,633        |   |            |   | 1             |  |               | 107,861 |              
|Stock options
      exercised                      | 2            |   |            |   |               |  |               | 3       |              
|Common stock issued under employee                 |              |   |            |   |               |  |               |         |              
|stock purchase plan                                | 31           |   |            |   |               |  |               | 67      |              
|Stock-based
      compensation                     |              |   |            |   |               |  |               | 990     |              
|Net loss                                           |              |   |            |   |               |  |               |         |              
|Change in
      unrealized gain on investments     |              |   |            |   |               |  |               |         |              
|Foreign currency translation adjustment            |              |   |            |   |               |  |               |         |              
|Comprehensive
      loss                           |              |   |            |   |               |  |               |         |              
|Balances, December 31, 2007                        | 9,666        |   |            |   | 1             |  |               | 108,921 |              
|Stock options
      exercised                      | -            |   |            |   |               |  |               | -       |              
|Common stock issued under employee                 |              |   |            |   |               |  |               |         |              
|stock purchase plan                                | 30           |   |            |   |               |  |               | 36      |              
|Stock-based
      compensation                     |              |   |            |   |               |  |               | 513     |              
|Repurchase of common stock                         | (236         | ) |            |   |               |  |               | (223    | )            
|Net
      loss                                     |              |   |            |   |               |  |               |         |              
|Change in unrealized gain on investments           |              |   |            |   |               |  |               |         |              
|Foreign currency
      translation adjustment      |              |   |            |   |               |  |               |         |              
|Comprehensive loss                                 |              |   |            |   |               |  |               |         |              
|Balances,
      December 31, 2008                  | 9,460        |   |            | $ | 1             |  | $             | 109,247 |              

Note: All share and per share data has
been adjusted to reflect the 1-for-2.5 reverse stock split which became
effective March 12, 2008.

The accompanying notes are an integral
part of these consolidated financial statements.

39

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LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS(in thousands)

|                                                                                                | Year Ended December 31,
|----------------------------------------------------------------------------------------------- | -----------------------
|                                                                                                | 2008                   
|Cash flows from operating activities:                                                           |                        
|Net loss                                                                                        | $                      
|Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities: |                        
|Depreciation and amortization                                                                   |                        
|Stock-based compensation                                                                        |                        
|Provision for (recovery of) allowance for doubtful
      accounts                               |                        
|Restructuring                                                                                   |                        
|Gain on sale of fixed assets                                                                    |                        
|Changes in operating assets and
      liabilities                                               |                        
|Accounts receivable                                                                             |                        
|Prepaid expenses and other current
      assets                                                 |                        
|Other long-term assets                                                                          |                        
|Accounts payable                                                                                |                        
|Accrued liabilities and restructuring
      charges                                             |                        
|Deferred revenue                                                                                |                        
|Net cash provided by (used in) operating
      activities                                       |                        
|                                                                                               
|Cash flows from investing activities:                                                           |                        
|Purchase of investments                                                                         |                        
|Purchase of property and equipment                                                              |                        
|Proceeds from sale of property and
      equipment                                              |                        
|Cash paid for business acquisition                                                              |                        
|Proceeds from maturities of investments                                                         |                        
|Net cash provided by investing
      activities                                                 |                        
|                                                                                               
|Cash flows from financing activities:                                                           |                        
|Proceeds from issuance of common stock, net                                                     |                        
|Payments made on capital lease                                                                  |                        
|Repurchase of common stock                                                                      |                        
|Net cash provided by (used in) financing
      activities                                       |                        
|                                                                                               
|Effect of foreign currency exchange rates on cash                                               |                        
|                                                                                               
|Net (decrease) increase in cash and cash equivalents                                            |                        
|Cash and cash
      equivalents, beginning of year                                              |                        
|Cash and cash equivalents, end of year                                                          | $                      
|                                                                                               
|Supplemental disclosure of cash flow information:                                               |                        
|Cash paid for interest                                                                          | $                      
|Cash (received) paid for income taxes                                                           | $                      
|                                                                                               
|Supplemental disclosure of noncash activities:                                                  |                        
|Assets acquired under capital lease                                                             | $                      
|Issuance of common stock for business
      acquisition                                         | $                      
|Contingent consideration issued for business
      acquisition                                  | $                      

The accompanying notes are an integral
part of these consolidated financial statements.

40

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LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. THE COMPANY

Nature of Business

LogicVision, Inc. (LogicVision, we, us, our or the Company) was
incorporated on July 23, 1992 and was reincorporated in the State of Delaware on
September 15, 2000. LogicVision is a test and yield learning company in the
semiconductor design-for-test sector. We provide proprietary technologies for
embedded test that enable the more efficient test of complex semiconductors. The
embedded test solution allows integrated circuit designers to embed, into a
semiconductor design, test functionality that can be used during semiconductor
production and throughout the useful life of the chip. The technology also
allows integrated circuits to be tested and characterized after they have been
assembled onto boards and systems.

We have
incurred substantial losses and negative cash flows from operations since
inception. For the year ended December 31, 2008, we incurred a net loss of
approximately $3.5 million and had positive cash flows from operations of
approximately $1.6 million. As of December 31, 2008, we had an accumulated
deficit of approximately $103.3 million. While management believes that our
current funds will be sufficient to enable us to meet our planned expenditures
through at least December 31, 2009, we are subject to risks associated with
companies of similar size and stage of development, including but not limited
to, dependence on key individuals, competition from substitute services and
larger companies, and the continued successful development and marketing of our
products and services. If anticipated operating results are not achieved,
management has the intent and believes it has the ability to delay or reduce
expenditures so as not to require additional financing resources. Failure to
generate sufficient cash flows from operations, raise additional capital or
reduce certain discretionary spending could have a material adverse effect on
the Company's ability to achieve its intended business objectives.

Reverse Stock Split

The
Company implemented a 1-for-2.5 reverse stock split of its Common Stock on March
12, 2008, which had been approved by the Companys stockholders at the Special
Meeting of Stockholders on February 28, 2008. As the reverse stock split
proportionally reduced the authorized and outstanding shares of Common Stock of
the Company, without any change to the par value, the Common Stock balance on
the consolidated balance sheet, and all share and per share data contained in
these consolidated financial statements has been adjusted to reflect the
1-for-2.5 reverse stock split assuming the reverse stock split had occurred on
January 1, 2006.

Reclassifications

Certain amounts have been
reclassified from the prior year to confirm to the current years presentation.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of
Consolidation

The
accompanying consolidated financial statements include the accounts of
LogicVision, Inc. and its wholly-owned subsidiaries conducting business in
Japan, Canada, and the United Kingdom. All significant intercompany balances and
transactions have been eliminated in consolidation. The Companys fiscal year
end is December 31.

Use of Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, investments, income taxes,
long-term service contracts and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Cash and Cash Equivalents and
Investments

We
consider all highly liquid investment instruments purchased with original
maturities of three months or less at the acquisition date to be cash
equivalents. Investment instruments purchased with original maturities of more
than three months, which mature in less than twelve months, are considered to be
short-term investments. All investments are classified as available-for-sale and
are reported at fair value. At December 31, 2008 and 2007, the carrying value of
our available-for-sale investments approximates their fair value. Interest and
realized gains and losses are included in interest income. Realized gains and
losses are recognized based on the specific identification method.

41

---

Cash and cash equivalents and
investments consist of the following (in thousands):

December 31,2008
    
    2007Cash and cash equivalents:Cash
    $
    647
    
    $
    1,848Money market funds
    
    8,452
    
    
    1,596Commerical paper
    
    -
    
    
    524U.S.
      government agency notes
    
    150
    
    
    2,815Total cash and cash equivalents
    $
    9,249
    
    $
    6,783Short-term investments:Commerical paper
    
    -
    
    
    199U.S.
      government agency notes
    $
    150
    
    $
    1,345Total short-term investments
    $
    150
    
    $
    1,544


The
contractual maturities of debt securities classified as cash equivalents and
available-for-sale investments at December 31, 2008 and 2007 are as follows (in
thousands):

Estimated Fair Value2008
    
    2007Maturing 90 days or less from purchase
    
    $
    150
    
    $
    3,339Maturing between
      90 days and one year from purchase
    
    
    150
    
    
    1,544Total available-for-sale debt
      securities
    
    $
    300
    
    $
    4,883


Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties, and the Company may need to sell the investments to meet its cash
needs. There was no unrealized gain (loss) at December 31, 2008, and there was
$1,000 of unrealized gain at December 31, 2007.

Fair
Value Measurement

On
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), which defines fair value, establishes a
framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. SFAS 157 applies whenever other
statements require or permit assets or liabilities to be measured at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, except
for nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, for which application
has been deferred for one year.

The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with SFAS 157 as of December 31, 2008 (in
thousands):

Significant OtherBalance as of
    
    Observable InputsDecember 31, 2008
    
    (Level 2)Assets:Cash
      equivalents:U.S. government agency notes
    
    $
    150
    
    $
    150Short-term
      investments:U.S. government agency notes
    
    
    150
    
    
    150$
    300
    
    $
    300Liabilities:
    
    $
    -
    
    $
    -


42

---

Our
financial assets are valued using market prices on less active markets (level
2). Level 2 instrument valuations are obtained from readily-available pricing
sources for comparable instruments. As of December 31, 2008, we did not have any
assets with instrument valuations obtained from real-time quotes for
transactions in active exchange markets involving identical assets (level 1) or
assets without observable market values that would require a high level of
judgment to determine fair value (level 3).

Property and Equipment

Property
and equipment are stated at cost and are depreciated on a straight-line basis
over their estimated useful lives of three to five years. Leasehold improvements
are amortized on a straight-line basis over the estimated useful life of the
asset or the lease term, if shorter. Maintenance and repairs are charged to
operations as incurred.

Long-Lived Assets

We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable. We use
an estimate of the future undiscounted net cash flow of the related asset or
asset grouping over the remaining life in measuring whether these assets are
recoverable. During the three years ended December 31, 2008, we did not record
any impairment of our long-lived assets, other than amounts related to our
November 2005 restructuring.

Stock-Based Compensation

Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors, including employee stock options and employee stock purchases under
our 2000 Employee Stock Purchase Plan based on estimated fair values.

Our
Consolidated Financial Statements as of December 31, 2008, 2007 and 2006 reflect
the impact of SFAS 123(R). Stock-based compensation expense recognized under
SFAS 123(R) for the years ended December 31, 2008, 2007 and 2006 were $513,000,
$990,000 and $376,000, respectively, which consisted of stock-based compensation
expense related to employee stock options and the employee stock purchase
plan.

SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statements of
Operations.

Stock-based compensation expense recognized during the current period is
based on the value of the portion of share-based payment awards that is
ultimately expected to vest during the period. Stock-based compensation expense
recognized in our Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006 include compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31, 2005
based on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123),
and compensation expense for the share-based payment awards granted subsequent
to December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Compensation expense for all share-based
payment awards is recognized using the multiple option approach. As stock-based
compensation expense recognized in the Consolidated Statements of Operations for
the years ended December 31, 2008, 2007 and 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.

We use
the Black-Scholes option-pricing model (Black-Scholes model) to determine the
fair value of share-based awards granted. Our determination of the fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of complex
and subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. Expected volatilities are
based on the historical volatility of our common stock. We use historical data
to estimate option exercise and employee terminations. The expected term of the
options granted represents the period of time that options are expected to be
outstanding, based on historical information. The risk-free interest rate is
based on the U.S. Treasury zero-coupon issues with remaining terms similar to
the expected term of our equity awards. We do not anticipate paying any cash
dividends in the foreseeable future and therefore used an expected dividend
yield of zero.

For further information on
stock-based compensation, see Note 9.

We
account for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. We believe that
the fair value of the stock options is more reliably measured than the fair
value of the services received. The fair value of each non-employee stock award
(except stock awards to non-employee directors) is remeasured at each period end
until a commitment date is reached, which is generally the vesting date. All of
our non-employee stock awards were fully vested as of December 31,
2008.

43

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Revenue Recognition

We
account for our revenue under the provisions of Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions.

Our
revenues are derived from three primary sources: license revenues, comprised of
fees associated with the licensing of software; product revenues, from the sale
of hardware products; and service revenues, from maintenance and consulting and
training services. Revenue is recognized when persuasive evidence of an
arrangement exists, all obligations have been performed pursuant to the terms of
such an arrangement, the product has been delivered, the fee is fixed or
determinable and the collection of the resulting receivable is reasonably
assured. If any of these criteria are not met, revenue recognition is deferred
until such time as all criteria are met. Payments received in advance of
revenues being recognized are presented as deferred revenue in the accompanying
balance sheets.

*License revenues*

We have three license
types:

Subscription licenses  subscription licenses include software licenses
and maintenance for a specific time period, generally three years or less.
Maintenance is bundled into the license agreement for the term of the license
and is not charged separately. Since vendor-specific objective evidence (VSOE)
of fair value does not exist for each element of the arrangement, revenues from
subscription licenses are recognized ratably over the license term commencing
upon the effective date of the license, if delivery and other revenue
recognition criteria are met.

Term
licenses  term licenses include software licenses for a specific time period,
generally one to three years. Revenues associated with term licenses are
recognized on the effective date of the license, if delivery and other revenue
recognition criteria are met. Maintenance agreements for term licenses are sold
separately for a specified period and may continue to be renewed for the balance
of the license term.

Perpetual
licenses  perpetual licenses consist of software licensed on a perpetual basis.
Revenues associated with perpetual licenses are recognized on the effective date
of the license, if delivery has occurred and other revenue recognition criteria
are met. We no longer offer this type of license.

The
timing of revenue recognition for licenses will differ depending on the license
type and on the individual terms and conditions associated with each particular
license agreement. We use VSOE of fair value to allocate the total fee among all
delivered and undelivered elements in those arrangements which contain multiple
elements. If the arrangement includes the future delivery of a specified product
or upgrade, all revenues under the arrangement are deferred until the specified
product or upgrade has been delivered. If VSOE does not exist for one or more
delivered elements, the residual method of accounting is applied to the
delivered elements. Under the residual method, the VSOE of the fair value of the
undelivered elements is deferred, and the remaining portion of the arrangement
is recognized as revenue. VSOE for maintenance is generally based upon the
customers annual renewal rates as set forth in the license agreement. When VSOE
for maintenance cannot be established, all related revenues are recognized
ratably over the term of the maintenance obligation. VSOE for services is
generally based on the price charged when the services are sold
separately.

The
Company, on occasion, offers extended payment terms beyond its normal business
practice of between 30 and 60 days to certain customers. We do not have
sufficient experience collecting under these extended payment term arrangements.
As a result, when payment terms are extended, the fee is not considered fixed or
determinable and we recognize revenue when the payment is due.

*Service revenues*

Maintenance revenue is recognized ratably over the maintenance period.
For term and perpetual licenses, customers generally renew maintenance
agreements annually. For subscription licenses, a portion of revenue is
allocated to maintenance revenue using the estimated fair value of the
maintenance, which is based on maintenance renewals sold separately for similar
products.

Consulting service revenues are generally recognized as the services are
performed. Training revenues are recognized when the training is performed.

44

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*Product revenues*

The terms
of our hardware product sales include annual maintenance. Product revenues are
recognized ratably over the term of our maintenance obligation as we do not have
a history of selling maintenance for this product separately.

Research and Development

Research and development costs are
charged to operating expense as incurred.

Software Development Costs and
Capitalized Technology License

Costs
related to research and development are generally charged to expense as
incurred. Capitalization of material software development costs begins when a
product's technological feasibility has been established in accordance with the
provisions of SFAS 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed". To date, the period between achieving
technological feasibility, which we have defined as the establishment of a
working model, and which typically occurs when beta testing commences, and the
general availability of such software has been very short. Accordingly, software
development costs have been expensed as incurred.

Restructuring Charges

Restructuring charges are comprised primarily of severance and associated
employee termination costs related to workforce reductions, costs related to
facilities abandoned and related write-down of leasehold improvements. We
account for restructuring charges in accordance with SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities which requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is
incurred.

Certain Risks and Concentrations

Our cash
and cash equivalents and investments are maintained at five financial
institutions, two in the United States, one in Canada, one in Japan, and one in
the United Kingdom. Deposits in these institutions may exceed the amount of
insurance provided on such deposits.

For
accounts receivable, management performs ongoing credit evaluations of its
customers financial condition and, generally, requires no collateral from its
customers. Based on the expected collectibility of the accounts receivable
balance, we maintain an allowance for doubtful accounts. We review our allowance
for doubtful accounts monthly by assessing individual accounts receivable over a
specified aging and amount, and all other balances on a pooled basis based on
historical collection experience. Accounts receivable are written off on a
case-by-case basis, net of any amounts that may be collected. At December 31,
2008, four customers accounted for approximately 34%, 25%, 10% and 10% of net
accounts receivable, respectively. At December 31, 2007, four customers
accounted for approximately 26%, 17%, 17% and 10% of net accounts receivable,
respectively.

Customers accounting for more than
10 percent of revenues are as follows:

Year Ended December 31,2008
    
    2007
    
    2006LSI Corporation
    16
    %
    
    21
    %
    
    26
    %Broadcom
      Corporation
    18
    %
    
    19
    %
    
    18
    %


There can
be no assurance that the market will accept our technology as an alternative to
current design test development methods. If the market does not accept our
technology at all or in the time frame anticipated in our projections, our
revenues, results of operations, financial condition or cash flows would be
materially affected.

Income Taxes

Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109,
which provisions included a two-step approach to recognizing, de-recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS 109
(SFAS 109), Accounting for Income Taxes. As a result of the implementation
of FIN No. 48, the Company recognized an increase of approximately $0.6 million
in the liability for unrecognized tax benefits and a decrease in the related
reserve of the same amount. Therefore upon implementation of FIN No. 48, the
Company recognized no material adjustment to the January 1, 2007 balance of
retained earnings.

45

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The
Company adopted a policy to classify accrued interest and penalties as part of
the accrued FIN No. 48 liability in the provision for income taxes. For the year
ended December 31, 2008, the Company did not recognize interest or penalties
related to unrecognized tax benefits.

Unrecognized
      Tax BenefitsBalance at January 1, 2008
    $
    600,000Additions for
      tax positions of prior years
    
    -Reductions for tax position of prior years
    
    -Additions based
      on tax positions related to the current year
    
    -Decreases  Settlements
    
    -Reductions 
      Settlements
    
    -Balance at December 31, 2008
    $
    600,000


None of the $0.6 million of tax
positions would affect our income tax expense if recognized.

Our
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. As of December 31, 2008, the Company had no
accrued interest and penalties related to uncertain tax matters.

By the
end of 2009, the Company expects to have no uncertain tax positions that would
be reduced as a result of a lapse of the applicable statute of limitations. We
do not anticipate the adjustments would result in a material change to our
financial position.

We file
income tax returns in the U.S. federal jurisdictions, and various states and
foreign jurisdictions. The 1991 through 2008 tax years are open and may be
subject to potential examination in one or more jurisdictions. The Company is
not currently under federal, state or foreign income tax
examination.

Foreign Currency Translation

We have
foreign subsidiaries whose financial statements are denominated in the local
currency. Foreign exchange gains and losses, which result from the process of
remeasuring foreign currency financial statements into U.S. dollars, have been
included on the balance sheet as a cumulative foreign currency translation
adjustment included in accumulated other comprehensive income (loss). Exchange
gains or losses from foreign currency transactions are included in the
consolidated statement of operations and were not material for any period
presented.

Fair Value of Financial Instruments

The
carrying amounts of our financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value due to their short maturities.

Net Loss Per Share

Basic net
loss per share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of the common shares
outstanding during the period. Diluted net loss per share does not differ from
basic net loss per share since potential common shares from conversion of
preferred stock, stock options and warrants and outstanding shares of common
stock subject to repurchase are anti-dilutive for all periods presented. Options
and warrants to purchase approximately 2.8 million, 1.7 million and 1.5 million
shares of common stock have been excluded for the years ended December 31, 2008,
2007 and 2006, respectively, as they are anti-dilutive. There were no shares
subject to repurchase as of December 31, 2008, 2007 and 2006.

Comprehensive Loss

Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
requires companies to classify items of other comprehensive income (loss) by
their nature in the financial statements and display the accumulated balance of
other comprehensive income (loss) separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. For all
periods presented, the primary differences between our net loss and
comprehensive loss arise from foreign currency translation adjustments and
unrealized gains (losses) on investments, the components of which are immaterial
for all periods presented.

46

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Recent Accounting
Pronouncements

In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007), Business
Combinations(SFAS 141(R)). SFAS 141(R) changes accounting for acquisitions that
close beginning in 2009. More transactions and events will qualify as business
combinations and will be accounted for at fair value under the new standard.
SFAS 141(R) promotes greater use of fair values in financial reporting. Some of
the changes will introduce more volatility into earnings. SFAS 141(R) is
effective for fiscal years beginning on or after December 15, 2008. We are
currently assessing the impact that SFAS 141(R) may have on our financial
position, results of operations, and cash flows.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests in Consolidated Financial Statements - an
Amendment of ARB No. 51 (SFAS 160). SFAS 160 will change the accounting and
reporting for minority interests which will be recharacterized as noncontrolling
interests and classified as a component of equity. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. We are currently assessing the impact that SFAS 160
may have on our financial position, results of operations, and cash flows.

In
December 2007, the FASB issued EITF Issue 07-1 Accounting for Collaborative
Arrangements (EITF 07-1). Collaborative arrangements are agreements between
parties to participate in some type of joint operating activity. The task force
provided indicators to help identify collaborative arrangements and provides for
reporting of such arrangements on a gross or net basis pursuant to guidance in
existing authoritative literature. The task force also expanded disclosure
requirements about collaborative arrangements. Conclusions within EITF 07-1 are
to be applied retrospectively. EITF 07-1 is applicable for fiscal years
beginning after December 15, 2008. We are currently assessing the impact that
EITF 07-1 may have on our financial position, results of operations, and cash
flows.

3. BALANCE SHEET COMPONENTS

Property and equipment, net were
comprised of the following (in thousands):

December 31,2008
    
    2007Computer equipment and software
    $
    2,486
    
    
    $
    2,987Office equipment
      and leasehold improvements
    
    474
    
    
    
    5062,960
    
    
    
    3,493Less:
      accumulated depreciation
    
    (2,549
    )
    
    
    (2,983
    )$
    411
    
    
    $
    510


Depreciation and amortization expense related to property and equipment
totaled $338,000, $447,000 and $562,000 for the years ended December 31, 2008,
2007 and 2006, respectively. During 2007, the Company entered into a capital
lease for computer equipment valued at $163,000. As of December 31, 2008, the
carrying value of this equipment was $113,000.

Accrued liabilities were comprised
of the following (in thousands):

December 31,2008
    
    2007Accrued compensation and benefits
    $
    1,030
    
    $
    1,415Accrued
      professional fees
    
    349
    
    
    318Other accrued liabilities
    
    412
    
    
    282$
    1,791
    
    $
    2,015


4. LOAN AGREEMENT

We have a
loan agreement with a bank under which we may borrow, on a revolving basis, up
to $1.0 million at an interest rate equal to prime rate, which was equal to an
annual rate of 3.25% at December 31, 2008. The agreement is unsecured and is not
collateralized by our assets. Under the agreement, we must comply with certain
operating and reporting covenants and are not permitted to pay dividends, or
make material investments or dispositions without the prior written consent of
the bank. If we fail to comply with our covenants under the agreement, the bank
can declare any outstanding amounts immediately due and payable and cease
advancing money or extending credit to or for the Company. The agreement was
amended subsequent to the end of the year and will expire on March 27, 2009. We
are in compliance with the covenants under this agreement at December 31, 2008.
At December 31, 2008 there were no outstanding borrowings under the agreement
and $1.0 million was available.

47

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5. COMMITMENTS AND CONTINGENCIES

Lease Obligations

The
Company and its subsidiaries in the US and Canada rent office facilities under
noncancelable operating leases which expire through July 2011. The Company and
its subsidiaries are responsible for certain maintenance costs, taxes and
insurance under the respective leases. Total future minimum payments under such
operating leases, including estimated operating costs, and payments due under a
capital lease, at December 31, 2008 were as follows (in thousands):

OperatingYear ending
      December 31,
    Leases
    
    Capital Lease2009
    
    763
    
    
    472010
    
    305
    
    
    652011
    
    70
    
    
    -$
    1,138
    
    $
    112


Rent expense for the years ended
December 31, 2008, 2007 and 2006 was $451,000, $474,000 and $586,000,
respectively.

Indemnification
Obligations

We enter
into standard license agreements in the ordinary course of business. Pursuant to
these agreements, we agree to indemnify our customers for losses suffered or
incurred by them as a result of any patent, copyright, or other intellectual
property infringement claim by any third party with respect to the Companys
products. These indemnification obligations have perpetual terms. Our normal
business practice is to limit the maximum amount of indemnification to the
amount received from the customer. On occasion, the maximum amount of
indemnification we may be required to make may exceed our normal business
practices. We estimate the fair value of our indemnification obligations as
insignificant, based upon our historical experience concerning product and
patent infringement claims. Accordingly, we had no liabilities recorded for
indemnification under these agreements as of December 31, 2008.

We have
agreements whereby our officers and directors are indemnified for certain events
or occurrences while the officer or director is, or was, serving at our request
in such capacity. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have a directors and officers insurance policy that reduces our exposure and
enables us to recover a portion of future amounts paid. As a result of our
insurance policy coverage, we believe the estimated fair value of these
indemnification agreements is minimal. Accordingly, no liabilities have been
recorded for these agreements as of December 31, 2008.

See also Note 10.

Warranties

We offer
our customers a warranty that our products will conform to the documentation
provided with the products. To date, there have been no payments or material
costs incurred related to fulfilling these warranty obligations. Accordingly, we
had no liabilities recorded for these warranties as of December 31, 2008 or
2007. We assess the need for a warranty reserve on a quarterly basis, and there
can be no guarantee that a warranty reserve will not become necessary in the
future.

6. INTANGIBLE ASSETS AND GOODWILL

Amortization of intangible assets was $0 in fiscal 2008, $178,000 in
fiscal 2007, and $287,000 in fiscal 2006. In fiscal 2007 and 2006, amortization
of developed technology was charged to cost of sales. In fiscal 2006,
amortization of the non-compete agreements was charged to sales and marketing
and general and administrative expenses.

We
evaluate goodwill at least on an annual basis (in the fourth quarter) and
whenever events and changes in circumstances suggest that the carrying amount
may not be recoverable from its estimated future cash flow. We performed our
annual goodwill impairment test as of October 1, 2008, and the test did not
indicated impairment of goodwill. No assurances can be given that future
evaluations of goodwill will not result in charges as a result of future
impairment.

48

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7. PREFERRED STOCK

At
December 31, 2008 and 2007, we had 5,000,000 shares of undesignated preferred
stock, $0.0001 par value, authorized, none of which were issued or outstanding.
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
other rights of those shares. The preferences, powers, rights and restrictions
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions, and purchase funds and other
matters.

On
December 16, 2008, the Board of Directors declared a dividend distribution of
one "Right" for each outstanding share of our Common Stock to stockholders of
record at the close of business on December 26, 2008. The description and terms
of the Rights are set forth in a Rights Agreement (the Rights Agreement)
between the Company and Mellon Investor Services LLC.

Under the
Rights Agreement, one right will be distributed for each outstanding share of
our Common Stock held by stockholders of record as of the close of business on
December 26, 2008. Each Right when exercisable entitles the registered holder to
purchase from the Company one one-thousandth of a share of a new series of
preferred stock, designated as Series A Participating Preferred at a price of
$6.00 per one one-thousandth of a share.

The
Rights will be exercisable if a person, entity or group acquires 15% or more of
the Companys Common Stock, subject to certain exceptions set forth in the
Rights Agreement. The Rights Agreement has a term of one year and will expire on
December 16, 2009, unless the Rights are earlier redeemed or the Rights
Agreement is terminated earlier.

8. STOCK OPTION PLANS AND WARRANTS

Stock Option Plan

Our 2000
Stock Incentive Plan (the 2000 Plan) is a successor to the 1994 Flexible Stock
Option Plan (the 1994 Plan). The number of shares reserved for issuance under
the 2000 Plan are increased on the first day of each of our fiscal years from
2002 to 2010 by the lesser of 300,000 shares, 3.5% of the outstanding shares of
our common stock on that date or a lesser amount determined by the Board of
Directors and are also increased by any forfeitures under the 1994 Plan. On
January 24, 2008, the Board of Directors approved an increase of 300,000 shares
for issuance under the 2000 Plan. As of December 31, 2008, options to purchase a
total of 2,772,641 and 4,251 shares of common stock were outstanding under the
2000 Plan and the 1994 Plan, respectively. In addition, the Board of Directors
has granted 280,200 non-qualified options, none of which options remained
outstanding at December 31, 2008. A total of 2,844,037 shares are reserved for
future issuance at December 31, 2008.

Under the
2000 Plan, the Board of Directors has the authority to determine the type of
option and the number of shares subject to each option. The exercise price is
generally equal to the fair value of the underlying stock at the date of grant.
Options generally vest over a four-year period and, if not exercised, expire ten
years from the date of grant. The option plan also provides for accelerated
vesting if there is a change in control of the Company (as defined in the 2000
Plan).

Under the
2000 Plan, the Board of Directors has the discretion to grant options to
nonemployee directors. Each nonemployee director will be granted an option to
purchase 8,000 shares when they first join the Board. In addition, each
nonemployee director will be granted an option to purchase 4,000 shares on the
day following the Companys annual meeting of stockholders.

On
February 7, 2007, we commenced an offer (the Exchange Offer) to our eligible
employees to exchange some or all of their outstanding stock options to purchase
shares of common stock for new options to be granted under the 2000 Plan. The
Exchange Offer covered all employee options with an exercise price greater than
$3.70 per share. Other than eligible options tendered by our five executive
officers, the exchange rate was one-for-one. The exchange ratio applicable to
our executive officers was one-for-1.25.

The
Exchange Offer expired on March 8, 2007, at which time properly tendered options
for 972,964 shares were cancelled and new options for 879,684 shares were
granted at the closing price of our common stock on the grant date. All new
options have an option expiration term of ten years. Each new option had a one
year vesting period.

49

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The
following table summarizes all option activities from January 1, 2006 through
December 31, 2008 (shares in thousands, except per share data):

Year Ended December 31,2008
    
    2007
    
    2006Weighted
    
    
    
    
    Weighted
    
    
    
    
    WeightedAverage
    
    
    
    
    Average
    
    
    
    
    AverageNumber of
    
    Exercise Price
    
    Number of
    
    Exercise Price
    
    Number of
    
    Exercise PriceShares
    
    Per Share
    
    Shares
    
    Per Share
    
    Shares
    
    Per ShareOptions outstanding:Beginning balance
    1,738
    
    
    $
    2.84
    
    1,479
    
    
    $
    7.84
    
    1,743
    
    
    $
    8.90Granted
    1,430
    
    
    $
    1.22
    
    1,419
    
    
    $
    2.55
    
    272
    
    
    $
    3.28Exercised
    -
    
    
    
    
    
    (2
    )
    
    $
    1.50
    
    (20
    )
    
    $
    1.93Forfeited
    (391
    )
    
    $
    2.70
    
    (1,158
    )
    
    $
    8.88
    
    (516
    )
    
    $
    9.23Ending Balance
    2,777
    
    
    $
    2.02
    
    1,738
    
    
    $
    2.84
    
    1,479
    
    
    $
    7.84Options exercisable at end of year
    1,326
    
    
    $
    2.69
    
    932
    
    
    $
    3.00
    
    1,230
    
    
    $
    8.73


The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2008, 2007 and 2006 were $0.77, $1.03 and $2.08, respectively.
There were no option exercises during the year ended December 31, 2008. The
total intrinsic value of options exercised during the years ended December 31,
2007 and 2006 were $1,000 and $28,000, respectively. We issue new shares upon
the exercise of options. There was no tax benefit realized from exercised
options. For the three years ended December 31, 2008, the value of the option
grants has been calculated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:

Year Ended December 31,2008
    
    2007
    
    2006Expected average life of option
    4.7 years
    
    4.8 years
    
    4.2 yearsRisk-free
      interest rate
    1.76%
    
    4.82%
    
    4.37%Expected dividends
    -
    
    -
    
    -Expected
      volatility
    87%
    
    73%
    
    83%


The
options outstanding and currently exercisable by exercise price at December 31,
2008 were as follows (options in thousands):

|                                  |  | Options Outstanding |  | Options Exercisable
|--------------------------------- |  | ------------------- |  | -------------------
|                                  |  |                     |  | Weighted           
|                                  |  | Number
      of     |  | average            
|                                  |  | Shares              |  | remaining          
|Exercise                          |  | Underlying          |  | contractual        
|Price                             |  | Options             |  | life(years)        
|$0.83-$0.83                       |  | 807                 |  | 9.9                
|$0.97-$2.35                       |  | 489                 |  | 9.1                
|$2.50-$2.50                       |  | 852                 |  | 8.1                
|$2.67-$9.05                       |  | 629                 |  | 7.6                
|                                  |  | 2,777               |  | 8.7                
|Vested and
      expected to vest |  | 2,193               |  | 7.5                

The
aggregate intrinsic value of options outstanding in the preceding table, based
on our closing stock price of $0.76 as of December 31, 2008 was $0. The
aggregate intrinsic value of vested options and those expected to vest was $0 as
of December 31, 2008. The total fair value of options vested during the years
ended December 31, 2008, 2007 and 2006 were $488,000, $829,000, and $293,000,
respectively. As of December 31, 2008, total compensation cost related to
non-vested stock options not yet recognized was $553,000 which is expected to be
recognized over the next 1.8 years.

50

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Valuation and Expense Information
under SFAS 123(R)

SFAS
123(R) requires the measurement and recognition of compensation expense for all
share-based payment awards made to our employees and directors, including
employee stock options and employee stock purchases related to the Purchase Plan
based on estimated fair value. The following table summarizes stock-based
compensation expense related to employee stock options and employee stock
purchases under SFAS 123(R) for the years ended December 31, 2008, 2007 and 2006
which was allocated as follows (in thousands):

Year Ended December 31,2008
    
    2007
    
    2006Cost of revenues:Service
    $
    22
    
    
    $
    50
    
    
    $
    27Stock-based compensation expense included in cost of sales
    
    22
    
    
    
    50
    
    
    
    27Operating
      expenses:Research and development
    
    161
    
    
    
    321
    
    
    
    70Sales and marketing
    
    187
    
    
    
    320
    
    
    
    146General and administrative
    
    143
    
    
    
    299
    
    
    
    133Stock-based
      compensation expense included in operating expenses
    
    491
    
    
    
    940
    
    
    
    349Total stock-based compensation expense related to employeestock options and employee stock purchases
    $
    513
    
    
    $
    990
    
    
    $
    376Effect on net loss per share, basic and diluted
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    (0.05
    )


As
stock-based compensation expense recognized is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures are estimated based on historical experience.

Warrants

At December 31, 2008, we had
warrants outstanding to purchase common stock as follows:

Number
    
    
    
    ExerciseWarrants type
    
    outstanding
    
    Expiration date
    
    priceWarrants issued for Series G financing
    
    31,293
    
    December 2009
    
    $
    2.50


The fair
value of these warrants was determined using the Black-Scholes model assuming
volatility factors of 0.60, contractual lives between 4 and 10 years, and
risk-free rates of return between 5.3% and 5.6%.

9. STOCK PURCHASE PLAN

Under the
Companys Employee Stock Purchase Plan (Purchase Plan) a total of 400,000
shares of common stock were reserved for issuance at December 31, 2008. The
number of shares reserved for issuance under the Purchase Plan is increased on
the first day of each fiscal year by the lesser of 50,000 shares, 1% of the
outstanding shares on that date or a lesser amount as determined by the Board of
Directors. On January 24, 2008, the Board of Directors approved an increase in
the number of shares reserved for issuance by 50,000 shares. The Purchase Plan,
which is intended to qualify under Section 423 of the Internal Revenue Code of
1986, as amended, is administered by the Compensation Committee of the Companys
Board of Directors. During the years ended December 31, 2008, 2007, and 2006, we
issued 29,958, 31,240, and 27,636 shares under the Purchase Plan at average
prices of $1.24, $2.15, and $2.65 per share, respectively. At December 31, 2008,
there were 104,195 shares available for future issuance under the Purchase Plan.

The
estimated fair value of purchase rights under our Purchase Plan was determined
using the Black-Scholes pricing model with the following assumptions:

Year Ended December 31,2008
    
    2007
    
    2006Expected average life of option
    6 months
    
    6 months
    
    6 monthsRisk-free
      interest rate
    1.99%
    
    5.09%
    
    5.15%Expected dividends
    -
    
    -
    
    -Expected
      volatility
    105%
    
    62%
    
    70%


51

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The
weighted average per share fair value of purchase rights under the Purchase Plan
was $0.64, $0.85 and $1.20 for the years ended December 31, 2008, 2007 and 2006,
respectively.

10. PRIVATE PLACEMENT

On
December 19, 2006, we completed a private placement of 1,562,000 shares of our
common stock to certain accredited investors at a price per share equal to
$2.03, as well as the sale of 38,000 shares of common stock to certain members
of our management at a price per share equal to $2.30 (the closing bid price of
the Common Stock on The Nasdaq Global Market on December 18, 2006), each
pursuant to the terms of a Common Stock Purchase Agreement, dated December 19,
2006. The net proceeds of this private placement were approximately $3.1
million.

11. INCOME TAXES

The components of the provision
(benefit) for income taxes were as follows (in thousands):

December 31,2008
    
    2007
    
    2006CurrentFederal
    $
    -
    
    $
    -
    
    
    $
    -State and foreign
    
    22
    
    
    (37
    )
    
    
    14422
    
    
    (37
    )
    
    
    144DeferredFederal
    
    -
    
    
    -
    
    
    
    -State and foreign
    
    -
    
    
    -
    
    
    
    -Total provision (benefit) for income taxes
    $
    22
    
    $
    (37
    )
    
    $
    144


In 2008, we recorded an income tax
provision of $22,000 related to foreign taxes.

Significant components of our
deferred tax assets and liabilities were as follows (in thousands):

December 31,2008
    
    2007
    
    2006Deferred tax assets:Net operating losses
    $
    33,710
    
    
    $
    31,528
    
    
    $
    30,530Reserves and accruals
    
    368
    
    
    
    243
    
    
    
    241Credits
    
    1,106
    
    
    
    1,120
    
    
    
    1,852Deferred revenue
    
    241
    
    
    
    1,288
    
    
    
    1,215Depreciation and amortization
    
    643
    
    
    
    709
    
    
    
    69036,068
    
    
    
    34,888
    
    
    
    34,528Valuation
      allowance
    
    (36,068
    )
    
    
    (34,888
    )
    
    
    (34,528
    )Net deferred tax assets
    $
    -
    
    
    $
    -
    
    
    $
    -


We have
established a full valuation allowance against our deferred tax assets due to
the uncertainty surrounding the realization of such assets. Management
evaluates, on an annual basis, the recoverability of the deferred tax assets and
the level of the valuation allowance.

As of
December 31, 2008, we had federal and California net operating loss
carryforwards of approximately $93.1 million and $33.8 million available to
reduce future federal and California taxable income, respectively. These federal
and California carryforwards begin to expire in 2010 if not utilized. The extent
to which these carryforwards can be used to offset future taxable income may be
limited under Section 382 of the Internal Revenue Code and applicable state tax
law.

As of
December 31, 2008, we had federal and California research and experimentation
tax credit carryforwards of approximately $1.1 million and $0.9 million,
respectively. These federal tax credit carryforwards begin to expire in 2010, if
not utilized. Unused California tax credit carryforwards may be carried forward
indefinitely. The extent to which these tax credit carryforwards can be used to
offset future taxes may be limited under Section 383 of the Internal Revenue
Code and applicable state law.

For
financial reporting purposes the tax effect of the net operating loss and tax
credit carryforwards have been recorded as deferred tax assets.

52

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The effective tax rate differs from
the statutory federal income tax rate as follows:

December 31,2008
    
    2007
    
    2006Statutory federal income tax rate
    (34.0
    )%
    
    (34.0
    )%
    
    (34.0
    )%State income
      taxes, net of federal benefit
    (5.8
    )
    
    (5.8
    )
    
    (5.8
    )Stock-based compensation
    4.3
    
    
    10.4
    
    
    2.1Credits
    -
    
    
    -
    
    
    (0.2
    )Change in valuation allowance
    33.5
    
    
    25.5
    
    
    40.5Foreign
      taxes
    0.3
    
    
    (1.9
    )
    
    2.3Expiration of State NOLs
    -
    
    
    3.9
    
    
    -Other
    2.3
    
    
    0.9
    
    
    (3.0
    )Effective tax rate
    0.6
    %
    
    (1.0
    )%
    
    2.0
    %


The domestic and foreign components
of earnings before taxes were as follows (in thousands):

December 31,2008
    
    2007
    
    2006U.S.
    $
    (3,502
    )
    
    $
    (3,840
    )
    
    $
    (6,860
    )Non-U.S.
    
    (20
    )
    
    
    80
    
    
    
    (83
    )$
    (3,522
    )
    
    $
    (3,760
    )
    
    $
    (6,943
    )


The
valuation allowance increased by $1.2 million and $0.4 million during the years
ended December 31, 2008 and 2007, respectively.

12.
SEGMENT REPORTING

We have
adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information. Although we offer various design and manufacturing embedded test
software products and services to our customers, we do not manage our operations
by these products and services, but instead view the Company as one operating
segment when making business decisions. We do not manage our operations on a
geographical basis. Revenues attributed to the United States and to all foreign
countries are based on the geographical location of the customers. We use one
measurement of profitability for our business.

The table below sets forth revenues
by product line (in thousands):

Year ended December 31,2008
    
    2007
    
    2006Revenue by product line:ETCreate
    $
    9,608
    
    $
    9,621
    
    $
    7,774Silicon Insight
    
    1,720
    
    
    1,313
    
    
    1,759Yield Insight
    
    -
    
    
    93
    
    
    134Consulting & Training
    
    845
    
    
    591
    
    
    850Total
      revenues
    $
    12,173
    
    $
    11,618
    
    $
    10,517


The following is a summary of our
revenues by geographic operations (in thousands):

Year ended December 31,2008
    
    2007
    
    2006Revenue by geographic region:United States
    $
    8,580
    
    $
    8,766
    
    $
    8,827Japan
    
    2,118
    
    
    1,901
    
    
    1,176Other
    
    1,475
    
    
    951
    
    
    514Total revenues
    $
    12,173
    
    $
    11,618
    
    $
    10,517


53

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The following is a summary of our
long-lived assets (in thousands):

December 31,**2008**
    
    2007United States
    $
    323
    
    $
    357Canada
    
    85
    
    
    153Japan
    
    3
    
    
    -$
    411
    
    $
    510


13. BENEFIT PLAN

We have a
defined contribution savings plan (the 401(k) Plan) to provide retirement
income to all qualified employees of the Company. The 401(k) Plan is intended to
be qualified under Section 401(k) of the Internal Revenue Code of 1986, as
amended. The 401(k) Plan is funded by voluntary pre-tax contributions from
employees. Contributions are invested, as directed by the participant, in
investment funds available under the 401(k) Plan. We are not required to make,
and we have not made, any contributions to the Plan.

14. RESTRUCTURING
COSTS

In the
fourth quarter of 2008, we implemented a restructuring plan to reduce operating
costs by consolidating facilities. Accordingly, we recognized a restructuring
charge of approximately $0.3 million for the facility abandonment expenses and
other contractual charges associated with these facilities. The restructuring
plan eliminated the Massachusetts facility and reduced the utilized space leased
in San Jose, California. The restructuring plan was substantially completed by
the end of December 2008.

The
following is a summary of activities in accrued restructuring and excess
facilities costs at December 31, 2008 (in thousands):

ExcessFacilities
    
    TotalBalance as of January 1, 2008
    
    $
    -
    
    $
    -Restructuring charge
    
    
    334
    
    
    334Balance as of December 31,
      2008
    
    $
    334
    
    $
    334


At
December 31, 2008, the current portion of our restructuring accrual of $246,000
is included in accrued liabilities and the long-term portion of our
restructuring accrual of $88,000 is included in other long-term liabilities on
our consolidated balance sheet.

The restructuring charges are
included in the Consolidated Statement of Operations for the year ended December
31, 2008 as follows (in thousands):

ExcessFacilities
    
    TotalRestructuring charge
    $
    334
    
    $
    334Total operating expenses
    $
    334
    
    $
    334


15. STOCK REPURCHASES

In April
2008, the Board of Directors authorized the repurchase of up to $200,000 worth
of the Companys common stock. The Company was authorized to repurchase the
shares in the open market or private transactions, at the discretion of the
Companys management. The Company began repurchasing shares in May 2008. In
November 2008, the Board of Directors approved the repurchase of an additional
$23,039 worth of the Companys Common Stock. During the year ended December 31,
2008, the Company repurchased 236,492 shares for an aggregate cost of
$223,000.

54

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16. CHANGE OF CONTROL AGREEMENTS

On
November 12, 2008, we entered into Change of Control Severance Agreements (the
Agreements) with James T. Healy, our President and Chief Executive Officer,
Fadi Maamari, our Chief Operating Officer, and Mei Song, our Chief Financial
Officer. The Agreements entered into with Messrs. Healy and Maamari replaced
existing Change of Control Severance Agreements between each of them and the
Company.

Each
Agreement provides that in the event of an involuntary termination of the
executive within three months before or twelve months after a change of control,
the executive will be entitled to (i) a cash payment based on the executives
annual base salary as of the termination date (equal to 150% of such annual base
salary for Mr. Healy, and equal to 100% of such annual base salary for each of
Mr. Maamari and Ms. Song), (ii) a cash payment based the executives target
bonus and target commission for the year in which the executive is terminated
(equal to 150% of such target bonus and target commission for Mr. Healy, and
equal to 100% of such target bonus and target commission for each of Mr. Maamari
and Ms. Song), (iii) the immediate acceleration of vesting and exercisability of
the executives outstanding options to acquire our common stock and (iv)
reimbursement of health insurance premiums for the executive and eligible
dependents for up to twelve months measured from the date of termination. The
executives have agreed not to solicit our employees for a period of time (18
months for Mr. Healy, and 12 months for each of Mr. Maamari and Ms. Song)
following termination of employment giving rise to severance payments, and not
to compete with the Company for the period during which they receive severance
payments. A change of control includes a merger or consolidation involving the
Company in which our stockholders immediately prior to such merger or
consolidation own 50% or less of the voting power of the surviving entitys
voting securities, sale of all or substantially all of our assets, the approval
by our stockholders of a plan of complete liquidation or dissolution, and the
acquisition by a person or related group of persons of 50% or more of the voting
power of our voting securities.

55

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SELECTED QUARTERLY CONSOLIDATED
FINANCIAL DATA (Unaudited)

The
following table presents selected unaudited consolidated financial results for
each of the eight quarters in the two-year period ended December 31, 2008. In
our opinion, this unaudited information has been prepared on the same basis as
the audited information and includes all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the financial
information for the period presented.

|                                                 | Three Months Ended                         
|------------------------------------------------ | -------------------------------------------
|                                                 | Dec. 31,                                   
|                                                 | 2008                                       
|                                                 | (In
      thousands, except per share data)
|Revenues:                                        |                                            
|License                                          | $                                          
|Service                                          |                                            
|Product                                          |                                            
|Total revenues                                   |                                            
|                                                
|Cost of revenues:                                |                                            
|License                                          |                                            
|Service                                          |                                            
|Total cost of
      revenues                     |                                            
|Gross profit                                     |                                            
|                                                
|Operating expenses:                              |                                            
|Research and development                         |                                            
|Sales and marketing                              |                                            
|General and administrative                       |                                            
|Restructuring                                    |                                            
|Total operating
      expenses                   |                                            
|                                                
|Loss from operations                             |                                            
|Interest and
      other income                  |                                            
|                                                
|Loss before provision (benefit) for income taxes |                                            
|Provision
      (benefit) for income taxes       |                                            
|                                                
|Net loss                                         | $                                          
|                                                
|Net loss per share, basic and diluted            | $                                          
|                                                
|Market stock price range:                        |                                            
|High                                             | $                                          
|Low                                              | $                                          

|Note: |  | All per share data has been adjusted to
      reflect the 1-for-2.5 reverse stock split of our Common Stock which became
      effective March 12, 2008.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

56

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SCHEDULE IIVALUATION AND QUALIFYING
ACCOUNTSFor the Years Ended December 31, 2008, 2007 and 2006(in
thousands)

Allowance forDoubtful
    
    InventoryDescription
    
    Accounts
    
    ReserveYear ended December 31, 2006:Balance at beginning of fiscal
      year
    
    $
    25
    
    
    $
    60Addition/charged to expenses
    
    
    -
    
    
    
    -Recoveries
    
    
    (19
    )
    
    
    (60
    )Balance at end of fiscal year
    
    $
    6
    
    
    $
    -Year ended December 31, 2007:Balance at
      beginning of fiscal year
    
    $
    6
    
    
    $
    -Addition/charged to expenses
    
    
    20
    
    
    
    -Recoveries
    
    
    (6
    )
    
    
    -Balance at end of fiscal year
    
    $
    20
    
    
    $
    -Year ended December 31, 2008:Balance at
      beginning of fiscal year
    
    $
    20
    
    
    $
    -Addition/charged to expenses
    
    
    5
    
    
    
    -Recoveries/Write-offs
    
    
    (20
    )
    
    
    -Balance at end of fiscal year
    
    $
    5
    
    
    $
    -


57

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Item 9. Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A(T). Controls and
Procedures

Evaluation of disclosure controls and procedures.We maintain disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act), that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.

Based on their evaluation as of the
end of the period covered by this Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.

Managements annual report on internal control over financial
reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f). Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of the effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal ControlIntegrated Framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.

This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only managements
report in this annual report.

Changes in internal controls.There
was no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

Item 9B. Other
Information

Not applicable.

58

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PART III

Item 10.Directors, Executive Officers and
Corporate Governance

The
information required by this item (with respect to Directors) is incorporated by
reference from the information under the caption Election of Directors
contained in the Companys Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Companys 2009 Annual Meeting of Stockholders scheduled to be held on June 11,
2009 (the Proxy Statement). Certain information required by this item
concerning executive officers is set forth in Part I of this Report under the
caption Executive Officers of the Registrant.

Item 405
of Regulation S-K calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the Exchange Act. This
information is contained in the section called Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement and is incorporated
herein by reference.

The
Company has a separately designated standing Audit Committee established in
accordance with Section 3(a) (58) (A) of the Securities Exchange Act of 1934.
The members of the Audit Committee are Richard Okumoto (Chairperson), Randall A.
Hughes and Richard C. Yonker. All of such members qualify as an independent
director under applicable Nasdaq Stock Market standards and meet the standards
established by The Nasdaq Stock Market for serving on an audit committee. The
Companys Board of Directors has determined that Mr. Okumoto qualifies as an
audit committee financial expert under the definition outlined by the
Securities and Exchange Commission.

The
Company has adopted a Code of Business Conduct for all of its directors,
officers and employees. The Companys Code of Business Conduct is available on
the Companys website atwww.logicvision.com.To date, there have been no waivers under the
Companys Code of Business Conduct. The Company will disclose future amendments
to certain provisions of its Code of Business Conduct and will post any waivers,
if and when granted, under its Code of Business Conduct on the Companys website
atwww.logicvision.com.

Item 11.Executive Compensation

The
information required by this item is incorporated by reference from the
information under the captions Compensation of Directors, Executive
Compensation, and Compensation Committee Interlocks and Insider Participation
contained in the Proxy Statement.

Item 12.Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

The
information required by this item with respect to security ownership of certain
beneficial owners and management is incorporated by reference from the
information under the caption Security Ownership of Certain Beneficial Owners
and Management contained in the Proxy Statement.

Equity Compensation Plan
Information

The
following table sets forth certain information regarding the Companys equity
compensation plans as of December 31, 2008 (as adjusted to reflect the 1-for-2.5
reverse stock split of our Common Stock which became effective March 12,
2008):

|                                                              |  |                         |           |                      |     | Number of securities 
|------------------------------------------------------------- |  | ----------------------- | --------- | -------------------- | --- | ---------------------
|                                                              |  |                         |           |                      |     | remaining available  
|                                                              |  |                         |           |                      |     | for future issuance  
|                                                              |  | Number of securities    |           |                      |     | under equity         
|                                                              |  | to be issued upon       |           | Weighted-average     |     | compensation plans   
|                                                              |  | exercise of outstanding |           | exercise price of    |     | (excluding securities
|                                                              |  | options, warrants       |           | outstanding options, |     | reflected in         
|                                                              |  | and rights              |           | warrants and rights  |     | column (a))          
|Plan category                                                 |  |                         | (a)       |                      | (b) |                      
|Equity compensation plans approved by security
      holders: |  |                         |           |                      |     |                      
|1994 and 2000 Stock Option
      Plan                         |  |                         | 2,776,892 |                      |     | $                    
|2000 Employee
      Stock Purchase Plan                       |  |                         |          |                      |     |                      
|                                                             
|Total                                                         |  |                         | 2,776,892 |                      |     | $                    

59

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|(1) |  | Consists of the number of shares
      reserved for issuance under the Companys 2000 Stock Incentive Plan. The
      number of shares reserved for issuance under the Companys 2000 Stock
      Incentive Plan will be increased on the first day of each of the Companys
      fiscal years from 2002 to 2010 by the lesser of 300,000 shares, 3.5% of
      the outstanding shares of the Companys common stock on that date or a
      lesser amount determined by the Companys Board of Directors. Stock
      options, restricted stock, restricted stock units or stock appreciation
      rights may be awarded under the 2000 Plan.                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of the number of shares
      available for sale pursuant to the Companys 2000 Employee Stock Purchase
      Plan. Shares of common stock will be purchased at a price equal to 85% of
      the fair market value per share of common stock on either the first day
      preceding the offering period or the last date of the offering period,
      whichever is less. The number of shares reserved for issuance will be
      increased on the first day of each fiscal year, commencing in 2002, by the
      lesser of 50,000 shares, 1% of the outstanding common stock on that date,
      or such lesser number of shares as is determined by the Board of
      Directors.

Item 13. Certain Relationships and
Related Transactions, and Director Independence

The
information required by this item is incorporated by reference from the
information contained under the caption Certain Relationships and Related Party
Transactions and Director Independence contained in the Proxy
Statement.

Item 14. Principal Accountant Fees
and Services

The
information required by this item is incorporated by reference from the
information contained under the caption Pre-Approval Policies and Procedures
contained in the Proxy Statement.

60

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PART IV

Item 15. Exhibits and Financial
Statement Schedules

|(a) |  | Documents
      filed as part of this report:
|--- |  | ---------------------------------------------
|   
|    |  | (1)                                          
|    |  |                                              
|    |  |                                              
|   
|    |  | (2)                                          
|    |  |                                              
|    |  |                                              
|   
|    |  | (3)                                          
|   
|    |  |                                              
|   
|(b) |  | Exhibits.                                    

|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                         
|3(i)    |  | Amended and Restated Certificate
      of Incorporation.                                                                                                                                                                                                                                                                                                                                        
|       
|3(ii)   |  | Bylaws of the Company, amended as
      of October 16, 2003 (incorporated by reference to the exhibit of the same
      number to the Companys Annual Report on Form 10-K for the year ended
      December 31, 2003).                                                                                                                                                                         
|       
|4.1     |  | Form of Common Stock Certificate
      (incorporated by reference to the exhibit of the same number to Amendment
      No. 8 to the Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                                                                                   
|       
|4.2     |  | Form of Warrant to Purchase
      Shares of Common Stock (incorporated by reference to Exhibit 4.4 to
      Amendment No. 5 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                                    
|       
|4.3     |  | Form of Extinguishing Warrant to
      Purchase Shares of Common Stock (incorporated by reference Exhibit 4.5 to
      Amendment No. 1 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                         
|       
|4.4     |  | Rights Agreement, dated as of
      December 16, 2008, between LogicVision, Inc. and Mellon Investor Services
      LLC, which includes the form of Right Certificate as Exhibit B and the
      Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated
      by reference to Exhibit 4.1 to the Companys Registration Statement on
      Form 8-A filed December 17, 2008).
|       
|4.6#    |  | Form of Stock Option Agreement
      (incorporated by reference to Exhibit 4.8.2 to Amendment No. 6 to the
      Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                                                                                                      
|       
|10.1.1# |  | Form of agreements under the 1994
      Flexible Stock Incentive Plan (incorporated by reference to the exhibit of
      the same number to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                       
|       
|10.1.2# |  | 1994 Flexible Stock Incentive
      Plan, as amended (incorporated by reference to Exhibit 99.2 to the
      Companys Registration Statement on Form S-8 (File No.
      333-74336)).                                                                                                                                                                                                          
|       
|10.2.1# |  | Amended and Restated 2000 Stock
      Incentive Plan (incorporated by reference to Exhibit 10.1 to the Companys
      Quarterly Report on Form 10-Q for the quarterly period ended June 30,
      2004).                                                                                                                                                                                       
|       
|10.2.2# |  | Amendments Nos. 1 and 2 and
      Addendum to Amended and Restated 2000 Stock Incentive Plan (incorporated
      by reference to Exhibit 10.2 to the Companys Quarterly Report on Form
      10-Q for the quarterly period ended June 30, 2003).                                                                                                                                               
|       
|10.2.3# |  | Form of agreement under the 2000
      Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the
      Companys Quarterly Report on Form 10-Q for the quarterly period ended
      June 30, 2003).                                                                                                                                                                                
|       
|10.3#   |  | Form of Indemnification Agreement
      between the Registrant and its officers and directors (incorporated by
      reference to the exhibit of the same number to the Companys Annual Report
      on Form 10-K for the year ended December 31, 2001).                                                                                                                                       
|       
|10.4    |  | Sixth Amended and Restated
      Registration Rights Agreement dated as of January 28, 2000 (incorporated
      by reference to the exhibit of the same number to the Companys
      Registration Statement on Form S-1 (File No.
  333-43654)).                                                                                                                                               

61

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|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                                    
|10.5    |  | Lease, dated as of August 13,
      1998, by and between Spieker Properties, L.P. and the Company
      (incorporated by reference to the exhibit of the same number to Amendment
      No. 1 to the Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                             
|       
|10.6.1  |  | Extension Agreement, dated as of
      January 17, 2000, by and between Spieker Properties, L.P. and the Company
      (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the
      Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                
|       
|10.6.2  |  | Second Amendment, dated as of
      January 23, 2004, to Lease Agreement dated August 13, 1998 by and between
      CA-Metro Plaza, as successor in interest to Spieker Properties, L.P., and
      the Company (incorporated by reference to the exhibit of the same number
      to the Companys Annual Report on Form 10-K for the year ended December
      31, 2003).
|       
|10.6.3  |  | Third Amendment, dated as of May
      7, 2004, by and between CA-Metro Plaza, as successor in interest to
      Spieker Properties, L.P., and the Company (incorporated by reference to
      the exhibit of the same number to the Companys Quarterly Report on Form
      10-Q for the quarterly period ended June 30, 2004).                                          
|       
|10.7.1  |  | Agreement, dated as of September
      14, 1992, between Northern Telecom Limited and the Company (incorporated
      by reference to the exhibit of the same number to the Companys Annual
      Report on Form 10-K for the year ended December 31,
2002).                                                                                                              
|       
|10.7.2  |  | Amendment, dated as of October 1,
      1993, to the Agreement between Northern Telecom Limited and the Company
      (incorporated by reference to the exhibit of the same number to the
      Companys Annual Report on Form 10-K for the year ended December 31,
      2002).                                                                                          
|       
|10.7.3  |  | Amendment, dated as of January
      11, 1994, to the Agreement between Northern Telecom Limited and the
      Company (incorporated by reference to the exhibit of the same number to
      Amendment No. 1 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                              
|       
|10.7.4  |  | Amendment, dated as of March 20,
      2001, to the Agreement between Nortel Networks Limited (formerly Northern
      Telecom Limited) and the Company (incorporated by reference to the exhibit
      of the same number to the Companys Annual Report on Form 10-K for the
      year ended December 31, 2002).                                                        
|       
|10.8#   |  | Amended and Restated 2000
      Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to
      the Companys Quarterly Report on Form 10-Q for the quarterly period ended
      March 31, 2004).                                                                                                                                                         
|       
|10.8.1# |  | Amendment, dated February 18,
      2005, to the Amended and Restated 2000 Employee Stock Purchase Plan
      (incorporated by reference to Exhibit 10.2.1 to the Companys Quarterly
      Report on Form 10-Q for the quarterly period ended March 31,
      2005)                                                                                                       
|       
|10.9.1  |  | Amended and Restated Loan
      Agreement, dated as of February 11, 2004, by and between Comerica
      BankCalifornia and the Company (incorporated by reference to the exhibit
      of the same number to the Companys Annual Report on Form 10-K for the
      year ended December 31, 2003).                                                                        
|       
|10.9.2  |  | Second Amendment, dated as of
      January 31, 2005, to Second Amended and Restated Loan Agreement by and
      between Comerica BankCalifornia and the Company (incorporated by
      reference to the exhibit of the same number to the Companys Current
      Report on Form 8-K filed with the Commission on February 4,
      2005).                               
|       
|10.9.3  |  | Third Amendment to the Second
      Amended and Restated Loan Agreement, dated February 9, 2006, by and
      between Comerica Bank and the Company (incorporated by reference to the
      Companys Current Report on Form 8-K filed with the Commission on February
      10, 2006).                                                                                    
|       
|10.10#  |  | Change in Control Severance
      Agreement entered into by and between the Company and James T.
      Healy.                                                                                                                                                                                                                                                              
|       
|10.11#  |  | Change in Control Severance
      Agreement entered into by and between the Company and Fadi
      Maamari.                                                                                                                                                                                                                                                                
|       
|10.12#  |  | Change in Control Severance
      Agreement entered into by and between the Company and Mei
    Song.                                                                                                                                                                                                                                                                      
|       
|21.1    |  | Subsidiaries of the Company
      (incorporated by reference to the exhibit of the same number to the
      Companys Annual Report on Form 10-K for the year ended December 30,
      2002).                                                                                                                                                                              
|       
|23.1    |  | Consent of Burr, Pilger &
      Mayer LLP, Independent Registered Public Accounting
  Firm                                                                                                                                                                                                                                                                                 

62

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|Exhibit |    |  |                                                                                                                        
|------- | -- |  | -----------------------------------------------------------------------------------------------------------------------
|Number  |    |  | Description of Document                                                                                                
|24.1    |    |  | Power of Attorney (see page 64 of
      this Form 10-K)                                                                
|        |    |  |                                                                                                                        
|31.1    |    |  | Rule 13a-14(a) Certification of
      Chief Executive Officer.                                                         
|        |    |  |                                                                                                                        
|31.2    |    |  | Rule 13a-14(a) Certification of
      Chief Financial Officer.                                                         
|        |    |  |                                                                                                                        
|32.1    | ** |  | Statement of Chief Executive
      Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
      §1350).
|        |    |  |                                                                                                                        
|32.2    | ** |  | Statement of Chief Financial
      Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
      §1350).

|#  |  | Indicates management contract or
      compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | In accordance with Item
      601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
      34-47986, Final Rule: Managements Reports on Internal Control Over
      Financial Reporting and Certification of Disclosure in Exchange Act
      Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2
      hereto are deemed to accompany this Form 10-K and will not be deemed
      filed for purpose of Section 18 of the Exchange Act. Such certifications
      will not be deemed to be incorporated by reference into any filing under
      the Securities Act or the Exchange Act, except to the extent that the
      registrant specifically incorporates it by
  reference.

|(c) |  | Financial Statement Schedules.
|--- |  | ------------------------------
|    |  |                               
|    |  | See Index under
      Item 8. 

63

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SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

LOGICVISION, INC.


Date: March 18, 2009

By:
    /s/     JAMEST. HEALY**James T. Healy****President and Chief Executive
      Officer**


POWER OF ATTORNEY

KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James T. Healy and Mei Song, and each of them, his true
and lawful attorneys-in-fact, each with full power of substitution, for him or
her in any and all capacities, to sign any amendments to this report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|**Name**                     |  | **Title**                                              |  | **Date**            
|---------------------------- |  | ------------------------------------------------------ |  | --------------------
|/s/     JAMEST. HEALY        |  | President and
      Chief Executive Officer (Principal |  | March 18,
      2009
|**James T. Healy**           |  | Executive Officer) and Director                        |  |                     
|                            
|/s/     MEISONG              |  | Vice President
      of Finance and Chief Financial    |  | March 18,
      2009
|**Mei Song**                 |  | Officer (Principal Financial and Accounting            |  |                     
|                             |  | Officer)                                               |  |                     
|                            
|/s/     GREGGADKIN           |  | Director                                               |  | March 18,
      2009
|**Gregg Adkin**              |  |                                                        |  |                     
|                            
|/s/     RANDALLA. HUGHES     |  | Director                                               |  | March 18,
      2009
|**Randall A. Hughes**        |  |                                                        |  |                     
|                            
|/s/    
      RICHARDOKUMOTO |  | Director                                               |  | March 18,
      2009
|**Richard Okumoto**          |  |                                                        |  |                     
|                            
|/s/     MATTHEWRAGGETT       |  | Director                                               |  | March 18,
      2009
|**Matthew Raggett**          |  |                                                        |  |                     
|                            
|/s/     RICHARDC. YONKER     |  | Director                                               |  | March 18,
      2009
|**Richard C. Yonker**        |  |                                                        |  |                     

64

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EXHIBIT INDEX

|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                        
|3(i)    |  | Amended and Restated Certificate
      of Incorporation.                                                                                                                                                                                                                                                                                                                                       
|       
|3(ii)   |  | Bylaws of the Company, amended as
      of October 16, 2003 (incorporated by reference to the exhibit of the same
      number to the Companys Annual Report on Form 10-K for the year ended
      December 31, 2003).                                                                                                                                                                        
|       
|4.1     |  | Form of Common Stock Certificate
      (incorporated by reference to the exhibit of the same number to Amendment
      No. 8 to the Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                                                                                  
|       
|4.2     |  | Form of Warrant to Purchase
      Shares of Common Stock (incorporated by reference to Exhibit 4.4 to
      Amendment No. 5 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                                   
|       
|4.3     |  | Form of Extinguishing Warrant to
      Purchase Shares of Common Stock (incorporated by reference Exhibit 4.5 to
      Amendment No. 1 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                        
|       
|4.4     |  | Rights Agreement dated as of
      December 16, 2008, between LogicVision, Inc. and Mellon Investor Services
      LLC, which includes the form of Right Certificate as Exhibit B and the
      Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated
      by reference to Exhibit 4.1 to the Companys Registration Statement on
      Form 8-A filed December 17, 2008).
|       
|4.6#    |  | Form of Stock Option Agreement
      (incorporated by reference to Exhibit 4.8.2 to Amendment No. 6 to the
      Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                                                                                                     
|       
|10.1.1# |  | Form of agreements under the 1994
      Flexible Stock Incentive Plan (incorporated by reference to the exhibit of
      the same number to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                                                                                                                                                      
|       
|10.1.2# |  | 1994 Flexible Stock Incentive
      Plan, as amended (incorporated by reference to Exhibit 99.2 to the
      Companys Registration Statement on Form S-8 (File No.
      333-74336)).                                                                                                                                                                                                         
|       
|10.2.1# |  | Amended and Restated 2000 Stock
      Incentive Plan (incorporated by reference to Exhibit 10.1 to the Companys
      Quarterly Report on Form 10-Q for the quarterly period ended June 30,
      2004).                                                                                                                                                                                      
|       
|10.2.2# |  | Amendments Nos. 1 and 2 and
      Addendum to Amended and Restated 2000 Stock Incentive Plan (incorporated
      by reference to Exhibit 10.2 to the Companys Quarterly Report on Form
      10-Q for the quarterly period ended June 30, 2003).                                                                                                                                              
|       
|10.2.3# |  | Form of agreement under the 2000
      Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the
      Companys Quarterly Report on Form 10-Q for the quarterly period ended
      June 30, 2003).                                                                                                                                                                               
|       
|10.3#   |  | Form of Indemnification Agreement
      between the Registrant and its officers and directors (incorporated by
      reference to the exhibit of the same number to the Companys Annual Report
      on Form 10-K for the year ended December 31, 2001).                                                                                                                                      
|       
|10.4    |  | Sixth Amended and Restated
      Registration Rights Agreement dated as of January 28, 2000 (incorporated
      by reference to the exhibit of the same number to the Companys
      Registration Statement on Form S-1 (File No. 333-43654)).                                                                                                                                                
|       
|10.5    |  | Lease, dated as of August 13,
      1998, by and between Spieker Properties, L.P. and the Company
      (incorporated by reference to the exhibit of the same number to Amendment
      No. 1 to the Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                 
|       
|10.6.1  |  | Extension Agreement, dated as of
      January 17, 2000, by and between Spieker Properties, L.P. and the Company
      (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the
      Companys Registration Statement on Form S-1 (File No.
      333-43654)).                                                                                                                    
|       
|10.6.2  |  | Second Amendment, dated as of
      January 23, 2004, to Lease Agreement dated August 13, 1998 by and between
      CA-Metro Plaza, as successor in interest to Spieker Properties, L.P., and
      the Company (incorporated by reference to the exhibit of the same number
      to the Companys Annual Report on Form 10-K for the year ended December
      31, 2003).                    
|       
|10.6.3  |  | Third Amendment, dated as of May
      7, 2004, by and between CA-Metro Plaza, as successor in interest to
      Spieker Properties, L.P., and the Company (incorporated by reference to
      the exhibit of the same number to the Companys Quarterly Report on Form
      10-Q for the quarterly period ended June 30,
  2004).                                                            

---

|10.7.1  |    |  | Agreement, dated as of September
      14, 1992, between Northern Telecom Limited and the Company (incorporated
      by reference to the exhibit of the same number to the Companys Annual
      Report on Form 10-K for the year ended December 31,
2002).                                                                               
|------- | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|10.7.2  |    |  | Amendment, dated as of October 1,
      1993, to the Agreement between Northern Telecom Limited and the Company
      (incorporated by reference to the exhibit of the same number to the
      Companys Annual Report on Form 10-K for the year ended December 31,
      2002).                                                           
|       
|10.7.3  |    |  | Amendment, dated as of January
      11, 1994, to the Agreement between Northern Telecom Limited and the
      Company (incorporated by reference to the exhibit of the same number to
      Amendment No. 1 to the Companys Registration Statement on Form S-1 (File
      No. 333-43654)).                                               
|       
|10.7.4  |    |  | Amendment, dated as of March 20,
      2001, to the Agreement between Nortel Networks Limited (formerly Northern
      Telecom Limited) and the Company (incorporated by reference to the exhibit
      of the same number to the Companys Annual Report on Form 10-K for the
      year ended December 31, 2002).                         
|       
|10.8#   |    |  | Amended and Restated 2000
      Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to
      the Companys Quarterly Report on Form 10-Q for the quarterly period ended
      March 31, 2004).                                                                                                                          
|       
|10.8.1# |    |  | Amendment, dated February 18,
      2005, to the Amended and Restated 2000 Employee Stock Purchase Plan
      (incorporated by reference to Exhibit 10.2.1 to the Companys Quarterly
      Report on Form 10-Q for the quarterly period ended March 31,
      2005)                                                                        
|       
|10.9.1  |    |  | Amended and Restated Loan
      Agreement, dated as of February 11, 2004, by and between Comerica
      BankCalifornia and the Company (incorporated by reference to the exhibit
      of the same number to the Companys Annual Report on Form 10-K for the
      year ended December 31, 2003).                                         
|       
|10.9.2  |    |  | Second Amendment, dated as of
      January 31, 2005, to Second Amended and Restated Loan Agreement by and
      between Comerica BankCalifornia and the Company (incorporated by
      reference to the exhibit of the same number to the Companys Current
      Report on Form 8-K filed with the Commission on February 4,
      2005).
|       
|10.9.3  |    |  | Third Amendment to the Second
      Amended and Restated Loan Agreement, dated February 9, 2006, by and
      between Comerica Bank and the Company (incorporated by reference to the
      Companys Current Report on Form 8-K filed with the Commission on February
      10, 2006).                                                     
|       
|10.10#  |    |  | Change in Control Severance
      Agreement entered into by and between the Company and James T.
      Healy.                                                                                                                                                                                                                               
|       
|10.11#  |    |  | Change in Control Severance
      Agreement entered into by and between the Company and Fadi
      Maamari.                                                                                                                                                                                                                                 
|       
|10.12#  |    |  | Change in Control Severance
      Agreement entered into by and between the Company and Mei
    Song.                                                                                                                                                                                                                                       
|       
|21.1    |    |  | Subsidiaries of the Company
      (incorporated by reference to the exhibit of the same number to the
      Companys Annual Report on Form 10-K for the year ended December 30,
      2002).                                                                                                                                               
|       
|23.1    |    |  | Consent of Burr, Pilger &
      Mayer LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                   
|       
|24.1    |    |  | Power of Attorney (see page 64 of
      this Form 10-K).                                                                                                                                                                                                                                                                                    
|       
|31.1    |    |  | Rule 13a-14(a) Certification of
      Chief Executive Officer.                                                                                                                                                                                                                                                                              
|       
|31.2    |    |  | Rule 13a-14(a) Certification of
      Chief Financial Officer.                                                                                                                                                                                                                                                                              
|       
|32.1    | ** |  | Statement of Chief Executive
      Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
      §1350).                                                                                                                                                                                                                     
|       
|32.2    | ** |  | Statement of Chief Financial
      Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
      §1350).                                                                                                                                                                                                                     

|#  |  | Indicates management contract or
      compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | In accordance with Item
      601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
      34-47986, Final Rule: Managements Reports on Internal Control Over
      Financial Reporting and Certification of Disclosure in Exchange Act
      Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2
      hereto are deemed to accompany this Form 10-K and will not be deemed
      filed for purpose of Section 18 of the Exchange Act. Such certifications
      will not be deemed to be incorporated by reference into any filing under
      the Securities Act or the Exchange Act, except to the extent that the
      registrant specifically incorporates it by
  reference.

---