This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

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

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

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

Critical Accounting Policies and Estimates

LogicVision's financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for LogicVision include revenue recognition, allowance for doubtful accounts, valuation of investments, inventory, goodwill impairment, valuation of long-lived intangible assets, accounting for stock-based compensation, and accounting for income taxes, which are discussed in more detail under the caption "Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Stock-based compensation expense recognized under SFAS 123(R) for the three months ended March 31, 2009 and 2008 was $120,000 and $177,000, respectively, which consisted of stock-based compensation expense related to employee stock options and the employee stock purchase plan.

Compensation expense for all share-based payment awards is recognized using the multiple-option approach. As stock-based compensation expense recognized in the consolidated statements of operations for the three months ended March 31, 2009 and 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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

Results of Operations

Orders and backlog

We received new orders of $2.6 million in the first quarter of 2009, compared to $450,000 in the fourth quarter of 2008 and $10.5 million in the first quarter of 2008. These new orders are for periods ranging from one to three years. Receipt of new orders may fluctuate due to the lengthy sales cycles and our dependence on relatively few customers for large orders. One of the orders received in the first quarter of 2009 represented over 77% of the total of the new orders received; that order covered a three-year period and was from an existing customer.

Our one-year backlog was $10.7 million at March 31, 2009, compared with $9.9 million at December 31, 2008 and $10.1 million at March 31, 2008. Backlog is comprised of deferred revenues (orders which have been billed but for which revenue has not yet been recognized) plus orders which have been accepted but have not yet been billed and for which no revenue has been recognized. A portion of the orders which have been accepted but have not yet been billed provide customers with cancellation rights; customers may also renew contracts before their expiration or modify that portion of their orders which is cancelable. Therefore, our backlog at any particular date is not necessarily indicative of revenues to be recognized during any succeeding period.

The table below sets forth the fluctuations in revenues, cost of revenues and gross profit data for the three months ended March 31, 2009 and 2008 (in thousands, except percentage data):

                                                         Three Months Ended
                                                             March 31,                 %
                                                        2009            2008        Change
    Revenues:
        Bundled time-based license and maintenance  $    2,720      $    2,815          -3%
        Other license                                       61               -         100%
        Professional service                               283             155          83%
           Total revenues                                3,064           2,970           3%

    Cost of revenues:
        Bundled time-based license and maintenance         468             754         -38%
        Professional service                               136              77          77%
           Total cost of revenues                          604             831         -27%

    Gross profit                                    $    2,460      $    2,139          15%

Percentage of total revenues:
    Revenues:
        Bundled time-based license and maintenance          89 %            95 %
        Other license                                        2 %             0 %
        Professional service                                 9 %             5 %
           Total revenues                                  100 %           100 %

    Cost of revenues:
        Bundled time-based license and maintenance          15 %            25 %
        Professional service                                 5 %             3 %
           Total cost of revenues                           20 %            28 %

    Gross profit                                            80 %            72 %

The majority of our revenues are generated from time-based licenses, which are bundled to include maintenance services for the duration of their terms. We typically recognize the license and maintenance revenue ratably during the maintenance period. We believe the revised presentation is a better way to reflect our revenue stream. The professional service revenue is derived primarily from consulting and training services we provide to customers. Occasionally we sell a term-based or perpetual license to a customer for which we can carve out the fair value of any undelivered elements, which results in other license revenue.

Total revenues increased slightly for the three months ended March 31, 2009 compared to the same period in fiscal 2008 primarily due to orders received in the past three quarters. Professional service revenue increased primarily due to an increase in consulting services provided to customers.

Total cost of revenues decreased in the three months ended March 31, 2009 compared to the same period in fiscal 2008 primarily due to decreased post-sales support by our application engineering group, and a software license that had reached the end of its useful life by December 31, 2008. Cost of professional service increased primarily due to an increase in time spent on services provided to customers.

The table below sets forth the fluctuations in revenues by product line and geographic region for the three months ended March 31, 2009 and 2008 (in thousands, except percentage data):

   Revenue by product line:

                                           Three Months Ended
                                               March 31,              %
                                           2009          2008       Change
                  ETCreate              $    2,307    $    2,361       -2%
                  Silicon Insight              474           454        4%
                  Others                       283           155       83%
                      Total revenues    $    3,064    $    2,970        3%

Revenue by geographic region:

                                        Three Months Ended
                                            March 31,               %
                                        2009          2008       Change
                    United States    $    2,217    $    2,133         4%
                    Japan                   447           549       -19%
                    Others                  400           288        39%
                                     $    3,064    $    2,970         3%

Product line:

ETCreate™ consists of embedded test intellectual property and corresponding design automation software that provides embedded test solutions for different components of an application-specific integrated circuit or system-on-chip design. ETCreate revenues remained consistent for the three months ended March 31, 2009 compared to the same period in fiscal 2008.

Silicon Insight™ consists of hardware and software products for use with third party test platforms. Silicon Insight enables faster time-to-market and lower test costs through the support of interactive or test program controlled at-speed testing, datalogging, and debug of silicon designed with LogicVision's embedded test IP. Silicon Insight revenues remained consistent for the three months ended March 31, 2009 compared to the same period in fiscal 2008.

Others included revenues from consulting and training activities. Consulting revenue increased compared to the same period in fiscal 2008 due to an increase in consulting services provided to customers.

Geographic region:

Revenue in the United States was slightly higher for the three months ended March 31, 2009 compared to the same period in fiscal 2008. Revenue in Japan decreased in the three months ended March 31, 2009 compared to the same period in fiscal 2008 primarily due to decreased orders in the past three months.

   Operating Expenses:

   The table below sets forth operating expense data for the three months ended
March 31, 2009 and 2008 (in thousands, except percentage data):

                                                      Three Months Ended
                                                          March 31,                  %
                                                      2009            2008        Change
    Operating expenses:
        Research and development                  $      800      $    1,008         -21%
        Sales and marketing                              843           1,506         -44%
        General and administrative                       687             894         -23%
        Cost related to strategic alternatives           243               -         100%

        Total operating expenses                  $    2,573      $    3,408         -25%

Percentage of total revenues:
    Operating expenses:
        Research and development                          26 %            34 %
        Sales and marketing                               28 %            51 %
        General and administrative                        22 %            30 %
        Cost related to strategic alternatives             8 %             -

        Total operating expenses                          84 %           114 %

Research and development expenses decreased in the three months ended March 31, 2009 compared to the same period in fiscal 2008, primarily due to lower compensation and facility expenses resulting from our cost reduction effort.

Sales and marketing expenses decreased in the three months ended March 31, 2009 compared to the same period in fiscal 2008, primarily due to lower compensation expenses resulting from a reduction in headcount and lower commission expenses resulting from lower bookings.

General and administrative expenses decreased in the three months ended March 31, 2009, compared to the same period in fiscal 2008, primarily due to lower compensation and facility expenses resulting from our cost reduction effort.

Cost related to strategic alternatives comprised primarily of legal expenses related to consideration of strategic alternatives as publicly announced in December of 2008.

   Other Items:

   The table below sets forth other data for the three months ended March 31,
2009 and 2008 (in thousands, except percentage data):

                                                 Three Months Ended
                                                     March 31,               %
                                                 2009          2008       Change
            Interest and other income, net    $      9       $    18         -50%
            Income tax provision              $      -       $    15          -6%

        Percentage of total revenues:
            Interest and other income, net           0 %           1 %
            Income tax provision                     -             1 %

Interest and other income, net decreased in the three months ended March 31, 2009 compared to the same period in fiscal 2008, primarily due to lower interest rates earned on our investments as a result of lower market interest rates and lower investment balances.

Income tax provision Our net operating losses are generated domestically, and amounts attributed to our foreign operations have been insignificant for all periods presented. Our income tax provisions are primarily related to state and foreign taxes. No benefit for income taxes has been recorded due to the uncertainty of the realization of deferred tax assets. From inception through December 31, 2008, we incurred net losses for federal and state tax purposes. As of December 31, 2008, we had federal and California net operating loss carryforwards of approximately $93.1 million and $33.8 million available to reduce future federal and California taxable income, respectively. These federal and California carryforwards will begin to expire in 2009 if not utilized. The extent to which these carryforwards can be used to offset future taxable income may be limited under Section 382 of the Internal Revenue Code and applicable state tax law.

We did not record a provision for income taxes in the three months ended March 31, 2009, and provision for income taxes in the three months ended March 31, 2008 was $15,000.

Liquidity and Capital Resources

At March 31, 2009, we had cash and cash equivalents of $6.9 million and negative working capital of $362,000.

Net cash used in operating activities was $2.5 million and $0.9 million in the first three months of 2009 and 2008, respectively. Net cash used in operating activities for the three months ended March 31, 2009 was primarily due to a net loss of $0.1 million, decreases in deferred revenue of $0.8 million, accrued liabilities of $0.3 million, increases in accounts receivable of $1.5 million and prepaid expenses and other assets of $0.2 million; partially offset by non-cash charges from stock-based compensation and depreciation and amortization of $0.2 million, and an increase of accounts payable of $0.3 million. Net cash used in operating activities for the three months ended March 31, 2008 was primarily due to a net loss of $1.3 million, a decrease in accrued liabilities of $0.6 million and an increase in accounts receivable of $0.1 million; partially offset by non-cash charges from stock-based compensation and depreciation and amortization of $0.3 million, an increase in deferred revenue of $0.7 million and an increase in prepaid expenses and other current assets of $0.1 million.

Net cash provided by investing activities was $150,000 in the first three months of 2009, and net cash used in investing activates was $341,000 in the first three months of 2008. Net cash provided by investing activities in the first three months of 2009 was due to proceeds from maturities of marketable securities of $150,000. Net cash used by investing activities in the first three months of 2008 was primarily due to the purchase of marketable securities of $0.8 million and fixed assets of $59,000, partially offset by the proceeds from maturities of marketable securities of $0.5 million.

As of March 31, 2009, we had a loan agreement with a bank under which we could borrow, on a revolving basis, up to $1.0 million at an interest rate equal to prime rate, which was equal to an annual rate of 3.25% at March 31, 2009. There were no outstanding borrowings under the agreement, and we were in compliance with the covenants under the agreement as of March 31, 2009. The agreement expired on April 26, 2009.

On April 24, 2009, we entered into a loan agreement with a bank under which we may borrow, on a revolving basis, up to $2.0 million. The interest rate applicable to any outstanding amounts is determined by reference to LIBOR plus a stated margin, and is subject to daily adjustment. In connection with entering into the agreement, we granted the bank a security interest in all of our existing and after-acquired property, including, but not limited to, intellectual property, inventory and equipment. Under the agreement, we must comply with certain operating and reporting covenants as a condition to receiving credit extensions. If we fail to perform any of our obligations, violate any of our covenants, suffer a material adverse change in our business or financial condition or become insolvent under the agreement, the bank can declare any outstanding amounts immediately due and payable and cease advancing us money or extending us credit. The agreement expires on February 24, 2010. We are currently in compliance with all the operating and reporting covenants under the agreement and there are currently no borrowings outstanding.

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

We expect to finance our future commitments using existing cash resources. We currently anticipate that our available cash resources will be sufficient to meet our anticipated operating and capital requirements for at least the remainder of fiscal 2009.

Contractual Obligations and Other Commercial Commitments

   At March 31, 2009, our contractual obligations and commercial commitments
have been summarized below (in thousands):

                                    Operating                          Purchase
       Year ending December 31,      Leases        Capital Lease      Obligations
           2009                            574                 36              325
           2010                            305                 66              650
           2011                             70                  -              650
                                   $       949    $           102    $       1,625

Off-balance Sheet Arrangements

The Company's off-balance sheet arrangements consist solely of operating leases and purchase commitments as described above.