<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
      For the Transition Period from January 1, 1998 to September 30, 1998

                         COMMISSION FILE NUMBER 0-17187

                           LOGIC DEVICES INCORPORATED

                          (Exact name of registrant as
                            specified in its charter)

       CALIFORNIA                                               94-2893789
------------------------                                     ----------------
(State of Incorporation)                                     (I.R.S. Employer
                                                            Identification  No.)

                     1320 ORLEANS DRIVE, SUNNYVALE, CA 94089
                    ----------------------------------------
                    (Address of principal executive offices,
                               including Zip Code)

                                 (408) 542-5400
                         -------------------------------
                         (Registrant's telephone number,
                              including Area Code)

           Securities registered pursuant to Section 12(b) of the Act


<TABLE>
<CAPTION>
     Title of Class                  Name of each exchange on which registered
     --------------                  -----------------------------------------
<S>                                  <C>
          NONE                                        NONE         
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act

                         COMMON STOCK, WITHOUT PAR VALUE
                                (Title of Class)
                             -----------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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 [X] No [ ] 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant on November 30, 1998 was approximately $6,218,650. On that date,
there were 6,632,388 shares of Common Stock issued and outstanding.

Documents Incorporated By Reference: Proxy Statement for the 1999 Annual Meeting
of Shareholders.


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                                  Page 1 of 72
                        Exhibit List Appears at Page 47
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                                     PART I

ITEM 1. BUSINESS

        This item contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of factors set forth in
"Factors Affecting Future Results" and elsewhere in this Report.

GENERAL DEVELOPMENT OF THE BUSINESS

        Logic Devices Incorporated (the "Company") develops and markets
high-performance digital integrated circuits. The Company's circuits address
applications that require high computational speeds, high-reliability, high
levels of circuit integration (complexity), and low power consumption. The
Company's circuits are incorporated into products manufactured by original
equipment manufacturers and utilized to provide high-speed electronic
computation in digital signal processing, video image processing, and
telecommunications applications. The Company's product strategy is to develop
and market proprietary circuits which offer superior performance to meet
specific application requirements.

        In September 1998, the Company elected to change its fiscal year-end
from December 31 to September 30, effective September 30, 1998. This Form 10-K
report covers the nine-month transition period from January 1, 1998 to September
30, 1998 and all references to 1998, fiscal 1998 or fiscal year 1998 mean such
nine-month period unless otherwise noted.

        In the quarter ended September 30, 1998, the Company elected to 
discontinue certain of its product lines and to change its strategy to focus on 
proprietary products versus earlier second source products. This decision 
resulted in a broad ranging restructuring of its operations. As a result of 
this restructuring, the Company recorded significant write-downs of inventory, 
severance costs, and write-offs related to the impairment of long lived assets. 
See "Notes to Financial Statements."

        The Company's products generally address Digital Signal Processing (DSP)
requirements involving high-performance arithmetic computational functions such
as multiplication, arithmetic functions, and correlation. During its nine-month
fiscal period ending September 30, 1998, the Company introduced 3 new products
as well as obsoleted a number of maturing products. As of September 30, 1998,
the Company offered 38 products, which were sold to a diverse customer base.
With the multiplicity of packaging and performance options, the 38 basic
products result in approximately 250 catalog items.

        The Company's mature products are designed to replace existing industry
standard integrated circuits while offering superior performance, lower power
consumption, and reduced cost. The Company is focused on developing proprietary
catalog products to address specific functional application needs or performance
levels that are not otherwise commercially available. The Company seeks to
provide related groups of circuits that OEMs purchase for incorporation into
high-performance electronic systems.

        The Company relies on third party silicon foundries to process silicon
wafers, each wafer having up to several hundred integrated circuits of a given
Company design, from which finished products are then assembled. The Company's
strategy is to out-source wafer processing to third party foundries in order to
avoid the substantial investment in capital equipment required to establish a
wafer fabrication facility. See "Business -- Background." The Company works
closely with the foundries in order to take advantage of their processing
capabilities and continues to explore and develop additional foundry
relationships in order to minimize its dependence on any single relationship.


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<PAGE>   3
        The Company markets its products worldwide through its own direct sales
force, a network of 21 national and international independent sales
representatives, and 15 international and domestic distributors. In fiscal 1998,
approximately 54% of the Company's net revenues were derived from OEMs, while
sales through foreign and domestic distributors accounted for approximately 46%
of net revenues. Among the Company's OEM customers are Sony Corporation,
Hitachi, Honeywell, SDX, Solectron Corporation, Acuson Corporation, DSC
Communications Corporation, Lockheed Martin, Boeing, Boston Technology, General
Dynamics, ESI, Hewlett Packard and Advanced Technologies Laboratories, Inc.
Approximately 55% of the Company's net revenues were derived from within the
United States and approximately 47% were derived from foreign sales.

        The Company was incorporated under the laws of the State of California
in April 1983. The Company's initial public offering was in November 1988 at
which time the Company's shares commenced trading on the Nasdaq National Market.
The Company's principal offices are located at 1320 Orleans Drive, Sunnyvale,
California 94089, and the telephone number is (408) 542-5400.

BACKGROUND

        Continued rapid advances in fabricating silicon-based semiconductors are
driving a global revolution in electronics. With these ongoing advances the
ability to economically compute, communicate, and control seems to be limited
only by the creativity required to implement ever more complex electronic
systems. It is now not only possible, but also becoming increasingly more
common, to implement entire electronic systems on a single small sliver of
silicon. As a result, the challenges to the industry have increasingly turned
toward innovative product definition, timely product development, technical
customer support, and heavy capital investments in advanced semiconductor wafer
fabrication facilities. The rapid advances in chip fabrication technology have
resulted in a specialization of skills within the industry. In addition to the
specialization in materials processing skills required to fabricate
semiconductor wafers, the industry increasingly requires and values system
architecture, signal processing algorithms, and circuit design expertise as
essential skills for developing financially successful products. Opportunities
have thus emerged for semiconductor companies which focus on product definition,
advanced design techniques and technical application support, and which rely on
third parties for wafer fabrication. The Company focuses its resources on
defining and developing high performance integrated circuit components for
growing markets, which require demanding computational throughput.

        The semiconductor industry is intensely competitive and is characterized
by rapid technological change, product obsolescence, fluctuations in both demand
and capacity, and price erosion. These factors can obsolete processes and
products currently utilized or produced by the Company. In such cases, the
Company is required to develop products utilizing new processes and to either
integrate such products into its existing foundry relationships or establish new
foundry sources.

MARKETS AND PRODUCT STRATEGIES

        The Company believes it possesses advanced competencies in two areas:
DSP algorithm development and high speed, very large scale, integrated circuit
development.

        DSP involves converting light, sound, or other naturally occurring
analog waveforms into a stream of digital values, that may then be processed,
manipulated, exchanged, or sorted by electronic systems. DSP provides many
advantages, including: i) the ability to process and manipulate digital data
with consistency and precision; ii) the ability to store and recall information;
and iii) the ability to extract information content and compress the amount of
data which must be stored, processed or transmitted. Manipulation of video
images and speech 


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<PAGE>   4
requires signal-processing rates and precision that are not practical with
analog technology or with general-purpose (non-DSP) processors. DSP is an
increasingly important technology for many emerging product technologies.

        The Company's advanced capability in high-speed circuit design
facilitates the implementation of very high performance DSP circuits. With the
increasing cost effectiveness of DSP as a result of rapid advances in
semiconductor process technology, DSP is becoming ubiquitous in our lives. As a
result DSP has attracted the considerable attention of very large and formidable
competitors. Of necessity, these competitors, however, tend to focus on very
high volume, application specific markets, or on general-purpose programmable
DSP products that can be programmed to address a wide variety of applications.

        In order to avoid direct competition with these formidable competitors,
the Company seeks to identify products and markets which demand greater
performance than can be accomplished with a programmable DSP and markets for
application specific functions that are small enough not to attract significant
attention from larger chip manufacturers.

        High quality video image processing is one such area. Video image
processing requirements currently require between 10 and 100 times greater
computational capacity than programmable DSP processors can deliver. Mass market
video graphics and image processing products such as 3D personal computer
graphics boards are generally targeted at selling price points, which cannot
support studio broadcast quality images. Moreover, studio broadcast quality
equipment may generally be required to process video images many times in the
composition and editing of on-air material. In contrast, personal computer
graphics screens are processed for display in real time only. As a result while
the underlying mathematical computations for processing both broadcast and
computer images are similar, two distinct markets exist. As a result of the very
high volume potential available for a successful personal computer graphics chip
product, many companies compete fiercely over this market opportunity. In
contrast, the broadcast industry, while it requires more robust mathematical
precision in processing images, consumes far fewer chips. Due to its more modest
market size, this market has been relatively ignored by the chip industry. As a
result, the Company has identified this area as a productive area to apply its
core strengths.

        Beginning in November 1998, the Federal Communications Commission
directed that television broadcasters must begin a transition from current
analog broadcasts to high definition digital television (HDTV). All analog
broadcasts are scheduled to cease by the year 2007. In addition to providing
improved image quality as a result of increased resolution, the image aspect
ratio (width/height) will be changed from the traditional, nearly square 4 by 3
size of current televisions to a wider screen 16 by 9 ratio more similar to
motion picture screens. Due to the large base of currently installed equipment,
for a number of years both formats will co-exist. In addition, due to the
initially limited availability of content in the wide format, the industry faces
the need to resize images back and forth between the two formats with
exceptionally high computational precision, so as to preserve the image quality
advantages of the newer digital format.

        Many of the Company's initial DSP building block components were the
first to achieve speeds necessary to process broadcast video images in real
time. Later, the low power consumption of the Company's products allowed these
products to be offered in lower cost commercial grade packaging, as opposed to
high cost ceramic packages, which were required to dissipate the heat from
earlier high power bipolar components. As a result of these advantages, video
image processing applications have historically represented approximately 50% of
the Company's revenues.


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<PAGE>   5
        With the Company's significant presence in the broadcast equipment
industry, the Company has jointly defined with its existing customers a family
of very high performance digital image filtering circuits which facilitate the
smoothing of edges as video images are stretched and resized. During 1997, the
Company developed the initial members of this family and sampled them to OEMs
for incorporation into high definition digital television (HDTV) studio
production systems. During fiscal 1998, many of those OEMs completed their
system level product development on this new generation of HDTV compatible
studio systems.

        As a result of its initial work on digital filtering and image resizing
circuits, the Company has identified a number of secondary applications for this
product technology. Many of the current products are also applicable, and are
expected to be incorporated into, advanced medical imaging equipment such as
computer aided tomography (CAT) and ultrasound scanners. Military applications
include infrared, radar, and video image seekers, as well as multi-mode
displays.

         In order to expand production unit volumes, the Company defined in 1997
additional related products which it intends to develop to address the
multi-media projector market. While the core image processing requirements are
similar to the broadcast industry, this market requires higher levels of
integration in order to support a lower cost solution.

        Telecommunications, in all of its various forms, is the fastest growing
and largest current market for DSP chips. The Company has found that its digital
filtering components also find application in wireless base station processing.
Analogous to video image processing, major industry suppliers have tended to
concentrate their efforts on the high volume, handset side of the wireless link,
while the base station side has received far less attention. Due to demands for
fewer, smaller, and less intrusive antenna sites, the digital image filtering
required in multichannel wireless base stations is computationally intensive and
power limited. The Company believes this area is an attractive target for the
Company's future product directions.

PRODUCTS IN DEVELOPMENT

        The Company has historically experienced a correlation between its
success in introducing new products and increases in revenues. Consequently, the
Company is committed to a high level of product design and development activity
as it considers new product development critical to its future success. During
1996, the Company committed approximately $2.5 million to purchase design
automation tools and to expand its product development group in order to
accelerate the rate of new product development. As a result of this expanded
effort, the Company developed circuits of aggregate transistor complexity
approximately equal to the entire number of transistors implemented during its
entire prior history during 1997. In fiscal 1998, the Company reassigned some of
the designers who were involved in the development of these products to support
customer engineers in their incorporation of these products into end-systems.
These customer engineers are then able to provide the Company with the technical
requirements for potential future products. During 1998, the Company developed
circuits that provide two-dimensional filtering of video images, color space
conversion between computer and broadcast standards, and video line buffering.

        With the benefit of this on-going customer input resulting from its
current digital filtering products, the Company has a number of new DSP product
opportunities that it will undertake to develop in fiscal 1999. These products
generally will be utilized in conjunction with the Company's current DSP
products to further facilitate high performance signal processing. At current
resource levels the Company does not expect to be able to complete all of the
new product opportunities that it has identified. The level of product
development expenditures will be dependent on the Company's success in meeting
its financial objectives.


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<PAGE>   6
WAFER FABRICATION TECHNOLOGY

        The Company relies on third party silicon foundries to produce processed
wafers from mask patterns designed by the Company. Through its wafer suppliers,
the Company has access to advanced high-speed, high-density complimentary metal
oxide semiconductor (CMOS) process technology, without the significant
investment in capital equipment and facilities required to establish a wafer
fabrication facility. Products developed in 1998 utilize process technology with
effective channel lengths under 0.35 micron. Coupled with the Company's
structured custom design methodology and experience in high-speed circuit
design, this technology has allowed the Company to create products that offer
high computational speeds, high reliability, high levels of circuit integration
(complexity) and low power consumption.

        The Company currently is dependent on two wafer-processing sources.
Wafers are processed to pre-agreed specifications to produce integrated circuits
designed by the Company. There can be no assurance that such relationships will
continue to be on terms satisfactory to the Company. In general the Company's
foundry sources do not guarantee minimum supplies. At times the Company's
revenues have been limited by its inability to obtain adequate quantities of
processed wafers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

PRODUCTION, ASSEMBLY AND TEST

        The Company's production operations consist of functional and parametric
wafer testing, package marking, hot and cold testing, final inspection, quality
inspection, and shipment. As is customary in the industry, the Company's
commercial grade plastic package devices are wafer tested and then shipped to
high-volume assembly subcontractors in the Far East for assembly. Thereafter,
the assembled devices are returned to the Company for final testing and shipment
to customers. The Company continues to test raw material through finished
product at various stages in the manufacturing process utilizing automated test
equipment capable of volume production.

MARKETING, SALES AND CUSTOMERS

        The Company markets its products worldwide to a broad range of customers
through its own sales efforts, a network of 21 national and international
independent sales representatives, and 15 electronics distributors. The Company
concentrates its direct marketing efforts on the high-performance segments of
the telecommunication, military, industrial, and computer markets in
applications where high-speed and low power consumption are critical. Among the
Company's OEM customers are Sony Corporation, Hitachi, Honeywell, SDX, Solectron
Corporation, Acuson Corporation, DSC Communications Corporation, Lockheed
Martin, Boeing, Boston Technology, General Dynamics, ESI, Hewlett Packard and
Advanced Technologies Laboratories, Inc.

        The Company coordinates sales from its Sunnyvale, California facility.
The Company maintains a regional sales office on Staten Island, New York, as
well as field applications support offices in Raleigh, North Carolina to serve
the East Coast and San Diego, California to serve the West Coast. The Company
also has a sales office in Warminster, England to support the Company's European
sales activities. The Company's sales managers direct the activities of the
independent sales representative firms and focus on major target accounts. Sales
representatives obtain orders on an agency basis and the Company ships directly
to its customers. Sales representatives receive commissions on sales within
their territories. Distributors purchase the Company's products for resale
generally to a broad base of small to medium-size customers. Four regional and
national stocking distributors service North America. As is customary in the
industry, domestic distributors are entitled to certain price rebates and
limited stock rotation rights, for which the Company has made a provision in its
consolidated financial statements. During fiscal 1998 and 1997, sales through
both international and domestic distributors accounted 


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<PAGE>   7
for approximately 46% and 66% of net sales, respectively, while direct sales to
OEMs accounted for approximately 54% and 34%, respectively, of net sales.

        In fiscal 1998, three customers accounted for approximately 27%, 12% 
and 12%% of net revenues. In fiscal 1997, two customers accounted for
approximately 16% and 12%, respectively, of net revenues.

        International sales are conducted by sales representatives and
distributors located in Japan, Canada, United Kingdom, Germany, France, Italy,
Netherlands, Sweden, Finland, Hong Kong, Israel, Korea, Taiwan, and Spain.
During fiscal 1998, 1997, and 1996, the Company's export sales were
approximately 47%, 31%, and 27%, respectively, of net sales (see Note 11 in
"Notes to the Financial Statements" contained in Item 8 below). The Company's
international sales are billed in United States dollars and therefore
settlements are not directly subject to currency exchange fluctuations. However,
changes in the relative value of the dollar may create pricing pressures for the
Company's products. Although the Company's international sales are subject to
certain export restrictions, including the Export Administration Amendments Act
of 1985 and the regulations promulgated thereunder, the Company has not
experienced any material difficulties because of these restrictions.

        The Company's domestic distributors generally market products
competitive with the Company's products. The Company's independent sales
representatives and foreign distributors also may represent competitors of the
Company.

        The Company warrants its products against defects in materials and
workmanship for a period of 12 months from the date of shipment. Warranty
expenses to date have been nominal.

BACKLOG

        As of November 30, 1998, the Company's backlog was approximately
$2,042,900. The Company includes in its backlog all released purchase orders
shippable within the following 18 months, including orders from distributors.
The Company's backlog, although useful for scheduling production, does not
represent actual sales and the backlog at any particular time should not be used
as a measure of future sales or revenues. In accordance with accepted industry
practice, orders on the backlog are subject to cancellation without penalty at
the option of the purchaser at any time prior to shipment. Changes in delivery
schedules and price adjustments that may be passed on to distributors and
credits for returned products are not reflected. The Company produces catalog
products that may be shipped from inventory within a short time after receipt of
a purchase order. The Company's business for its catalog products, like the
businesses of many companies in the semiconductor industry, is characterized by
short-term orders and shipment schedules rather than by volume purchase
contracts. For these reasons, the Company's backlog as of any particular date is
not representative of actual sales for any succeeding period and the Company
believes that backlog is not a good indicator of future revenues.

RESEARCH AND DEVELOPMENT

        The Company's engineering staff is involved in the design of integrated
circuits. In 1998, the Company's development efforts were focused on the
development of new digital processing circuits that address video image
processing applications. The Company's product design efforts are supplemented
by computer aided design and simulation equipment. The Company also has an
experienced test-engineering group that works closely with the designers to
develop production test software. Research and development expenditures were 10%
of sales in 1998 and 11% in 1997 and historically have been approximately 10% of
net sales. See "Selected Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Consolidated Statements
of Income" contained in Item 8.


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<PAGE>   8
COMPETITION

        The semiconductor industry is intensely competitive and characterized by
rapid technological change and rates of product obsolescence, price erosion,
periodic shortage of materials, variations in manufacturing yields and
efficiencies, and increasing foreign competition. The industry includes many
major domestic and international companies that have substantially greater
financial, technical, manufacturing, and marketing resources than the Company.
In addition, there are many emerging companies that are attempting to obtain a
share of the existing market. The Company faces competition from other
manufacturers of high-performance integrated circuits, many of which have
advanced technological capabilities, are currently increasing their
participation in the high-performance CMOS market and have internal wafer
production capabilities. The ability of the Company to compete in this rapidly
evolving environment depends on elements both within and outside the control of
the Company. These elements include: the Company's ability to develop new
products in a timely manner; the cost effectiveness of its manufacturing; the
acceptance of new products by customers; the speed at which customers
incorporate the Company's products into their systems; the continued access to
advanced semiconductor foundries; the number and capabilities of its competitors
as well as general economic conditions. In the area of high-performance DSP
circuits, the Company competes with Analog Devices, Fairchild Semiconductor,
Genesis, Gennum, Harris, Lucent Technology, and Texas Instruments, among others.

PATENTS AND COPYRIGHTS

        Because of the rapidly changing technology in the semiconductor
industry, the Company relies primarily upon its design know-how, rather than
patents and copyrights, to develop and maintain its competitive position. The
Company attempts to protect its trade secrets and other proprietary information
through confidentiality agreements with employees, consultants, suppliers, and
customers, but there can be no assurance that those measures will be adequate to
protect the Company's interests. The Company is of the opinion that patent
maskwork protection is of less significance in the Company's business than
factors such as the experience and innovative skill of its personnel and the
abilities of its management. There can be no assurance that others will not
develop or patent technology similar to the Company's technology or copy or
otherwise duplicate the Company's products. The Company owns five patents
awarded by the United States Patent Office.

        Since others have obtained patents covering various semiconductor
designs and processes, certain of the Company's present or future designs or
processes may be claimed to infringe the patents of third parties. The Company
has previously received and may in the future receive claims that one or more
aspects or uses of the Company's products infringe on patent or other
intellectual property rights of third parties. See Item 3 - Legal Proceedings.
The Company does not believe that it infringes any known patents at this time.
If any such infringements exist or arise in the future, the Company may be
liable for damages and may, like many companies in the semiconductor industry,
find it necessary or desirable to obtain licenses relating to one or more of its
current or future products. Based on industry practice the Company expects that
any necessary licenses or rights under patents could be obtained on conditions
that would not have a material adverse effect on the Company. There can be no
assurance, however, that licenses could in fact be obtained on commercially
reasonable terms, or at all, or that litigation would not occur. The Company's
inability to obtain such licenses or the occurrence of litigation could
adversely affect the Company.


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<PAGE>   9
FACTORS AFFECTING FUTURE RESULTS

        Except for historical information contained herein, the discussion in
this Form 10-K report contains forward looking statements within the meaning of
Section 27 A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including but not limited to, statements as to future
operating results and business plans of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include but are not limited to, general economic conditions, the cyclical nature
of the semiconductor industry, especially the markets addressed by the Company's
products such as HDTV, telecommunications, military weapons system, medical
diagnostic imaging equipment, and general computing applications. Also to be
considered are factors such as slower than expected demand for the Company's
products, the availability of external sources of supply for critical materials
such as processed silicon wafers, the extent of utilization of internal
manufacturing capacity, fluctuation in wafer and assembly yields, competitive
factors, price erosion, the successful development and market acceptance of new
product introductions, product obsolescence, costs associated with litigation
and the impact of Year 2000 issues on the Company's operations, and the
availability of adequate capital.

Fluctuation in operating results

        The Company's quarterly and annual results of operations are effected by
many factors that could materially and adversely impact revenues, margins, and
income from operations. These factors include, among others, demand for the
Company's products, changes in product mix, competitive pricing pressure,
fluctuations in yields, cost and availability of raw materials, delays in the
introduction or the performance of the Company's new products, market acceptance
of the Company's products, competitive product introductions, product
obsolescence, costs of litigation, and the dependence of the Company on a
limited number of key personnel. In addition to the risks inherent in the
cyclical nature of the industry, the Company frequently ships more products
during the third month of each quarter than in the first two months of the
quarter. Moreover, shipments in the third month are generally higher toward the
end of the month resulting in a concentration in sales in the latter part of the
quarter that contributes to difficulty in predicting the Company's revenues and
results of operations.

International operations

        The Company's products are comprised of materials and produced through
processes supplied by foreign companies. The Company also has many overseas
customers, the sales to which are billed in United States dollars, and
therefore, not directly subjected to currency exchange fluctuations. However,
changes in the relative value of the U.S. dollar may change the price of the
Company's products relative to the prices of its foreign competitors.
Accordingly, both the Company's manufacturing and sales may be adversely
affected by changes in the rates of exchange between the U.S. dollar and certain
foreign currencies. In addition, the implementation of various forms of
protectionist trade legislation, a change in current tariff structures or other
trade policies, changes in foreign political or economic conditions,
difficulties in collecting accounts receivable and changes in taxes either in
the United States or in certain foreign countries, could adversely affect the
Company, its international customers or suppliers or advantage the Company's
international competitors.

New product development risks

        The Company's future success depends heavily on its ability to develop
and introduce new products which meet critical customer needs and which compete
effectively on the basis of cost and performance with alternative products and
solutions. The success of new product introductions is highly dependent on the
timely completion and introduction of new product 


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<PAGE>   10
designs. The development of new products by the Company and their design-in to
customer systems can take several years.

Dependence on limited sources of supply and assembly

        The Company is dependent on subcontractors for its processed silicon
wafers and its assembly of products. There are only a limited number of such
suppliers and the Company has had difficulty in the past obtaining adequate
suppliers during periods of rapid industry growth. Changes in suppliers require
qualification by the Company and may result in considerable expense and delay in
shipping products.

Manufacturing and test capacity

        Although fab-less, the Company has made substantial investments in
manufacturing and test capacity. There can be no assurance that market
conditions will result in sufficient demand to permit the Company to fully
utilize this capacity. Also, the Company's manufacturing facilities are located
in the Silicon Valley area that is known to be at high risk for major
earthquakes. The Company could suffer either direct damages or its operations
could otherwise be disrupted as a result of a major earthquake.

Inventory risk

        The Company must order wafers and packaging materials and build
inventory well in advance of product orders. Because the Company's markets are
volatile and subject to rapid fluctuations, there are risks that the Company
will forecast demand incorrectly and produce excess or insufficient inventory.
Some of the Company's products enjoy customer demand beyond the period that the
Company's wafer sources offer the process technology that the products were
originally designed with. In order to avoid spending limited high skill
engineering resources on continuous re-tooling of more mature products to
utilize newer process technology, on some product types the Company makes
lifetime buys of its anticipated needs resulting in heightened risk of inventory
obsolescence.

Liquidity

        Semiconductor manufacturers generally have extraordinarily high ongoing
capital requirements. There can be no assurance that the Company can generate
sufficient cash flow from operations or be able to obtain financing from other
sources that will meet the Company's capital requirements.

Dependence on key personnel

        The Company is highly dependent upon a limited number of key management
and technical personnel. The Company's future success also depends on its
ability to attract and retain additional personnel, especially highly skilled
product design engineers. There can be no assurance that the Company will be
successful in hiring and retaining such personnel, and any loss of key personnel
could have a material adverse effect on the Company.

EMPLOYEES

        As of September 30, 1998, the Company had 50 full-time employees: 8 in
administration, 13 in research and development, 3 in quality assurance, 12 in
production/test and 14 in marketing and sales. In addition, from time to time,
the Company uses consultants and part-time employees. The Company's ability to
attract and retain qualified personnel is an important factor in its continued
success. None of the Company's employees are represented by a collective
bargaining 


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agreement, and the Company has never experienced any work stoppage. The Company
believes that its employee relations are good.

REGULATION

        Federal, state, and local regulations impose various environmental
controls on the discharge of chemicals and gases in connection with the wafer
manufacturing process. Since the Company relies on third party manufacturers and
its activities do not involve utilization of hazardous substances generally
associated with semiconductor processing, the Company believes such regulations
are unlikely to have a material affect on its business or operations.


ITEM 2. PROPERTIES

        The Company's executive offices, as well as its manufacturing and
principal research and design facilities, are located in approximately 21,600
square feet of space in Sunnyvale, California pursuant to a lease expiring on
December 15, 2002. The Company maintains additional sales or field application
support offices located in the metropolitan area of Raleigh, North Carolina,
Staten Island, New York, San Diego, California, and Warminster, England. The
Company currently leases these sales and field application support offices on a
month-to-month basis. The Company believes that its facilities will be adequate
to meet its reasonably foreseeable needs and, if necessary, that alternative
facilities will be available to it on acceptable terms so as to meet its
requirements.


ITEM 3. LEGAL PROCEEDINGS

        The Company is not presently involved in any legal proceedings. From
time to time the Company receives demands from various parties asserting patent
claims. These demands are often not based on any specific knowledge of the
Company products or operations. Because of the uncertainties inherent of
litigation the outcome of any such claim, including simply the cost of a
successful defense against such a claim, could have a material adverse impact on
the Company.

        In January 1998, the Company was contacted by the attorneys representing
the estate of Mr. Jerome Lemelson charging that the Company infringed on certain
patents registered by Mr. Lemelson. The attorneys for the estate have not filed
suit, but have urged the Company to enter into a licensing agreement with the
estate in order to avoid litigation. The Company is in the process of reviewing
the charges to determine the validity of the claims. Should the estate file
suit, the Company would vigorously defend itself in this matter. However,
because of the inherent uncertainties of litigation, the outcome of this action
could be unfavorable, in which event the Company might be required to pay
damages and other expenses, which could have a material adverse effect on the
Company's financial position and results of operations. In addition, the Company
could be required to alter certain of its production processes or products as a
result of this matter.


ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of the Company's security holders
during the last quarter of fiscal 1998.


                                       11


<PAGE>   12
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        The Company's Common Stock is traded under the symbol "LOGC" on the
Nasdaq National Market System. The following table sets forth for the period
indicated, the high and low closing prices for the Company's Common Stock as
reported by Nasdaq:


<TABLE>
<CAPTION>
1996                          HIGH          LOW
----                          ----          ---
<S>                          <C>           <C>
Fourth Quarter               $ 3 3/4       $ 2 1/16

1997                          HIGH          LOW

First Quarter                $ 2 3/4       $ 2 5/16
Second Quarter               $ 2 1/2       $ 1 15/16
Third Quarter                $ 3 1/2       $ 1 15/16
Fourth Quarter               $ 4 7/16      $ 2 5/32

1998

First Quarter                $ 3 1/2       $ 2 1/32
Second Quarter               $ 3 3/4       $ 2 1/2
Third Quarter                $ 3 1/4       $ 1 1/5
</TABLE>


HOLDERS

        As of November 30, 1998, there were approximately 3,400 holders of the
Company's Common Stock.

DIVIDENDS

        The Company has not paid any dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company has entered
into bank credit agreements that preclude the payment of dividends without the
prior consent of the parties to such agreements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Financing". Regardless of any such restrictions in its bank
credit agreement, the present policy of the Company is to retain earnings to
provide funds for the expansion of its business.

UNREGISTERED SALES OF COMMON STOCK

        On September 30, 1998, the Company sold 510,638 newly issued shares of
Common Stock for $1.46875 per share or $750,000 in the aggregate in equal
amounts to William J. Volz, President and a director of the Company, and BRT
Partnership. BRT Partnership is a partnership, the sole partners of which are 25
individual trusts commonly known as the Bea Ritch Trusts, the beneficiaries of
which are family members of Burton W. Kanter, a director of the Company, though
Mr. Kanter is not a beneficiary. The per share sale price equals the closing
price for the Company's Common Stock on September 17, 1998, the date on which
the parties entered into an agreement to effect such sale. The sale was not
registered under the Securities Act of 1933 in reliance on an exemption from the
registration requirements thereof under Section 4(2) of such act and the rules
promulgated thereunder and on other exemptions. At the time of the sale, the
Company entered into an agreement to register resales of such shares in the
future but to date has not filed a registration statement covering such resales.
No broker-dealers or underwriters were 


                                       12


<PAGE>   13
used to effect such sale and no brokerage commissions or underwriting discounts
were paid in connection therewith.

ITEM 6. SELECTED FINANCIAL DATA

        In September 1998, the Company elected to change its fiscal year-end
from December 31 to September 30, effective September 30, 1998.

        The following table sets forth selected financial data for the Company
for the nine month fiscal year ended September 30 1998, the nine months ended
September 30, 1997, and for the fiscal years ended December 31, 1997, 1996,
1995, and 1994. This information has been derived from the Company's audited
consolidated financial statements. This data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere in this report.

(Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                  Nine Months Ended
                                    September 30,                              Year ended December 31,          
                            -----------------------------   -----------------------------------------------------------
                                 1998            1997           1997            1996           1995           1994  
                            -------------   -------------   -------------   -------------  -------------  -------------
                                             (Unaudited)
<S>                         <C>             <C>             <C>             <C>            <C>            <C>   
Net revenues                $       9,562    $      9,006    $     12,519    $     12,525   $     16,611   $     13,492

Net (loss) income                  (6,334)           (407)           (399)            122          1,384            708

Basic (loss) income
per common share                    (1.03)          (0.06)          (0.07)           0.02           0.26           0.15

Weighted average
common shares
outstanding
(thousands)                         6,178           6,366           6,122           6,041          5,420          4,841

Working capital             $       9,630          16,282          15,184          16,641         17,148          7,218

Property and
equipment (net)                     4,935           4,781           5,110           4,204          2,410          2,163

Total assets                       23,599          20,727          27,493          26,500         23,366         14,925

Long-term liabilities                 392           1,164           1,125           1,206            391          1,228

Shareholders' equity               15,143          20,719          20,727          21,126         20,711          8,810

Research and
development expenses                  959           1,148           1,406           1,450          1,451          1,338
</TABLE>


                                       13


<PAGE>   14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


Reported fiscal financial results may not be indicative of the financial results
of future periods. All non-historical information contained in the following
discussion constitutes forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements are not guarantees of future performance and involve a
number of risks and uncertainties, including but not limited to operating
results, new product introductions and sales, competitive conditions, customer
demand, capital expenditures and resources, manufacturing capacity utilization,
and intellectual property claims and defense. Factors that could cause actual
results to differ materially are included in, but not limited to, those
identified in "Factors Affecting Future Results". The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may reflect events or circumstances after the
date of this report.

OVERVIEW

        The Company's election to change its fiscal year-end from December 31 to
September 30 was part of an overall restructuring of the Company's operations
that was undertaken in the quarter ended September 30, 1998.

        Historically, the Company has been one of the smallest publicly traded
semiconductor manufacturers. In order to bootstrap its growth from a very
limited capital base, the Company initially developed plug compatible second
source products that were form, fit, and function compatible with products
offered by other manufacturers. These products also offered oneupmanship
advantages such as faster performance, lower power consumption, and lower cost.
The primary advantage of this plug compatible second sourcing was to shorten the
time from product introduction to initial revenues. Due to the presence of
competitive suppliers, the disadvantages of these products include the need for
broad distribution channels and highly competitive pricing and delivery demands.

        Recognizing the disadvantages of relying on plug compatible products, in
1996 the Company embarked on a redirection and expansion of its product
development efforts. During 1996, the Company acquired advanced design
automation tools and sharply increased the number of people involved in product
development. At the same time, the Company also began identifying unique,
proprietary products driven by the requirements of its existing customer base.
In 1997, the Company introduced a number of these proprietary products and
continues to focus on defining and developing proprietary products.

        Fiscal 1998 can be characterized as a year of transition for the
Company. Sales of the Company's more mature products continue to decline as the
products reach end of life. The Company's newer products have been designed-in
(incorporated) into end system level products that address the high definition
television market. These systems are expected to move toward volume production
during fiscal 1999. As the newer products begin to contribute increasing
revenues, the Company's support of its older products will become more and more
inefficient. As a result, the Company has elected to phase down a number of its
more mature products and to accelerate its transition to its proprietary
products.

        The Company derives its revenues primarily from the sale of
semiconductor chips that address high-speed digital signal processing (DSP)
applications. In the past, the Company also enjoyed significant revenues from
the sale of high performance static random access memories (SRAMs). Applications
requiring high speed processing generally also require high-speed 


                                       14


<PAGE>   15
memory. However, since 1996, the industry has suffered from excess wafer
fabrication capacity. This excess capacity has resulted in severe downward price
pressure on memory products. Due to the resulting falling demand and sharply
lower pricing, sales of the Company's SRAM products have declined significantly
as a percentage of total revenues.

        The Company's second source products provide the building blocks from
which high performance arithmetic computing engines can be configured. With the
on-going advances in semiconductor process lithography, it has become
technically feasible to incorporate entire systems on a single chip. While this
capability is just becoming economically attractive, the Company has recognized
that the remaining life of its more mature products is limited, as the building
blocks provided by the Company's products on separate chips can now be combined
onto a single chip with other necessary building blocks for arithmetic computing
systems. These products suffer pricing pressure as a result of the introduction
of more highly integrated, and therefore more economical, product introductions
by the Company's competitors. This pricing pressure impacts the Company to a
lesser degree than the impact of excess capacity on memory products due to
performance requirements and the more limited size of the markets that these
products address.

        Many of the Company's customers produce systems that address the
television broadcast industry. In the United States, television broadcasting
began the transition from analog to digital transmission in November 1998. By
the year 2007, all analog broadcasts are scheduled to cease. As a result of this
transition, the Company believes that there will be expanded opportunities for
the sales of its newer products that generally address the requirements for
processing studio quality broadcast images. In the short term however, sales of
the Company's existing products have been adversely impacted as broadcasters
have delayed planned incremental upgrades of their facilities that would have
quickly become obsolete as a result of the transition to HDTV.

RESULTS OF OPERATIONS

Nine Month Year Ended September 30, 1998 compared to the Nine Month Year ended
September 30, 1997

        Net revenues for the nine month year ended September 30, 1998 were
$9,562,700, up six percent from the $9,006,400 recorded in the nine months ended
September 30, 1997.

        Cost of revenues increased from $5,730,000 in the nine month period
ended September 30, 1997 to $7,252,100 in the nine month year ended September
30, 1998. Gross profit decreased from $3,276,400 for the nine month period in
1997 to $(1,861,800) in 1998, due to this increase in cost of goods sold and due
to the recording of certain one time charges associated with the Company's
business plan of reorganization. Gross profit margin as a percentage of sales
decreased from 37% for the nine month period in 1997 to negative 19 percent in
1998. This decrease in gross profit dollars and decrease in gross profit margin
on revenue from product sales in 1997 was due to the increase in cost of goods
sold as well as higher inventory write downs in the 1998 period.

        Research and development expenses were $959,500 in the nine month year
ended September 30, 1998 versus $1,147,700 in the nine month year ended
September 30, 1997. Research and development expenses as a percentage of net
revenues decreased from 13% for the nine month period in 1997 to 10% in 1998.
Research and development expenses decreased in 1998 compared to the 1997 period
as a result of fewer mature product re-tooling charges for the period.


                                       15


<PAGE>   16
        Selling, general and administrative expenses increased 21% from
$2,613,100 in the nine month period ended September 30, 1997 to $3,154,700 in
the nine month year ended September 30, 1998. As a percentage of net revenues,
selling, general and administrative expenses increased from 29% for the nine
month period in 1997 to 33% in 1998.

        For the nine month year ended September 30, 1998, the operating (loss)
increased 1724% to $(5,976,000) from $(406,600) for the nine month period ended
September 30, 1997, due to the above-mentioned factors. As a percentage of net
revenues, operating income decreased from negative 5% for the nine month period
in 1997 to negative 62% for the nine month period in 1998.

        Interest expense increased from $188,900 for the nine month period in
1997 to $434,400 for the nine month period in 1998 as the Company's borrowing
increased from $3,275,000 at September 30, 1997 to $5,350,000 at September 30,
1998.

        As a result of the foregoing, net loss increased from a loss of $406,600
for the nine month year ended September 30, 1997 to a loss of $6,333,700 for the
nine month period ended September 30, 1998.

Year Ended December 31, 1997 compared to the Year ended December 31, 1996

        Net revenues for the year ended December 31, 1997 were $12,518,500,
essentially unchanged from $12,524,900 recorded in the year ended December 31,
1996. In early 1997, the Federal Communications Commission announced that it
would require broadcasters in the ten largest market areas to begin digital
television broadcasting by the fall of 1998. The immediate response to this
announcement was to slow planned incremental upgrades of existing studio
equipment while broadcasters assessed the requirements to move to digital
television broadcasting. As a result of this pause in end equipment purchases,
sales of the Company's components to studio equipment manufacturers were
adversely impacted. Also during 1997, the Company experienced periods where it
was unable to support certain of its SRAM product types due to a transition to
manufacturing these products with newer process technology.

        Cost of revenues increased from $7,008,900 in the year ended December
31, 1996 to $7,933,100 in the year ended December 31, 1997. Gross profit
decreased from $5,516,000 in 1996 to $4,585,400. Gross profit margin as a
percentage of sales decreased from 44% in 1996 to 36% in 1997. This decrease in
gross profit dollars and lower gross profit margin on revenues was due to higher
inventory write downs and falling SRAM pricing in 1997.

        Research and development expenses were $1,405,600 in the year ended
December 31, 1997 versus $1,450,100 in the year ended December 31, 1996.
Research and development expenses as a percentage of net revenues decreased from
12% in 1996 to 11% in 1997. Research and development expenses were essentially
unchanged for the 1997 and 1996 periods as a result of fewer mature product
re-tooling charges for the period but were offset by substantial investments in
R&D personnel and design software which increased the new product development
during 1997.

        Selling, general and administrative expenses decreased 8% from
$3,827,000 in the year ended December 31, 1996 to $3,507,500 in the year ended
December 31, 1997. The decrease was primarily due to expense control activities
instituted in light of the Company's losses during 


                                       16


<PAGE>   17
1997. As a percentage of net revenues, selling, general and administrative
expenses decreased from 30% in 1996 to 28% in 1997.

        In the year ended December 31, 1997, operating income (loss) decreased
237% to $(327,700) from $238,900 in the year ended December 31, 1996. As a
percentage of net revenues, operating income decreased from 2% in the 1996
period to negative (3)% in the 1997 period.

        Interest expense increased from $94,500 in 1996 to $439,700 in 1997 as
the Company's borrowing increased from $2,000,000 at year end 1996 to $3,525,000
at year end 1997. This was offset by interest income of $72,200 in 1996 and
$4,900 in 1997.

        As a result of the foregoing, net income decreased from $122,300 in the
year ended December 31, 1996 to a loss of $(398,600) in the year ended December
31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

        For the three years ended September 30, 1998 the Company's cash flow
(after-tax net loss plus non-cash items) has significantly exceeded its net
loss, due to significant non-cash charges for restructuring, depreciation, and
inventory write-downs. This cash flow ($-467,200 in 1998, $1,104,600 in 1997,
and $1,595,200 in 1996) as well as approximately $3,350,000 in increased bank
borrowings between December 1996 and September 30, 1998, and a private sale of
Common Stock for an aggregate consideration of $750,000 on September 30, 1998
have served as the primary source of financing for the Company's working capital
needs and for capital expenditures during these years.

        During fiscal 1998, the Company's after-tax net cash flow (net loss of
$6,378,400 plus non-cash items of $5,866,500) along with increases in
inventories of $136,500 and decreases in accounts receivables of $2,228,400
along with net other cash flow items from operations used a total of
$(1,682,500) in net cash from operating activities. Capital expenditures and
increases to other assets used $293,500 in cash. Bank borrowing provided
$2,325,000 in cash, and repayment of long-term capital lease obligations and
bank borrowings used $1,044,000 in cash. The Company also raised $750,000 in
additional equity in September 1998. Net of such amounts resulted in a increase
in cash and cash equivalents of $55,000 for the 1998 period.

        During 1997, the Company's after-tax cash earnings (net loss of $398,600
plus non-cash items of $1,503,200) along with a decrease in inventories of
$1,529,800, were offset by growth in accounts receivables of $2,179,300. These
items along with net other cash flows items from operations provided a total of
$292,800 in net cash from operating activities. Capital equipment expenditures
and increases to other assets used $1,740,100 in cash. Bank borrowing provided
$2,325,000 in cash, and repayment of long-term capital lease obligation used
$660,700 in cash. Net of such amounts resulted in a decrease in cash and cash
equivalents of $583,000 for the 1997 period.

        During 1996, the Company's after-tax cash earnings (net income of
$122,300 plus non-cash items of $1,472,900), along with cash provided from
accounts receivables of $1,191,500, were more than offset by increases in
inventories of $5,632,900 (increased in inventories were funded by after-tax
cash earnings, cash provided from receivables and cash on hand.). These items
along with net other cash flows items from operations used a total of $4,060,700
in net cash from operating activities. Capital equipment expenditures and
increases to other assets used 


                                       17


<PAGE>   18
$1,517,500 in cash. Bank borrowing provided $2,000,000 in cash, exercise of
warrants and stock options provided $292,500 in cash and repayment of long-term
capital lease obligations used $421,900 in cash. Net of such amounts resulted in
a decrease in cash and cash equivalents of $3,707,600 for the 1996 period.

        The Company has addressed its requirements for working capital by
reducing expenditures, accelerating accounts receivables collections, and by
shifting its focus to higher margin products. The Company believes that these
actions combined with anticipated after-tax cash earnings, and reductions in the
levels of inventories as well as the financing available under other third party
financing, will be sufficient to support its working capital and capital
expenditure requirements for the next twelve months.

Working Capital

        The Company's investment in inventories and accounts receivable has been
significant and will continue to be significant in the future. Over prior
periods, the Company, as a nature of its business, has maintained high levels of
inventories and accounts receivable in order to be responsive to its customer
base. As the Company shifts from more competitive second source products to
proprietary sole source products the Company believes that it will be able to
streamline its inventories. It also intends to shorten its accounts receivable
collection cycle by re-focusing on direct sales to customers rather than through
distribution channels.

        The Company relies on third party suppliers for its raw materials,
particularly its processed wafers, and as a result maintains substantial
inventory levels to protect against disruption in supplies. At periods in the
past the Company has experienced disruptions in obtaining wafers from its
suppliers. As the Company continues its shift to higher margin proprietary
products, the Company expects to be able to reduce inventory levels by
streamlining its product offerings.

        As part of its restructuring activities, the Company recalled from
distributor stock product material that was not committed to an existing
customer order. The material that was recalled was added back into the Company's
inventory pool. This enlarged inventory pool was then culled for products that
the Company identified as having reached end of life. As a result of this
activity the Company has scrapped $4,172,400 as part of its restructuring
efforts during the quarter ended September 30, 1998. The Company provides
reserves for any product material that is over one year old with no backlog or
sales activity, and reserves for future obsolescence. See "Schedule II" of the
accompanying consolidated financial statements.

        The Company's accounts receivable level is generally correlated to the
Company's previous quarter revenue level. Because of customer order scheduling,
up to 80% of the quarterly revenues are often shipped in the last month of the
quarter. This has the effect of placing a large portion of the quarterly
shipments reflected in accounts receivable still not yet due per the Company's
net 30 day terms. This, combined with the fact that the Company's distributor
customers (which made up 46% of the Company's 1998 revenues) generally pay at 90
days and beyond, has resulted in accounts receivable balances at the end of the
quarterly period being at their highest point for the period. The Company
expects to be able to reduce accounts receivable levels as a result of a shift
in its sales focus toward direct customer sales rather than the broad channel
management sales activities it has required to support its second source
products.


                                       18


<PAGE>   19
        Although current levels of inventory impact the Company's liquidity, the
Company believes that these items are a cost of doing business as a fab-less
operation. The Company continues to evaluate alternative suppliers to diversify
its risk of supply disruption. However, this requires a significant investment
in product development to tool with new suppliers. Such efforts compete for the
Company's limited product development resources. The Company seeks to achieve
on-going reductions in inventory. However, it cannot guarantee that such
reductions will be achieved within a precise period of time due to both its
current high rate of introductions of new products into the inventory pool and
its inability to control customer order schedules.

Financing

        On June 1, 1998, the Company renewed a $6,000,000 revolving line of
credit with Sanwa Bank extending the maturity to May 31, 1999. The line of
credit bears interest at the bank's prime rate (8.50% at September 30, 1998)
plus 1.00%. The line of credit requires the Company to maintain a minimum
tangible net worth of $20,000,000, a maximum ratio of debt to tangible net worth
of not more than 0.50 to 1.00, a minimum current ratio of not less than 2.00 to
1.00, a minimum quick ratio of not less than 1.10 to 1.00 increasing to 1.20 to
1.00 at September 30, 1998 and increasing again to 1.35 to 1.00 at December 31,
1998 and thereafter, and profitability on a quarterly basis. As of September 30,
1998 the Company was not in compliance with certain covenants under the
borrowings and had not obtained a waiver from that bank. (See Notes 6 and 12 of
Notes to Consolidated Financial Statements.) The line of credit facility is
secured by all of the assets of the Company.

        Under the terms of its line of credit facility, the Company is precluded
from paying any cash dividends without the consent of the lender even if the
Company is in compliance with all of the financial covenants but is allowed to
pay stock dividends whether or not there was any other covenant violation.
Regardless of any such restrictions in its bank loan agreements, the Company
does not intend to pay cash dividends in the near future and anticipates
reinvesting its cash flow back into operations.

        Warrants to purchase an aggregate of 150,000 shares of Common Stock had
been issued in connection with an extension of the Shareholder Loan under a Loan
Extension and Warrant Purchase Agreement entered into in March 1991. Warrants to
purchase 74,955 shares were exercised during the year ended December 31, 1995
and warrants to purchase 75,045 were exercised in February of 1996. The exercise
price of the warrants was $3.45 per share.

        On February 15, 1995, the non-employee directors of the Company were
granted warrants to purchase an aggregate of 220,000 shares of Common Stock. The
grants were ratified by shareholders of the Company at the Company's 1996 annual
meeting of shareholders held June 13, 1996. The warrants have an exercise price
of $2.5625 per share, which was the last reported transaction price of the
Common Stock on February 15, 1995, and expire on February 15, 2000. Of these
warrants 120,000 were exercised in 1996 by two of the non-employee directors
through loans made to them from the Company. The loans matured July 1998 and
accrued interest at the reference rate plus 2%. The non-employee director loans
have been extended for a one-year period ending July 1999. As part of the loan
extension agreement, the terms of the loan have been changed to increase the
interest rate to 2% and to require the lenders to sell their shares consistent
with existing market conditions and repay their loans at any time when the offer
price for the underlying shares reaches $3.25.


                                       19


<PAGE>   20
        Certain other warrants to purchase an aggregate of 34,350 shares of
Common Stock were issued by the Company in connection with two of the private
placements that occurred in 1995. Under one transaction, the warrant gives the
holders the right to purchase from the Company up to 31,850 shares of Common
Stock at an exercise price equal to $12.625 per share (the last reported
transaction price on August 21, 1996). The warrant was exercisable immediately
upon its issuance and expired on August 21, 1998. Under the other transaction,
the warrants gives the holders the right to purchase from the Company up to
2,500 shares of Common Stock at an exercise price equal to $11.875 per share
(the closing bid price on September 14, 1996). These warrants were exercisable
immediately upon their issuance and expired on September 19, 1998.

        On September 30, 1998, the Company sold 510,638 newly issued shares of
Common Stock for $1.46875 per share or $750,000 in the aggregate in equal
amounts to William J. Volz, President and a director of the company, and BRT
Partnership. BRT Partnership is a partnership, the sole partners of which are 25
individual trusts commonly known as the Bea Ritch Trusts, the beneficiaries of
which are family members of Burton W. Kanter, a director of the Company, though
Mr. Kanter is not a beneficiary. The per share sale price equals the closing
price for the Company's Common Stock on September 17, 1998, the date on which
the parties entered into an agreement to effect such sale. The Company agreed to
register these shares upon request of the purchasers.

        While the Company will continue to evaluate debt and equity financing
opportunities, it believes its financing arrangements and cash flow generated
from operations provide an adequate base of liquidity to fund operations and
meet the capital needs to support the Company's operations.


YEAR 2000 COMPLIANCE

        The year 2000 creates the potential for date related data to cause
computer processing errors or system shut-downs because computer-controlled
systems have historically used two digits rather than four to define years. For
example, computer programs that contain time data sensitive software may
recognize a date using two digits of "00" as the year 1900 rather than the year
2000. The miscalculations and systems failures that may be caused by such date
misrecognition could disrupt the operations of the Company. Since the risk
relates to computer-controlled systems, the year 2000 issue affects computer
software, computer hardware, and any other equipment with imbedded technology
that involves date sensitive functions. The Company has determined to assess the
scope of its Year 2000 problems, to remediate the problem, and to plan for the
contingency of remediation failure separately for each of its internal computer
software programs, its computer hardware, its machinery which includes imbedded
computer technology, its suppliers and its products.

        As a result of its assessment, the Company has determined that none of
its products have date sensitive functions and, accordingly, that no products
will require modification or replacement.

        The Company believes that it has identified all of its computer software
programs, computer hardware and machinery with imbedded computer technology.
This assessment was eased by the small amount of computers and other machinery
that the Company possesses relative to the size of its operations since
production and assembly of its products is outsourced.


                                       20


<PAGE>   21
        The Company is still in the process of determining the extent to which
its customers and suppliers may be impacted by year 2000 computer processing
problems. This assessment has been slower than the Company's other assessment
efforts since it necessarily involves obtaining information from third parties,
and the Company's suppliers are foreign operations which may have local customs
or attitudes regarding disclosure which differ from those in the United States.
Conversely, because the Company relies on third parties to manufacture its chips
and assemble its products, the Company's production may be slowed or other of
its operations may be adversely impacted by the Year 2000 problems of its
suppliers. Although the Company has received assurances from certain of its
suppliers, including the silicon foundaries supplying the Company with silicon
wafers, that they are Year 2000 compliant, the Company plans to shortly require
a written evaluation from each of its suppliers about their state of Year 2000
readiness. The Company does not believe it has any technological interfaces with
customers that will be affected by the Year 2000 issue.

        The Company completed remediation of its computer hardware, internal
computer software programs and equipment with imbedded technology in March 1998.
Through December 31, 1998, the Company has spent approximately $50,000 modifying
or replacing its internal computer software programs, its computer hardware, and
machinery with embedded computer technology, primarily to upgrade software and
to modify maintenance agreements. Since it believes remediation of such systems
has been completed, the Company does not expect to expend any material amounts
on such remediation in the future. However, if the Company has failed to
properly assess any of the year 2000 problems or failed to fully remedy any
identified year 2000 problems of its computer hardware, computer software
programs, or machinery with embedded technology, the Company may be forced to
spend more than anticipates on such remediation in the future.

        Until its assessment efforts are complete, the Company will not be able
to reasonably estimate the future costs of eliminating problems caused by the
Year 2000 problems of its suppliers, whether by investing in new technology or
software to interface with these parties or finding alternative sources of
supply. Beginning June 1, 1999, the Company expects to shift production away
from suppliers that have not demonstrated Year 2000 compliance to the Company's
satisfaction and to the Company's current suppliers that are Year 2000
compliant. If such current suppliers are unable to satisfy increased production
burdens, the Company expects to engage new suppliers that are Year 2000
compliant. There can be no assurance that the Company will be able to shift
additional production to any of its current suppliers or to new suppliers
without additional costs or at all. Shifts to new suppliers typically require
capital outlays and increased time requirements for production, either of which
may adversely affect the results of operations of the Company.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


        Not Applicable.


                                       21


<PAGE>   22
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES


<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS:                                                             Page
----------------------------------                                                             ----
<S>                                                                                            <C>
Report of Independent Certified Public Accountants..........................................    23
Consolidated Balance Sheets, September 30, 1998 and December 31, 1997.......................    24
Consolidated Statements of Operations, period ended                                              
  September 30, 1998, and years ended December 31, 1997 and 1996............................    26
Consolidated Statements of Shareholders' Equity,                                                
  period ended September 30, 1998, and years ended December 31, 1997 and 1996...............    27
Consolidated Statements of Cash Flows, period ended                                              
  September 30, 1998, and years ended December 31, 1997 and 1996............................    28
Notes to Consolidated Financial Statements..................................................    29
Quarterly Financial Data (un-audited) period ended                                               
  September 30, 1998 and year ended December 31, 1997.......................................    41
                                                                                                
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:                                                     
                                                                                                
Schedule II - Valuation and Qualifying Accounts.............................................    45
Exhibit 11.1 - Computation of Earnings per Common Share.....................................    70
</TABLE>


                                       22


<PAGE>   23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
Logic Devices Incorporated

We have audited the consolidated financial statements of Logic Devices
Incorporated and subsidiary as listed in the accompanying index. In connection
with our audit of the consolidated financial statements, we also have audited
the consolidated financial statement schedules as listed in the accompanying
index. These consolidated financial statements and consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedules based on our audits.
The consolidated financial statements of Logic Devices Incorporated and
subsidiary as of December 31, 1997 and 1996 and for each of the years then
ended, were audited by Meredith, Cardozo, Lanz & Chiu LLP, whose practice has
been combined with our Firm and whose report dated March 2, 1998 expressed an
unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Logic Devices Incorporated and subsidiary as of September 30, 1998, and the
results of their operations and their consolidated cash flows for the nine
months ended September 30, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 of
Notes to Consolidated Financial Statements, the Company's recurring losses and
accumulated deficit raise substantial doubt about the entity's ability to
continue as a going concern. Management's plans in regards to this matter are
also described in Note 1. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of reported
asset amounts or the amount and classification of liabilities that might result
from the outcome of this uncertainty.


San Jose, California
January 8, 1999


                                       23


<PAGE>   24
                                                      LOGIC DEVICES INCORPORATED

                                                     CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30,      DECEMBER 31,
                                                                             1998              1997
---------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
ASSETS (Note 6)

CURRENT
    Cash and cash equivalents                                       $     142,900     $      87,900
    Accounts receivable, net of allowance for doubtful
      accounts of $169,500 in 1998 and 1997 (Notes 11 and 12)           4,553,400         6,781,800
    Inventories (Notes 1, 2, 3 and 12)                                 12,535,600        12,399,100
    Prepaid expenses and other assets                                     372,100           412,000
    Income taxes receivable (Note 7)                                       90,000           522,000
    Deferred income taxes (Note 7)                                             --           621,900
---------------------------------------------------------------------------------------------------

                   TOTAL CURRENT ASSETS
                                                                       17,694,000        20,824,700

PROPERTY AND EQUIPMENT, net (Note 4)                                    4,935,500         5,110,000

OTHER ASSETS (Note 8)                                                     969,400         1,558,300
---------------------------------------------------------------------------------------------------


                                                                    $  23,598,900     $  27,493,000
===================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       24


<PAGE>   25
                                                      LOGIC DEVICES INCORPORATED

                                                     CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30,        DECEMBER 31,
                                                                             1998                1997
-----------------------------------------------------------------------------------------------------
<S>                                                                 <C>                 <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT
    Bank borrowings (Notes 6 and 12)                                $   5,350,000       $   3,525,000
    Accounts payable                                                    1,585,400           1,011,400
    Accrued expenses (Note 2)                                             565,700             446,300
    Current portion of capital lease obligations (Note 9)                 562,400             658,500
-----------------------------------------------------------------------------------------------------
                TOTAL CURRENT LIABILITIES                               8,063,500           5,641,200

Capital lease obligations, less current portion (Note 9)                  392,100             705,300
Deferred income taxes (Note 7)                                                 --             419,500
-----------------------------------------------------------------------------------------------------
                    TOTAL LIABILITIES
                                                                        8,455,600           6,766,000
-----------------------------------------------------------------------------------------------------

Commitments and Contingencies (Notes 8 and 9)

STOCKHOLDERS' EQUITY (Notes 5 and 10)
    Preferred Stock, no par value; 1,000,000 shares
      authorized; 5,000 designated as Series A and 70,000
      designated as Series B Junior Participating; 0 shares 
      issued and outstanding                                                   --                  --
    Common Stock, no par value; 10,000,000 shares authorized;
      6,632,338 and 6,121,750 shares issued and outstanding,
      respectively                                                     18,091,900          17,341,900
    Common stock subscribed                                              (307,500)           (307,500)
    (Accumulated deficit) retained earnings                            (2,641,100)          3,692,600
-----------------------------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                                             15,143,300          20,727,000
-----------------------------------------------------------------------------------------------------

                                                                    $  23,598,900       $  27,493,000
=====================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       25


<PAGE>   26
                                                      LOGIC DEVICES INCORPORATED

                                           CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                     NINE MONTHS ENDED             Years Ended
                                                     -----------------    -------------------------------
                                                       SEPTEMBER 30,       DECEMBER 31,      DECEMBER 31,
                                                           1998                1997              1996
                                                     (NOTES 1 AND 14)
---------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>                <C>         
NET REVENUES (Note 11)                                 $  9,562,700       $ 12,518,500       $ 12,524,900

COST OF REVENUES (Notes 1, 2 and 8)                       7,252,100          7,933,100          7,008,900

INVENTORY WRITE-DOWN (Note 2)                             4,172,400                 --                 --
---------------------------------------------------------------------------------------------------------

              GROSS MARGIN                               (1,861,800)         4,585,400          5,516,000
---------------------------------------------------------------------------------------------------------

OPERATING EXPENSES:
    Research and development                                959,500          1,405,600          1,450,100
    Selling, general and administrative                   3,154,700          3,507,500          3,827,000
---------------------------------------------------------------------------------------------------------

        TOTAL OPERATING EXPENSES                          4,114,200          4,913,100          5,277,100
---------------------------------------------------------------------------------------------------------

(LOSS) INCOME FROM OPERATIONS                            (5,976,000)          (327,700)           238,900

OTHER (INCOME) EXPENSE:
    Interest expense                                        434,400            439,700             94,500
    Interest income                                            (100)            (4,900)           (72,200)
    Interest income on shareholder notes (Note 5)           (50,700)                --                 --
    Other                                                    18,800            (12,200)            14,300
---------------------------------------------------------------------------------------------------------

TOTAL OTHER EXPENSE                                         402,400            422,600             36,600
---------------------------------------------------------------------------------------------------------

(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES          (6,378,400)          (750,300)           202,300
---------------------------------------------------------------------------------------------------------

(BENEFIT) PROVISION FOR INCOME TAXES (Note 7)               (44,700)          (351,700)            80,000
---------------------------------------------------------------------------------------------------------

NET (LOSS) INCOME                                      $ (6,333,700)      $   (398,600)      $    122,300
=========================================================================================================

BASIC (LOSS) EARNINGS PER SHARE                        $      (1.03)      $      (0.07)      $       0.02
=========================================================================================================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                6,178,458          6,121,750          6,041,483
=========================================================================================================

DILUTED (LOSS) EARNINGS PER COMMON SHARE               $      (1.03)      $      (0.06)      $       0.02
=========================================================================================================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                6,178,458          6,171,959          6,041,483
=========================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.



                                       26
<PAGE>   27

                                                      LOGIC DEVICES INCORPORATED

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                              Retained
                                             Common Stock                  Common             Earnings
                                   -------------------------------          Stock           (Accumulated)
                                      Shares             Amount           Subscribed          (Deficit)              Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                <C>                <C>                <C>                  <C>         
BALANCES, December 31, 1995           5,916,705       $ 16,741,900       $         --        $  3,968,900        $ 20,710,800

Proceeds from exercise of
  stock options                          10,000             33,600                 --                  --              33,600

Conversion of stock warrants
  (Note 5)                              195,045            566,400           (307,500)                 --             258,900

Net income                                   --                 --                 --             122,300             122,300
-----------------------------------------------------------------------------------------------------------------------------

BALANCES, December 31, 1996           6,121,750         17,341,900           (307,500)          4,091,200          21,125,600

Net loss                                     --                 --                 --            (398,600)           (398,600)
-----------------------------------------------------------------------------------------------------------------------------

BALANCES, December 31, 1997           6,121,750         17,341,900           (307,500)          3,692,600          20,727,000

Sale of common stock
  (Note 5)                              510,638            750,000                 --                  --             750,000

Net loss                                     --                 --                 --          (6,333,700)         (6,333,700)
-----------------------------------------------------------------------------------------------------------------------------

BALANCES, September 30, 1998          6,632,388       $ 18,091,900       $   (307,500)       $ (2,641,100)       $ 15,143,300
=============================================================================================================================
</TABLE>


                    See accompanying notes to consolidated financial statements.



                                       27
<PAGE>   28

                                                      LOGIC DEVICES INCORPORATED

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                        Nine months ended                Years Ended
                                                        -----------------     ------------------------------
                                                          SEPTEMBER 30,       DECEMBER 31,       DECEMBER 31,
                                                                  1998               1997               1996
------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>                <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss) income                                      $(6,333,700)       $  (398,600)       $   122,300
    Adjustments to reconcile net (loss) income
      to net cash (used in) provided by
      operating activities:
        Depreciation and amortization                        1,494,100          1,438,400          1,210,400
        Gain on sale of capital equipment                       (2,500)
        Allowance for doubtful accounts                             --           (234,200)           284,200
        Deferred income taxes                                  202,400            299,000            (21,700)
        Inventory write-down                                 4,172,400                 --                 --
        Changes in assets and liabilities:
           Accounts receivable                               2,228,400         (2,179,300)         1,191,500
           Inventories                                      (4,608,900)         1,529,800         (5,632,900)
           Prepaid expenses and other assets                    39,900           (281,400)            57,700
           Income taxes receivable                             432,000            267,800           (789,800)
           Accounts payable                                    574,000            (63,200)            83,600
           Accrued expenses                                    119,400            (85,500)          (566,000)
------------------------------------------------------------------------------------------------------------

NET CASH (USED IN) PROVIDED BY OPERATING
  ACTIVITIES                                                (1,682,500)           292,800         (4,060,700)
------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                                      (924,800)        (1,522,700)        (1,344,400)
    Proceeds from sale of capital equipment                      2,500                 --                 --
    Other assets                                               628,800           (217,400)          (173,100)
------------------------------------------------------------------------------------------------------------

NET CASH USED IN INVESTING ACTIVITIES                         (293,500)        (1,740,100)        (1,517,500)
------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Sale of common stock (Note 5)                              750,000                 --            292,500
    Proceeds from bank borrowings                            2,325,000          2,325,000          2,000,000
    Repayments of bank borrowings                             (500,000)          (800,000)                --
    Payments of capital lease obligations                     (544,000)          (660,700)          (421,900)
------------------------------------------------------------------------------------------------------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                    2,031,000            864,300          1,870,600
------------------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            55,000           (583,000)        (3,707,600)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                    87,900            670,900          4,378,500
------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, END OF YEAR                     $   142,900        $    87,900        $   670,900
============================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.



                                       28
<PAGE>   29

                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF ACCOUNTING POLICIES

The Company

Logic Devices Incorporated (the Company) develops and markets high-performance
digital complementary metal oxide silicon (CMOS) integrated circuits for
applications that require high-operating speeds and low-operating power.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.

Basis of Presentation

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, the Company has an accumulated deficit of approximately
$2,641,100 as of September 30, 1998, has incurred losses of $6,333,700 and
$398,600, for the nine months ended September 30, 1998 and for the year ended
December 31, 1997, respectively. In addition, the Company is not in compliance
with certain of its line of credit covenants (Note 6) at September 30, 1998 and
has not received a bank waiver.

These conditions give rise to substantial doubt about the Company's ability to 
continue as a going concern. The consolidated financial statements do not 
include adjustments relating to the recoverability and classification of 
liabilities that might be necessary should the Company be unable to continue 
as a going concern. The Company's continuation as a going concern is dependent 
upon its ability to generate sufficient cash flow to meet its obligations on a 
timely basis, to comply with the terms of its financing agreement, to obtain 
additional financing or refinancing as may be required, and ultimately to 
attain profitability. The Company is actively marketing its existing and new 
products and restructuring to enable it to better market its remaining product 
lines, which it believes will ultimately lead to profitable operations.

Change in Fiscal Year

In 1998, the Company changed its reporting period from a calendar year ending
December 31 to a fiscal year ending September 30 (Note 14).

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.



                                       29
<PAGE>   30
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Cash Equivalents

For purpose of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net
realizable value (Notes 2, 3 and 12).

Property and Equipment

Property and equipment are stated at cost. Depreciation on equipment is
calculated on the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements and assets held
under capital leases are amortized on a straight-line basis over the shorter of
the lease terms or the estimated useful lives of the assets. Certain tooling
costs are capitalized by the Company and are amortized on a straight-line basis
over the shorter of the related product life cycle or five years.

Cost in Excess of Fair Value of Net Assets Acquired

The Company amortizes costs in excess of the fair value of net assets acquired
on a straight-line basis, over seven years. Included in other assets are
$309,400 of certain intellectual and intangible assets related to the 1995
acquisition of STAR Semiconductor Corporation, with related accumulated
amortization of $104,600 and $84,000 in 1998 and 1997, respectively.

Capitalized Software Costs

Internal test computer software development costs incurred subsequent to the
determination of its technical feasibility are capitalized and amortized on a
straight-line basis over the shorter of the related expected product life cycle
or five years. As of September 30, 1998 and December 31, 1997, such costs
aggregated $2,342,500 and $2,202,000, respectively, and are included in other
assets in the consolidated financial statements net of accumulated amortization
of $1,922,900 and $1,812,300, respectively. 

Revenue Recognition

Revenue is generally recognized upon shipment of product. Sales to distributors
are made pursuant to agreements that provide the distributors certain rights of
return and price protection on unsold merchandise. Revenues from such sales are
recognized upon shipment, with a provision for estimated returns and allowances
recorded at that time.

Advertising Costs

The cost of advertising is expensed as incurred. Advertising costs were not
significant in 1998, 1997 and 1996.

Income Taxes



                                       30
<PAGE>   31

                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No.
109, deferred tax liabilities or assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. Deferred income taxes as of December 31, 1997, primarily result from
certain expenses that are not currently deductible for tax purposes. In 1998, as
a result of recurring losses from operations, the Company full reserved its net
deferred tax assets.

Earnings Per Common Share

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings Per Share, which was effective December 28, 1997. Conforming
to SFAS No. 128, the Company changed its method of computing earnings per share
and restated all prior periods included in the consolidated financial
statements. Under SFAS No. 128, the dilutive effect of stock options is excluded
from the calculation of basic earnings per share. The impact of SFAS No. 128 was
not significant for the prior years' reports.

Fair Value of Financial Instruments

In estimating its fair value disclosures for financial instruments, the Company
used the following methods and assumptions:

Cash and Cash Equivalents

The carrying amount reported in the consolidated balance sheet for cash and cash
equivalents approximates fair value.

Short-term Debt

The fair value of short-term debt approximates cost because of the short period
of time to maturity.

Long-term Debt

The fair value of long-term debt is estimated based on current interest rates
available to the Company for debt instruments with similar terms and remaining
maturities.

As of September 30, 1998 and December 31, 1997, the fair values of the Company's
financial instruments approximate their historical carrying amounts.

Long-Lived Assets

The Company periodically reviews its long-lived assets and certain identifiable
intangibles for impairment. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, the Company writes
the asset down to its net realizable value. In 1998, the Company reviewed
certain long-term prepaid expenses and other assets, and determined that their
value had been impaired as a result of outside industry factors. Accordingly, in
1998 the Company took a charge to earnings, included in cost of sales, for
$693,600.



                                       31
<PAGE>   32
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Reclassifications

Certain 1997 and 1996 amounts in the consolidated financial statements and notes
thereto have been reclassified to conform to the 1998 presentation.

2.   BUSINESS LINE RESTRUCTURING

In September 1998, in connection with management's plan (the Plan) to pursue a
proprietary product strategy in the High Definition Television (HDTV) market,
reduce costs and improve operating efficiencies, the Company recorded a
write-down of inventory for $4,172,400, and accrued severance costs of $123,700,
which are included in cost of sales in the consolidated financial statements.
The principal actions in the Plan involve the shift of the Company's product
lines from "plug-compatible" integrated circuits to HDTV, the changing from an
indirect (distributor channel) sales force to a direct marketing sales force,
and consolidation of support infrastructure.

3.   INVENTORIES

A summary of inventories at September 30, 1998 and December 31, 1997 follows:

<TABLE>
<CAPTION>
September 30 and December 31,                          1998                 1997
--------------------------------------------------------------------------------
<S>                                             <C>                  <C>        
Raw materials                                   $ 2,599,900          $ 2,824,400
Work-in-process                                   5,373,600            6,468,900
Finished goods                                    4,562,100            3,105,800
--------------------------------------------------------------------------------

                                                $12,535,600          $12,399,100
================================================================================
</TABLE>

Based on 1998's sales levels and inventories on hand, the Company has
approximately twelve (12) months of sales in inventory (Note 12).

4.  PROPERTY AND EQUIPMENT

A summary of property and equipment as of September 30, 1998 and December 31,
1997 follows:

<TABLE>
<CAPTION>
September 30 and December 31,                           1998                1997
--------------------------------------------------------------------------------
<S>                                              <C>                 <C>        
Equipment                                        $ 9,851,300         $ 9,302,800
Tooling costs                                      6,116,000           5,518,500
Leasehold improvements                               225,200             225,200
--------------------------------------------------------------------------------
                                                  16,192,500          15,046,500
Less accumulated depreciation and
  amortization                                    11,257,000           9,936,500
--------------------------------------------------------------------------------

                                                 $ 4,935,500         $ 5,110,000
================================================================================
</TABLE>

Equipment under capital lease obligations aggregated $2,003,200 and $2,679,100
in 1998 and 1997, with related accumulated amortization of $986,737 and
$950,700, respectively.



                                       32
<PAGE>   33
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   RELATED PARTY TRANSACTIONS

During 1998, the Company sold a total of 510,638 shares of common stock to the
President of the Company and a partnership consisting of trusts, the
beneficiaries of which are family members of one of the Company's directors, but
not the director himself, for an aggregate price of $750,000.

In 1995, the Company granted 220,000 warrants to three non-employee directors to
purchase the Company's common stock. These warrants are exercisable at $2.5625
per share and expire February 15, 2000. In 1996, 120,000 of these warrants were
exercised via the issuance of two promissory notes originally maturing July 24,
1998, and bearing interest at a reference rate plus 2%. There was no warrant
activity during 1998 or 1997.

As of September 30, 1998, these notes were renegotiated to mature on the earlier
of July 24, 1999 or upon sale of the shares purchased with the notes. The
renegotiated agreement calls for the sale of these shares to occur if the market
value of the stock equals or exceeds $3.25 per share. Accrued interest on these
notes aggregated approximately $50,700 as of September 30, 1998. These notes are
included in common stock subscribed in the accompanying consolidated financial
statements.

6.   BANK BORROWINGS

The Company has a $6,000,000 revolving line of credit with a bank, which expires
on May 31, 1999, bears interest at the bank's prime rate (8.5% at September 30,
1998) plus 1.0%, and is secured by the assets of the Company. The line of credit
requires the Company to maintain a minimum tangible net worth, a maximum ratio
of debt to tangible net worth, a minimum current ratio, a minimum quick ratio
and profitability over a specified interval of time.

As of September 30, 1998, the Company was not in compliance with certain
covenants under the bank borrowings. The Company is in the process of obtaining
a bank waiver and renegotiating the terms of its line of credit, however, the
results of such efforts are not determinable as of the date of this report (Note
12). Management of the Company feels that they will ultimately be successful in
renegotiating/obtaining a line of credit under favorable terms, however, the 
outcome of such efforts is uncertain at this time.

7.   PROVISIONS FOR INCOME TAXES

The provision for income taxes for the nine months ended September 30, 1998 and
the years ended December 31, 1997 and 1996 comprise:

                               Current            Deferred              Total
-------------------------------------------------------------------------------

1998
-------------------------------------------------------------------------------
Provision (benefit)
Federal                       $(240,900)          $  91,600           $(149,300)
State                            (6,200)            110,800             104,600
-------------------------------------------------------------------------------

                              $(247,100)          $ 202,400           $ (44,700)
===============================================================================



                                       33
<PAGE>   34
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
1997                           Current            Deferred              Total
-------------------------------------------------------------------------------
<S>                           <C>                 <C>                 <C>       
Federal                       $(650,700)          $ 317,400           $(333,300)
State                                --             (18,400)            (18,400)
-------------------------------------------------------------------------------

                              $(650,700)          $ 299,000           $(351,700)
===============================================================================


1996
-------------------------------------------------------------------------------

Federal                       $  86,200           $ (18,400)          $  67,800
State                            15,500              (3,300)             12,200
-------------------------------------------------------------------------------

                              $ 101,700           $ (21,700)          $  80,000
===============================================================================
</TABLE>

Deferred income taxes (benefits) expenses result from timing differences in the
recognition of certain expenses and income items for tax and financial reporting
purposes as follows:

<TABLE>
<CAPTION>
                                     1998               1997               1996
-------------------------------------------------------------------------------
<S>                           <C>                <C>                <C>         
Distributor sales             $   177,300        $  (160,100)       $   (40,100)
Capitalized inventory              44,200            146,400            (81,700)
Reserves not currently
  Deductible                      (87,300)           160,200           (120,800)
Depreciation                     (417,900)           108,400            264,400
Capitalized software               48,900             44,100            (43,500)
Loss carryforward              (2,070,700)                --                 --
Valuation allowance             2,507,900                 --                 --
-------------------------------------------------------------------------------

                              $   202,400        $   299,000        $   (21,700)
===============================================================================
</TABLE>



                                       34
<PAGE>   35
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following summarizes the difference between the income tax (benefit) expense
and the amount computed by applying the Federal income tax rate of 34% in 1998,
1997 and 1996 to income before income taxes:

<TABLE>
<CAPTION>
                                          1998               1997               1996
------------------------------------------------------------------------------------
<S>                                <C>                <C>                <C>        
Federal income tax
  At statutory rate                $(2,168,600)       $  (255,100)       $    68,800
Utilization of tax credits                  --            (81,300)           (13,200)
State income taxes,
  Net of federal tax benefit          (389,000)           (45,800)            12,400
Other, net                               5,000             30,500             12,000
Valuation allowance                  2,507,900                 --                 --
------------------------------------------------------------------------------------

                                   $   (44,700)       $  (351,700)       $    80,000
====================================================================================
</TABLE>

Deferred tax assets comprise the following:

<TABLE>
<CAPTION>
September 30 and December 31,                         1998                 1997
-------------------------------------------------------------------------------
<S>                                            <C>                  <C>        
Distributor sales                              $    63,200          $   240,500
Capitalized inventory costs                        303,800              348,000
Reserves not currently deductible                  355,800              268,500
Depreciation                                      (178,000)            (595,900)
Capitalized software costs                        (107,600)             (58,700)
Loss carryforward                                2,070,700                   --
-------------------------------------------------------------------------------

                                                 2,507,900              202,400

Valuation allowance                             (2,507,900)                  --
-------------------------------------------------------------------------------

Net deferred tax asset                         $        --          $   202,400
===============================================================================
</TABLE>

At September 30, 1998, the Company has a net operating loss carryforward 
available for tax of $5,417,000 expiring in 2018.

8.   PRODUCT DEVELOPMENT AND FOUNDRY AGREEMENTS

In December 1995, the Company entered into a foundry capacity agreement (the
Agreement) with Zentrum Mikroelecktronik Dresden (ZMD), a German limited
liability company, to secure a long-term volume source of wafer production.
Under the terms of the Agreement, the Company secured a non-cancelable purchase
commitment for one year's production capacity of certain of its products with
ZMD, at predetermined prices. The Agreement required a $792,000 prepayment for
the year's purchases, and is renewable upon satisfaction of various provisions.
In 1998, the Company extended its foundry capacity agreement with ZMD through
March 1999. In September 30, 1998, the Company took a charge to earnings (Note
2) of $315,600 for the amount of the ZMD prepayment that would not be realized
as a result of the Company's restructuring. As of September 30, 1998, the
balance of this prepayment totaled approximately $291,400, which is included in
Other Assets on the Consolidated Balance Sheet.



                                       35
<PAGE>   36
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   COMMITMENTS

The Company leases its facilities and certain equipment under operating leases.
The facility leases require the Company to pay certain maintenance and operating
expenses, such as taxes, insurance and utilities. Rent expense related to these
operating leases was $1,049,500, $1,163,100 and $1,174,400, for the nine months
ended September 30, 1998, and for the years ended December 31, 1997 and 1996,
respectively.

A summary of the future minimum lease payments under capitalized leases together
with the present value of such minimum lease payments and future minimum
payments required under non-cancelable operating leases with terms in excess of
one year follows:

<TABLE>
<CAPTION>
                                                  Capitalized         Operating
Years ended September 30,                            Leases             Leases
--------------------------------------------------------------------------------
<S>                                               <C>                 <C>       
1999                                               $  620,700         $1,064,600
2000                                                  242,400            510,300
2001                                                  130,900            346,800
2002                                                   48,800            343,300
Thereafter                                             12,500             85,900
--------------------------------------------------------------------------------

Future minimum lease payments                       1,055,300         $2,350,900
                                                                      ==========
Less amount representing interest
  (9.5% to 15.8%)                                     100,800                 
                                                   ----------

Present value of future minimum lease
  payments                                            954,500
                                                   ----------

Less current portion                                  562,400
                                                   ----------

                                                   $  392,100
                                                   ==========
</TABLE>

10.  STOCKHOLDERS' EQUITY

Stock Purchase Warrants

As of September 30, 1998, the Company had 100,000 common stock warrants issued
and outstanding for non-employee Board of Director compensation. These warrants
have an exercise price of $2.56250 and expire on February 15, 2000.



                                       36
<PAGE>   37
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Stock Option Plan

SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to
provide pro forma information regarding net (loss) income and (loss) earnings
per share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of stock options at the grant date by
using the Black-Scholes option pricing-model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 0; expected volatility of 111, 139 and 112 percent; risk-free interest rates
of 4.4, 8.5 and 6.6 percent; and expected lives of four years for all plan
options.

Under the accounting provisions of SFAS No. 123, the Company's net (loss) income
and (loss) earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                                1998               1997               1996
------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>        
Net (loss) income:
  As reported                            $(6,333,700)       $  (398,600)       $   122,300
                                         ===========        ===========        ===========
  Pro forma                              $(6,639,900)       $  (507,000)       $    39,200
                                         ===========        ===========        ===========

Basic (loss) earnings per share:
  As reported                            $     (1.03)       $     (0.07)       $      0.02
                                         ===========        ===========        ===========
  Pro forma                              $     (1.07)       $     (0.08)       $      0.01
                                         ===========        ===========        ===========

Diluted (loss) earnings per share:
  As reported                            $     (1.03)       $     (0.06)       $      0.02
                                         ===========        ===========        ===========
  Pro forma                              $     (1.07)       $     (0.08)       $      0.01
                                         ===========        ===========        ===========
</TABLE>

A summary of the status of the Company's stock option plan as of September 30,
1998 and December 31, 1997 and 1996, and changes during the nine months and
years ended on those dates is presented in the following table:


<TABLE>
<CAPTION>
                                ----------------------------------------------------------------------------
                                                            Options Outstanding
                                ----------------------------------------------------------------------------
                                  September 30, 1998          December 31, 1997         December 31, 1996
                                              Wtd. Avg.                  Wtd. Avg.                  Wtd. Avg.
                                 Shares       Ex. Price     Shares       Ex. Price     Shares       Ex. Price
                                ----------------------------------------------------------------------------
<S>                             <C>           <C>          <C>           <C>          <C>           <C>     
Beginning                        261,000      $  3.402       94,000      $  7.963       97,500      $  7.270
Granted                          629,000      $  2.934      203,000      $  2.125       10,000      $  6.000
Exercised                             --      $     --           --      $     --      (10,000)     $  1.625
Forfeited                        (72,000)     $  3.706      (36,000)     $  8.000       (3,500)     $  8.000
                                --------                   --------                   --------

Ending                           818,000      $  3.015      261,000      $  3.402       94,000      $  7.963
                                ========      ========     ========      ========     ========      ========
</TABLE>



                                       37
<PAGE>   38
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<S>                             <C>           <C>          <C>           <C>          <C>           <C>     
Exercisable
 at year-end                     175,400                    104,700                     43,000
                                ========                   ========                   ========

Weighted-average fair value
 of options granted during
 the period:
                                              $  2.934                   $  2.125                   $  6.000
                                              ========                   ========                   ========
</TABLE>

The following table summarizes information about stock options outstanding at
September 30, 1998:

<TABLE>
<CAPTION>
                      Options Outstanding                            Options Exercisable
--------------------------------------------------------------------------------------------
                                   Wtd. Avg.
  Range of          Number         Remaining        Wtd. Avg.       Number         Wtd. Avg.
  Exercise        Outstanding     Contractual       Exercise      Exercisable      Exercise
   Prices         at 09/30/98         Life           Price        at 09/30/98        Price
--------------------------------------------------------------------------------------------
<S>               <C>             <C>              <C>            <C>              <C>      
$2.000-4.000         775,000       9.5 years       $   2.748         142,600       $   2.497
$4.001-6.000           2,000       1.6 years       $   4.250           2,000       $   4.250
$6.001-8.000          41,000       7.3 years       $   8.000          30,800       $   8.000
                   ---------                                       ---------                   

                     818,000                       $   3.015         175,400       $   3.482
                   =========                       =========       =========       =========
</TABLE>

11.  MAJOR CUSTOMERS, SUPPLIERS AND EXPORT SALES

Major Customers

For the nine months ended September 30, 1998, 3 customers accounted for
approximately 27%, 12%, and 12%, respectively, of net revenues, with accounts
receivable of $434,600; $51,300, and $55,700 at September 30, 1998,
respectively. In 1997 and 1996, two customers accounted for approximately 16%
and 12%; 10% and 10%, respectively, of net revenues.

Export Sales

The Company had the following export sales:

<TABLE>
<CAPTION>
                                      1998               1997               1996
--------------------------------------------------------------------------------
<S>                             <C>                <C>                <C>       
Western Europe                  $3,542,200         $3,077,000         $2,341,300
Far East                           734,700            717,000            904,000
Other                              226,800             80,300             99,600
--------------------------------------------------------------------------------

                                $4,503,700         $3,874,300         $3,344,900
================================================================================
</TABLE>

12.  USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISKS

The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require the use of management
estimates. These estimates are impacted, in part, by the following risks and
uncertainties:



                                       38
<PAGE>   39

                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions and, by policy, limits the amounts of credit exposure to
any one financial institution.

A significant portion of the Company's accounts receivable have historically
been derived from one major class of customer (distributors) with the remainder
spread across many other customers in various electronic industries. The Company
believes any risk of accounting loss is significantly reduced due to (1)
provision being made at the date of the sale for returns and allowances, and (2)
the diversity of its products, end-customers and geographic sales areas. The
Company performs credit evaluations of its customers' financial condition
whenever necessary. The Company generally does not require cash collateral or
other security to support customer receivables.

The Company produces inventory based on orders received and forecasted demand.
The Company must order wafers and build inventory well in advance of product
shipments. Because the Company's markets are volatile and subject to rapid
technology and price changes, there is a risk that the Company will forecast
incorrectly and produce excess or insufficient inventories of particular
products. This inventory risk is heightened because many of the Company's
customers place orders with short lead times. Demand will differ from forecasts
and such differences may have a material effect on actual operations.

As of September 30, 1998, the Company is not in compliance with certain of its
bank covenants and had not obtained a bank waiver. Borrowing under the bank line
of credit is secured by substantially all of the Company's assets, and the bank
line has historically been a source of cash to fund the Company's operations.
Though management of the Company feels that it will ultimately be able to
renegotiate or secure a line of credit favorable to the Company, the outcome of
such efforts is uncertain at this time, and the bank has the right to accelerate
repayment of the line of credit, and/or cease extending credit.

13.  STATEMENTS OF CASH FLOWS

The Company paid $402,400, $411,700 and $94,500 for interest in the nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996,
respectively, and $1,794,300 in income taxes in 1996. The Company did not make
any income tax payments during 1998 and 1997.

Noncash investing and financing activities for the nine months ended September
30, 1998 and the years ended December 31, 1997 and 1996 consisted of the
acquisition of $134,700, $675,800 and $1,429,000, respectively, of equipment
under capital leases.



                                       39
<PAGE>   40
                                                      LOGIC DEVICES INCORPORATED

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  TRANSITION PERIOD REPORTING

The following table of selected consolidated financial data below provides a
nine month comparison of the results of operations through September 30 for 1998
and 1997 (the transition period). The 1997 transition period figures are
unaudited, however, management believes that all necessary adjustments have been
made to make the periods comparable. Unaudited pro forma condensed consolidated
results of operations for the comparable 1998 and 1997 periods are as follows:

<TABLE>
<CAPTION>
Nine Months ended September 30,                       1998                 1997
-------------------------------------------------------------------------------
<S>                                            <C>                  <C>        
Net revenues                                   $ 9,562,700          $ 9,006,400
Gross margin (Note 2)                           (1,861,800)           3,276,400
Income tax (benefit)                                44,700             (266,700)

Net loss                                       $(6,333,700)         $  (484,400)
===============================================================================

Basic loss per share                           $      1.03          $      0.06
===============================================================================
</TABLE>




                                       40
<PAGE>   41


QUARTERLY FINANCIAL DATA (UN-AUDITED)

The following is a summary of un-audited results of operations (dollars in
thousands, except per share data) for the years ended September 30, 1998 and
December 31, 1997.

<TABLE>
<CAPTION>
                                                       Quarter ended
                           ------------------------------------------------------------------
                           3/31/98        6/30/98        9/30/98        12/31/98       Total
                           -------        -------        -------        --------      -------
<S>                        <C>            <C>            <C>            <C>           <C>
Net revenues               $ 3,245        $ 3,299        $ 3,019        $   N/A       $ 9,563

Gross margin               $ 1,375          1,574         (4,811)           N/A        (1,862)

(Loss) income from
operations                 $   115            164         (6,255)           N/A        (5,976)

(Loss) income before
 income taxes              $     5              0         (6,383)           N/A        (6,378)

Net (loss) income          $     4              0         (6,338)           N/A        (6,334)

Basic loss per share       $  0.00           0.00          (1.03)           N/A         (1.03)

Weighted average
Common shares                6,122          6,122          6,178            N/A         6,178
</TABLE>

<TABLE>
<CAPTION>
                                                      Quarter ended                         
                           ------------------------------------------------------------------
                           3/31/97        6/30/97        9/30/97        12/31/97       Total
                           -------        -------        -------        --------      -------
<S>                        <C>            <C>            <C>            <C>           <C>
Net revenues               $ 2,803        $ 3,022        $ 3,182        $ 3,511       $12,518

Gross margin               $ 1,042            988          1,247          1,308         4,585

(Loss) income from
operations                 $  (307)          (242)            65            156          (328)

(Loss) income before
 income taxes              $  (349)          (328)             4            (77)         (750)

Net (loss) income          $  (211)          (198)             3              8          (399)

Basic loss per share       $ (0.03)         (0.03)            --             --         (0.07)

Weighted average
Common shares                6,122          6,122          6,122          6,122         6,122
</TABLE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.



                                       41
<PAGE>   42

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

The following is a list of the directors and executive officers of the Company
as of September 30, 1998, all of whom are elected annually:

<TABLE>
<CAPTION>
                                                      Positions Held
        Name                           Age            with the Company
        ----                           ---            ----------------
<S>                                    <C>            <C>
        William J. Volz                50             President
                                                      Director

        Mary C. deRegt                 28             Chief Financial Officer
                                                      Secretary

        William Jackson                50             Chief Operating Officer

        Michael S. Andrews             36             Chief Technical Officer

        Howard L. Farkas               74             Chairman of the Board

        Burton W. Kanter               68             Director

        Albert Morrison, Jr.           61             Director

        Bruce B. Lusignan              62             Director
</TABLE>

        Mr. Volz is a founder of the Company. He has served as a director since
its inception and has been the President of the Company since December 1987. Mr.
Volz served as the Company's Vice President of Engineering from 1983 to 1987. He
was previously employed by Texas Instruments, Inc., Mostek Corporation, and
E-Systems, Inc.

        Ms. deRegt joined the Company in 1997 as Controller and became Chief
Financial Officer on March 23, 1998. Ms. deRegt is a Certified Public
Accountant, with 3 years public accounting experience and 4 years industry
experience. Prior to joining the Company, she was employed with Meredith,
Cardozo, Lanz & Chiu CPA's. She graduated from Loyola Marymount University with
a Bachelor of Science degree in Accounting in May 1992.

        Mr. Jackson joined the Company in 1990. Before joining the Company, Mr.
Jackson held various engineering and management positions at Advanced Micro
Devices ("AMD") and Monolithic Memories Inc. ("MMI"). Prior to AMD and MMI, he
was employed by Raytheon Corporation, Litronix Corporation, and Western
Electric. Mr. Jackson was appointed Chief Operating Officer in 1998.

        Mr. Andrews joined the Company in 1996 and was appointed Chief Technical
Officer in 1997. He has earned a B.S. in Computer Engineering from Florida
Institute of Technology in 1986, a M.S. in Electrical Engineering from the
University of Texas at Dallas in 1989, and a Ph.D. in Electrical Engineering
from the University of Texas at Dallas in 1998. He is an adjunct professor with
San Diego State University where he has taught courses in digital signal
processing and video processing. Before joining the Company, Mr. Andrews held a
field technical and sales management position with Star 



                                       42
<PAGE>   43

Semiconductor Corporation from 1991 to 1994. In 1994, he joined Texas
Instruments, Inc. as a Member of Technical Staff until April, 1996 when he
became employed by the Company in the position of Senior Member of Technical
Staff. During his time with Texas Instruments, Inc. he served on various
Telecommunications Industry Association (TIA) directed technical committees
developing 2nd and 3rd generation digital cellular systems.

        Mr. Farkas is Chairman of the Board of the Company and has been a
director since 1983. Mr. Farkas has been part owner of and a broker with Farkas
Group, Inc., a commercial real estate company, since 1981. He has been a
business advisor to Mr. S. A. Hellerstein, trustee of the Farkas Trusts, and Mr.
Hellerstein's predecessor since 1964. He serves as a director of Synthetech,
Inc., Power Cell, Inc. and Acquisition Industries, Inc. Mr. Farkas is vice
president of G.A.S. Corp., a privately held corporation which serves as the
corporate general partner of Gas Acquisition Services Limited Partnership.

        Mr. Kanter has served as a director of the Company since 1983. He is "of
counsel" to the law firm of Neal Gerber & Eisenberg in Chicago. He serves as a
director of numerous companies, including the following public companies: Walnut
Financial Services, Inc., First Health Group Corp. and Scientific Measurement
Systems, Inc. He also is a member of the Board of Directors or the Board of
Trustees of the Midwest Film Center of the Chicago Art Institute, the Chicago
International Film Festival and the Museum of Contemporary Art of Chicago. He is
also on the advisory board of the Wharton School of the University of
Pennsylvania Real Estate Center and the University of Chicago Annual Tax
Conference.

        Mr. Morrison has served as a director since 1983 and has been President
of Morrison, Brown, Argiz & Company, P.C., a certified public accounting firm in
Miami, Florida, since 1969. Mr. Morrison is Vice Chairman of the Dade County
Industrial Development Authority, Treasurer of the Board of Trustees of Florida
International University and a member of the Board of Directors of Chicago
Holdings, Inc., Heico Corporation, Walnut Financial Services, Inc. and a Trustee
of the Greater Miami Chamber of Commerce.

        Dr. Lusignan was elected to the Board of Directors in 1996. Dr. Lusignan
is Director of the Communications Satellite Planning Center, a research
laboratory of Stanford University's Electrical Engineering Department. Dr.
Lusignan is Vice President of Engineering for Primary Communication, Inc., a
small telecommunications consulting firm and does consulting work for Becker,
Gurman, Lucas, Meyers and O'Brien (regulatory law), Mendes and Mount (satellite
insurance), the Intergovernmental Bureau of Informatics, Cairo University, King
Saud University, E.F. Johnson Corporation, and the U.S. Congress Office of
Technology Assessment.

COMMITTEES OF THE BOARD OF DIRECTORS

        The Board has an Audit Committee and a Compensation Committee.
Currently, the members of the Audit Committee are Howard L. Farkas, Burton W.
Kanter and Albert Morrison, Jr., and the members of the Compensation Committee
are Howard L. Farkas, William J. Volz and Burton W. Kanter.

        The functions of the Audit Committee include reviewing the independence
of the Company's independent auditors, recommending to the Board the engagement
and discharge of independent auditors, reviewing with the independent auditors
the plan and results of auditing engagements, reviewing the scope and adequacy
of internal accounting controls and directing and supervising special
investigations. The Audit Committee held one meeting during 1998.

        The functions of the Compensation Committee include reviewing and making
recommendations to the Board with respect to the compensation of officers and
other employees of the Company and establishing employee benefit programs. The
Compensation Committee held three meetings during 1998.



                                       43
<PAGE>   44

        The Board held four meetings during 1998. All members of the Board
attended each meeting during the year.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

        Based solely upon a review of Form 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during fiscal 1998, the
Company is not aware of any directors, officer or beneficial owner of more than
10% of the shares of the Company's Common Stock who failed to file on a timely
basis, as disclosed in the above Forms, reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year or prior fiscal year except
Michael S. Andrews did not timely file a Form 3 when he was elected Chief
Technical Officer in March 1997 (he filed the Form 3 in December 1997) and
William J. Volz did not timely file a Form 4 reflecting purchases of the
Company's Common Stock in December 1997 and January 1998 (he filed a Form 4
disclosing such purchases in April 1998).
 .
ITEM 11.  EXECUTIVE COMPENSATION

The information required by this Item will be included in the Proxy Statement
and is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item will be included in the Proxy Statement
and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item will be included in the Proxy Statement
and is incorporated herein by reference.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

        (1) The Company's Consolidated Financial Statements and Notes to
        Consolidated Financial Statements appear at pages 29 to 40 of this
        report; see Index to Consolidated Financial Statements at page 22 of
        this report.

        (2) Consolidated Financial Statement Schedules appear at page 45 of this
        report; see Index to Consolidated Financial Statement Schedules at page
        22 of this report.

        (3) The Index to Exhibits appears at page 47 of this report.


(b) Reports on Form 8-K: During the last quarter of fiscal 1998, the Company
filed a Form 8-K for the change in fiscal year end from December 31 to September
30, effective September 30, 1998.



                                       44
<PAGE>   45

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                         Balance         Charged to                                          Balance
                           at              costs          Charged to                            at
                        beginning           and             other                             end of
Description             of period         expenses         accounts        Deductions         period
-----------             ----------       ----------       ----------       ----------       ----------
<S>                     <C>              <C>              <C>              <C>              <C>       
1998

Allowance for:

Doubtful accounts       $  169,500       $       --       $       --       $       --       $  169,500

Inventory reserve       $  500,000       $   90,000       $       --       $       --       $  590,000

Sales returns           $  200,500       $  234,000       $       --       $  285,400       $  149,100

1997

Allowance for:

Doubtful accounts       $  403,700       $  950,000       $       --       $  715,800       $  169,500

Inventory reserve       $  575,000       $1,224,000       $       --       $1,299,000       $  500,000

Sales returns           $  200,500       $   80,000       $       --       $   80,000       $  200,500

1996

Allowance for:

Doubtful accounts       $  119,500       $  400,000       $       --       $  115,800       $  403,700

Inventory reserve       $  575,000       $1,783,900       $       --       $1,783,900       $  575,000

Sales returns           $  100,500       $  100,000       $       --       $       --       $  200,500
</TABLE>



                                       45
<PAGE>   46

                                   SIGNATURES

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

  LOGIC DEVICES INCORPORATED

Date:  January 8, 1999                       By:   /s/ William J. Volz
                                                  ------------------------------
                                                  William J. Volz, President and
                                                  Principal Executive Officer

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

<TABLE>
<CAPTION>
Signature                               Title                               Date

<S>                                     <C>                                 <C>
  /s/ William J. Volz                   President                           January 8, 1999
--------------------------------        (Principal Executive Officer)
    William J. Volz


  /s/ Mary C. deRegt                    Chief Financial Officer             January 8, 1999
------------------------------          (Principal Financial
    Mary C. deRegt                      and Accounting Officer)


  /s/ Howard L. Farkas                  Chairman of the Board               January 8, 1999
------------------------------          of Directors
    Howard L. Farkas


 /s/ Burton W. Kanter                   Director                            January 8, 1999
------------------------------
    Burton W. Kanter


  /s/ Albert Morrison, Jr.              Director                            January 8, 1999
------------------------------
    Albert Morrison, Jr.


  /s/ Bruce B. Lusignan                 Director                            January 8, 1999
------------------------------
      Bruce B. Lusignan
</TABLE>



                                       46
<PAGE>   47

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.                         Description
-----------                         -----------
<S>            <C>
  3.1          Articles of Incorporation, as amended. [3.1] (1)

  3.2          Bylaws, as amended. [3.2] (1)

  10.1         Master Agreement dated August 11, 1988 between Registrant, Howard
               L. Farkas, Burton W. Kanter, William Volz, Albert Morrison, Jr.,
               as trustee of the T.C. Family Trust, Burton W. Kanter, as trustee
               of the Logical Trust, L.A. Hellerstein, as trustee, the Farkas
               Trusts, and Solomon A. Weisgal as trustee of the Bea Ritch
               Trusts, with exhibits. [10.1] (1)

  10.2         Logic Devices Incorporated Stock Purchase Plan. [10.2] (1)

  10.3         Incentive Stock Agreement dated September 1, 1986 between
               Registrant and certain employees and former employees of
               Registrant, including William Volz, James McAllister, Todd
               Ashford and Jesse Huffman. [10.3] (1)

  10.4         Sales Incentive Plan. [10.11] (1)


  10.5         Logic Devices Incorporated incentive and non-qualified stock
               option plan. [10.26] (2)

  10.6         SRAM Development Memorandum of Understanding between the
               Registrant and OKI Electric Industry Co., Ltd. dated March 3,
               1992. [10.32] (3) (7)

  10.7         Form of Warrant to purchase an aggregate of 220,000 shares of
               Common Stock. [10.23] (4)

  10.8         Form of Registration Agreement regarding the Warrants referenced
               in Exhibit 10.14. [10.24] (4)

  10.9         Foundry Capacity Agreement between Zentrum Mikroelektronik
               Dresden (ZMD) and Logic Devices Incorporated, dated December 14,
               1995. [10.27](4) (7)

  10.10        Real Estate lease regarding Registrant's Sunnyvale facilities.
               [10.1] (5)

  10.11        Assignment of Warrant to purchase an aggregate of 100,000 shares
               of Common Stock. [10.1] (5)

  10.12        Secured Promissory Note between Howard Farkas and Registrant.
               [10.4] (5)

  10.13        Secured Promissory Note between Albert Morrison, Jr. and
               Registrant. [10.5] (5)

  10.14        Logic Devices Incorporated 1996 Stock Incentive Plan. [99.1] (8)

  10.15        Logic Devices Incorporated 1998 Director Stock Incentive Plan.
               [10.1] (9)

  10.16        Letter agreement dated January 8, 1999 between Howard L. Farkas
               and Registrant.

  10.17        Letter agreement dated January 8, 1999 between Albert Morrison,
               Jr. and Registrant.

  10.18        Stock Purchase Agreement dated as of September 17, 1998 between
               William J. Volz, BRT Partnership and Registrant.

  10.19        Registration Rights Agreement dated September 30, 1998 between
               William J. Volz, BRT Partnership and Registrant.

  11.1         Computation of Earnings per Common Share.

  23.1         Consent letter of BDO Seidman LLP.

  27.1         Financial Data Schedule.
</TABLE>

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  [ ]     Exhibits so marked have been previously filed with the Securities and
          Exchange Commission ("SEC") as exhibits to the filings shown below
          under the exhibit numbers indicated following the respective document
          description and are incorporated herein by reference.

  (l)     Registration Statement on Form S-18, as filed with the SEC on August
          23, 1988 [Registration No. 33-23763-LA].

  (2)     Proxy Statement relating to the Annual Meeting of Shareholders held on
          June 12, 1990, as filed with the SEC on May 24, 1990.

  (3)     Annual Report on Form 10-K for the fiscal year ended December 31,
          1992, as filed with the SEC on April 15, 1993.

  (4)     Annual Report on Form 10-K for the fiscal year ended December 31,
          1995, as filed with the SEC on April 12, 1996.

  (5)     Registration Statement on Form S-3 as filed with the SEC on November
          21, 1996 [Registration No. 333-16591].

  (6)     Quarterly Report on Form 10-Q for the quarter ended September 30,
          1996, as filed with the SEC on November 14, 1996.

  (7)     Confidential treatment requested with respect to certain portions of
          such agreements.

  (8)     Registration Statement on Form S-8, as filed with the SEC on August
          17, 1997 [Registration No. 333-32819].

  (9)     Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
          filed with the SEC on August 14, 1998.



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