LOGICVISION INC, S-1, 2000-08-11

LOGICVISION INC
S-1, 2000-08-11

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<PAGE>

As filed with the Securities and Exchange Commission on August 11, 2000
Registration No. 333-

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Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

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

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<TABLE>
<S> <C> <C>
California (prior to
reincorporation) 7372 94-3166964
Delaware (after reincorporation) (Primary Standard Industrial) (I.R.S. Employer Identification No.)
(State or other jurisdiction of Classification Code Number)
incorporation or organization)
</TABLE>

LogicVision, Inc.
101 Metro Drive, Third Floor
San Jose, CA 95110
(408) 453-0146
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Vinod K. Agarwal
President and Chief Executive Officer
LogicVision, Inc.
101 Metro Drive, Third Floor
San Jose, CA 95110
(408) 453-0146
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

---------------

Copies to:
<TABLE>
<S> <C>
STANTON D. WONG SCOTT M. STANTON
GABRIELLA A. LOMBARDI MARTY B. LORENZO
MARY A. HELVEY JAMES CARTONI
DAVID M. KOENINGER Gray Cary Ware & Freidenrich LLP
Pillsbury Madison & Sutro LLP 4365 Executive Drive, Suite 1600
2550 Hanover Street San Diego, California 92121
Palo Alto, California 94304-1115 (858) 677-1400
(650) 233-4500 (858) 677-1477 (Fax)
(650) 233-4545 (Fax)
</TABLE>

---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE

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<TABLE>
<CAPTION>
Title of each class of securities Proposed maximum aggregate
to be registered offering price(1) Amount of registration fee
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.0001 par value........... $50,000,000 $13,200
-------------------------------------------------------------------------------------------------
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in these prospectus is not complete and may be changed. +
+Underwriter may not confirm sales of these securities until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. This prospectus is not an offer to sell these securities and its +
+not soliciting offers to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 11, 2000

PROSPECTUS

LOGICVISION, INC.

[LOGO]

Common Stock

This is an initial public offering of common stock by LogicVision, Inc. All
of the shares of common stock are being sold by LogicVision. The estimated
initial offering price will be between $ and $ per share.

------------

There is currently no public market for the common stock. We propose to list
the common stock on the Nasdaq National Market under the symbol "LGVN."

------------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds to LogicVision, Inc., before expenses............... $ $
</TABLE>

LogicVision has granted the underwriters an option for a period of 30 days to
purchase up to additional shares of common stock.

------------

Investing in the shares involves a high degree of risk.
See "Risk Factors" beginning on page 4.

------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

Chase H&Q
Robertson Stephens
SG Cowen

, 2000
<PAGE>

[INSIDE FRONT COVER]
LogicVision logo

Text: Embedded Test:

. Enables faster and more powerful semiconductors

. Improved time-to-market

. Reduced overall manufacturing cost

. System level test and field diagnostics

Color Artwork: Photograph of three complex semiconductor clips.
<PAGE>

[GATEFOLD]

[LOGICVISION LOGO APPEARS HERE]

From left to right there is a picture of a complex semiconductor chip, showing
the logic, core, and memory functional blocks together with LogicVision embedded
test blocks. The chip is connected via 1 EEE 11491.1 test access port to an
external tester. In the center, picture labeled Broadband Internet Access
depicts a personal computer, monitor, complex semiconductor chip, and close-up
of circuitry. Next, under the label wireless, is a picture of a satellite, a
handheld notebook computer and a cellular phone. The pictures are on a
background of floating complex semi-conductor chips.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1

LogicVision.............................................................. 1

Risk Factors............................................................. 4

Information Regarding Forward-Looking Statements......................... 13

Use of Proceeds.......................................................... 14

Dividend Policy.......................................................... 14

Capitalization........................................................... 15

Dilution................................................................. 16

Selected Consolidated Financial Data..................................... 17

Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19

Business................................................................. 26

Management............................................................... 38

Related Party Transactions............................................... 44

Principal Stockholders................................................... 46

Description of Capital Stock............................................. 48

Shares Eligible for Future Sale.......................................... 51

Underwriting............................................................. 53

Legal Matters............................................................ 56

Experts.................................................................. 56

Where You Can Find Additional Information................................ 56

Index to Consolidated Financial Statements............................... F-1
</TABLE>

----------------

LogicVision, the LogicVision logo and BIST on Board are our registered
trademarks, and we have filed the application to register test@speed. All other
trademarks and trade names appearing in this prospectus are the property of
their respective holders. The inclusion of other companies' brand names and
products in this prospectus is not an endorsement of LogicVision. These
companies are not involved with the offering of our securities.

i
<PAGE>

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus.

LogicVision

We provide proprietary technologies for embedded test that enable the more
efficient design and manufacture of complex semiconductors. Our embedded test
solution allows integrated circuit designers to embed into a semiconductor
design test functionality that can be used during semiconductor production and
throughout the useful life of the chip. We believe our solution can reduce a
customer's time-to-market, reduce manufacturing costs, improve manufacturing
yields and reduce system software complexity. Our solution also allows
integrated circuits to be tested after they have been assembled onto boards and
systems, which enables diagnostic test throughout the product's life cycle. Our
embedded test solution has been successfully deployed in numerous complex
semiconductors for gigabit switches, voice and data routers, high performance
servers and satellite systems.

Semiconductor designs have become more complex to address the needs of a
variety of high growth markets, such as the wireless and network communications
and consumer electronics markets. The demands of these markets, driven by such
trends as consumer desire for higher speed and wireless internet access,
require semiconductors to provide more functions and higher performance in
smaller products and with lower costs. Advancements in semiconductor design and
manufacturing technology have enabled the integration of analog, digital and
memory functions onto a single chip, referred to as a system-on-a-chip.
However, conventional methods of testing semiconductors, using external test
equipment, are approaching significant limitations. The speed and accuracy of
external testing are compromised by the delay and degradation of test signals
inherent when testing from outside the semiconductor, and external test
equipment cannot keep pace with the increased operating speeds of
semiconductors. External test equipment is becoming increasingly complex and
often lags behind the actual generation of chips being tested. These
limitations and equipment costs can result in higher manufacturing costs due to
the rejection of good chips during testing. Manufacturing costs are also rising
due to the increasing cost of external test equipment. Further, the current
external test methodology can result in increased time-to-market because of the
need to develop complex test software.

Our embedded test products generate proprietary circuit structures that are
incorporated into an integrated circuit to test and diagnose the chip at full
speed, without the signal delay or degradation experienced by external testers.
Our proprietary circuits are designed to be modular and reusable, to enable
more efficient design and to address time-to-market issues. We offer our
embedded test circuits, design software and manufacturing software products for
integrated circuit functions, such as memory, logic, cores and phase-locked-
loops.

Our customers include integrated device manufacturers such as Fujitsu
Limited, LSI Logic Corporation, National Semiconductor Corporation and Texas
Instruments Incorporated, fabless semiconductor companies such as S3
Incorporated and TranSwitch Corporation, and systems providers such as Cisco
Systems, Inc., Ericsson, Hughes Space and Communications Company, Lucent
Technologies, Inc., and Sun Microsystems, Inc.

We were incorporated as LV Software in California in July 1992. In June 1996,
we changed our corporate name to LogicVision, Inc. We plan to reincorporate in
Delaware prior to the commencement of this offering.

Our principal executive offices are located at 101 Metro Drive, Third Floor,
San Jose, California 95110. Our telephone number at that location is (408) 453-
0146.

1
<PAGE>

The Offering

<TABLE>
<C> <S>
Common stock offered by LogicVision........... shares

Common stock outstanding after this offering.. shares

Use of proceeds............................... General corporate purposes,
including working capital and
capital expenditures and
potential acquisitions.

Proposed Nasdaq National Market symbol........ LGVN
</TABLE>

----------------

Unless otherwise stated, all information in this prospectus assumes:

. the automatic conversion of all outstanding shares of our preferred stock
into common stock immediately prior to the closing of this offering;

. no exercise of the over-allotment option granted to the underwriters;

. our reincorporation as a Delaware corporation prior to this offering; and

. a -for- reverse stock split prior to the completion of this
offering.

The number of shares of common stock to be outstanding immediately after this
offering:

. is based upon shares of common stock outstanding as of June 30,
2000;

. includes shares issuable upon the exercise of outstanding warrants
with terms that expire at the closing of this offering, assuming exercise
on a net issuance basis and an assumed initial public offering price of
$ per share;

. excludes shares issuable upon the exercise of outstanding warrants
that do not expire at the closing of this offering, at a weighted average
exercise price of $ per share;

. excludes shares of common stock issuable upon the exercise of
options outstanding as of June 30, 2000, at a weighted average exercise
price of $ per share; and

. excludes shares of common stock available for future issuance under
our 1994 and 2000 stock plans.

2
<PAGE>

Summary Consolidated Financial Data

<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues................ $ 1,476 $ 3,418 $ 4,204 $ 3,016 $ 5,440 $ 2,124 $ 4,314
Total costs and
expenses............... 3,209 6,737 13,163 11,488 13,674 6,654 8,882
Loss from operations.... (1,733) (3,319) (8,959) (8,472) (8,234) (4,530) (4,568)
Net loss................ (1,738) (3,341) (8,665) (8,199) (8,098) (4,475) (4,362)
Net loss per share,
basic and diluted...... $ (0.99) $ (1.87) $ (4.75) $ (3.71) $ (3.14) $ (1.81) $ (1.51)
Shares used in
computation, basic and
diluted................ 1,760 1,782 1,824 2,212 2,631 2,517 2,944
Pro forma net loss per
share, basic and
diluted................ $ (0.57) $ (0.24)
Shares used in pro forma
computation, basic and
diluted................ 14,273 17,881
</TABLE>

<TABLE>
<CAPTION>
June 30, 2000
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $ 12,349
Working capital........................................... 11,864
Total assets.............................................. 18,379
Long-term debt, less current portion...................... --
Redeemable convertible preferred stock.................... 46,057
Total stockholders' deficit............................... (33,167)
</TABLE>

The preceding table presents a summary of our balance sheet data as of June
30, 2000:

. on an actual basis;

. on a pro forma as adjusted basis to give effect to the automatic
conversion of all of our outstanding shares of convertible preferred
stock into common stock, the exercise on a net issuance basis of all
warrants to purchase our capital stock that expire at the closing of this
offering, assuming an initial public offering price of $ per share, and
the sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.

See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.

Pro forma basic and diluted net loss per share have been calculated assuming
the conversion of all previously outstanding shares of convertible preferred
stock into common stock as if the stock had been converted immediately upon its
issuance.

3
<PAGE>

RISK FACTORS

You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business and
financial results could be harmed. In that case, the trading price of our
common stock could decline and you might lose all or part of your investment.
You should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.

Risks Related To Our Business

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

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

. our target markets and customers may determine that existing solutions
adequately address their testing needs, or the industry may develop
alternative technologies to address their testing needs;

. our customers may not need our technology if there is a slowdown in
semiconductor manufacturing or a decrease in the demand for more complex
semiconductors;

. our potential customers may not be willing to accept the perceived delays
in the early design stages associated with implementing embedded test
technology in order to achieve potential time savings at later stages of
silicon debugging and production testing;

. our potential customers may have concerns over the reliability of
embedded testing methods relative to existing test methods; and

. designers may be reluctant to take on the added responsibility of
incorporating embedded test technology as part of their design process,
or to learn how to implement embedded test technology.

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

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

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

. timing, terms and conditions of customer agreements;

. timing and acceptance of new technologies, product releases or
enhancements by us, our competitors or our customers;

.timing and completion of milestones under customer agreements;

4
<PAGE>

. changes in our and our customers' development schedules and levels of
expenditures on research and development;

. customers placing orders at the end of the quarter;

. industry patterns and changes or cyclical and seasonal fluctuations in
the markets we target; and

. market and general economic conditions.

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

We have incurred net losses since our inception and we expect to incur losses
in the future. We may not be able to generate sufficient net revenue in the
future to achieve or sustain profitability.

We have incurred significant net losses since our inception, including losses
of $8.7 million in 1997, $8.2 million in 1998, $8.1 million in 1999 and $4.4
million in the six month period ended June 30, 2000. At June 30, 2000, we had
an accumulated deficit of approximately $35.6 million. To achieve
profitability, we will need to generate and sustain substantially higher
revenue while maintaining reasonable cost and expense levels. We expect to
increase expense levels in each of the next several quarters primarily to
support increased sales and marketing, technical support and research and
development costs. These expenditures may not result in increased revenues or
customer growth. We do not know when or if we will become profitable. If we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or an annual basis.

Because the sales and implementation cycles for our products are typically long
and unpredictable, we may have difficulty predicting future revenues and our
revenue and operating results may fluctuate significantly, which could cause
our stock price to fluctuate.

We believe that convincing a potential customer to integrate our technology
into an integrated circuit at the design stage, which we refer to as a design
win, is critical to retaining existing customers and to obtaining new
customers. However, acceptance of our embedded test technology generally
involves a significant commitment of resources by prospective customers and a
fundamental change in their method of designing and testing integrated
circuits. Many of our potential customers are large enterprises that generally
do not adopt new design methodologies quickly. As a result, the period between
our initial contact with a potential customer and the sale of our products to
that customer, if any, is often lengthy and may include delays associated with
our customers' budgeting and approval processes.

Historically, our sales cycle has ranged from six months to two years and our
customers' implementation cycle has been approximately an additional six to
twelve months. If we fail to achieve a design win with a potential customer to
which we have devoted a substantial amount of time and other resources, it is
unlikely that the potential customer will become a customer before its next
product cycle, if at all. Because of the length of our sales cycle, our failure
to achieve design wins could have a material and prolonged adverse effect on
our sales and revenue growth. Our revenue streams may fluctuate significantly
due to the length of our sales cycle, which may make our future revenues
difficult to project and may cause our stock price to fluctuate.

5
<PAGE>

Intense competition in the semiconductor market could prevent us from
increasing or sustaining our revenues and prevent us from achieving or
sustaining profitability.

The semiconductor and system industries are extremely competitive and
characterized by rapidly changing technology. The market for embedded test
solutions is still evolving, and we expect competition to become more intense
in the future. Increased competition could result in pricing pressures, reduced
sales, reduced margins or failure to achieve or maintain widespread market
acceptance, any of which could prevent us from increasing or sustaining our
revenues and achieving or sustaining profitability.

Our current principal competitors in the design phase of product development
include:

. electronic design automation providers such as Mentor Graphics
Corporation and Synopsys, Inc., both of which offer basic built-in self-
test capability;

. smaller test tool providers like SynTest Technologies, Inc., Genesis
Microchip Inc., and the Fluence subsidiary of Credence Systems
Corporation;

. potential customers that develop test solutions internally; and

. integrated device manufacturers, such as IBM, that use their own test
solutions in chips manufactured for and sold to others.

Our embedded test technology also has the potential to impact the automated
test equipment market, which may place us in competition with traditional
hardware tester manufacturers such as Teradyne, Inc., Credence, Advantest
Corporation, Agilent Technologies, Inc. and Schlumberger Limited. As embedded
test becomes adopted more widely in the market, any of these automated test
equipment companies, or others, may offer their own embedded test solutions.
These companies are significantly larger than we are and have greater financial
resources, greater name recognition and longer operating histories than we
have.

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

We derive a significant portion of our revenues from a small number of
customers and we anticipate that we will continue to do so in the future. As a
result, we must obtain orders from new significant customers on an ongoing
basis to increase our revenues and grow our business. In addition, the loss of
any significant or well-known customer could harm our reputation.

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

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

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

Although we are presently working with a number of automated test equipment
companies to achieve optimal compatibility of our technologies, these companies
may elect not to work with us in the future. If

6
<PAGE>

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

If we fail to develop and introduce new products and enhancements on a timely
basis, our ability to attract and retain customers could be impaired.

The semiconductor industry is characterized by rapidly changing technology,
evolving industry standards, rapid changes in customer requirements, frequent
product introductions and ongoing demands for greater speed and functionality.
We must continually design, develop and introduce new products with improved
features to be competitive. Our products may not achieve market acceptance or
adequately address the changing needs of the marketplace and we may not be
successful in developing and marketing new products or enhancements to our
existing products on a timely basis. The introduction of products embodying new
technologies, the emergence of new industry standards or changes in customer
requirements could render our existing products obsolete and unmarketable.

Changes to financial accounting standards, including pronouncements and
interpretations of accounting pronouncements on software revenue recognition,
may affect our reported results of operations.

We prepare our financial statements to conform with accounting principles
generally accepted in the United States, or GAAP. GAAP are subject to
interpretation by the American Institute of Public Accountants, the SEC and
various bodies formed to interpret and create appropriate accounting policies.
A change in those policies can have a significant effect on our reported
results and may even affect our reporting of transactions completed before a
change is announced. In particular, new pronouncements and varying
interpretations of pronouncements on software revenue recognition have occurred
with frequency, may occur in the future and could impact our revenues.
Accounting policies affecting many other aspects of our business, including
rules relating to revenue recognition, purchase and pooling-of-interests
accounting for business combinations and employee stock option grants have
recently been revised or are under review. Changes to those rules or the
questioning of current practices may adversely affect our reported financial
results or the way we conduct our business.

Because our embedded test products are complex and are deployed in a wide
variety of complex semiconductor environments, they may have errors or defects
that users identify after deployment, which could harm our reputation and our
business.

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

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

We have experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled engineers with appropriate qualifications
to support our rapid growth and expansion. In particular, our strategy for
encouraging the adoption of our technology requires that we employ highly
skilled applications engineers to work with our customers. As a result, our
future success depends in part on our ability to identify, attract, retain and
motivate qualified engineering personnel. If we lose the services of a

7
<PAGE>

significant number of our engineers, it could disrupt our ability to implement
our business strategy. Competition for qualified engineers is intense,
especially in the Silicon Valley where we are located.

Our chief executive officer, chief scientist and vice president of engineering
are critical to our business, and they may not remain with us in the future.

Our future success depends to a significant extent on the continued services
of Vinod K. Agarwal, our President and Chief Executive Officer, Benoit Nadeau-
Dostie, our Chief Scientist, and Michael C. Howells, our Vice President of
Engineering. The loss of the services of any of these key executives could slow
our product development processes. Searching for replacements could divert
senior management's attention and increase our operating expenses. In addition,
our industry partners and customers could become concerned about our future
operations, which could injure our reputation. We do not have employment
agreements with these executives, and we do not maintain key person life
insurance policies except on Vinod Agarwal.

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

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

Litigation may be necessary to enforce our intellectual property rights or to
determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. We may need to take legal action to
enforce our proprietary rights in the future. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.

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

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

We have limited control over third-party distributors who market, sell and
support our products in foreign markets.

We sell our products and services through a distributor in Japan and sales
representatives in Singapore, Korea and Taiwan. We anticipate that sales in
these markets will account for a significant percentage of our total revenues
in future periods. Our third-party distributors are not obligated to continue
selling our

8
<PAGE>

products, and they may terminate their arrangements with us at any time with
limited prior notice. Establishing alternative distribution channels in any of
these markets could consume substantial time and resources, decrease our
revenues and increase our expenses.

We face business, political and economic risks because a portion of our sales
are to customers outside of the United States.

International revenues from sales outside the United States and Canada
accounted for 17% of revenues for the six month period ended June 30, 2000, 7%
of revenues in 1999 and 4% of revenues in 1998. Our success depends upon
continued expansion of our international operations. Our international business
involves a number of risks, including:

. our ability to adapt our products to foreign design methods and
practices;

. cultural differences in the conduct of business;

. difficulty in attracting qualified personnel;

. longer payment cycles for and greater difficulty collecting accounts
receivable;

. unexpected changes in regulatory requirements, royalties and withholding
taxes that restrict the repatriation of earnings;

. tariffs and other trade barriers; and

. the burden of complying with a wide variety of foreign laws.

Our international sales are currently denominated in U.S. dollars, creating a
risk that fluctuation in currency exchange rates will make our prices
uncompetitive. To the extent that profit is generated or losses are incurred in
foreign countries, our effective income tax rate may be significantly affected.
Any of these factors could significantly harm our future international sales
and, consequently, our revenues and results of operations and business and
financial condition.

If we are unable to manage growth effectively, our operations and ability to
support our customers could be affected, which could harm our revenues.

Growth and expansion of our operations may place a significant strain on our
resources and increased demands on our management information and reporting
systems, financial and management controls and personnel. We may not be able to
develop the internal capabilities or collaborative relationships required to
manage future growth and expansion or to support future operations. If we are
unable to manage growth effectively, our revenues could decline.

We may be unable to consummate potential acquisitions or investments or
successfully integrate them with our business, which may slow our ability to
expand the range of our proprietary technologies and products.

To expand the range of our proprietary technologies and products, we may
acquire or make investments in additional complementary businesses,
technologies or products, if appropriate opportunities arise. We may be unable
to identify suitable acquisition or investment candidates at reasonable prices
or on reasonable terms, or consummate future acquisitions or investments, each
of which could slow our growth strategy. If we do acquire additional companies
or make other types of acquisitions, we may have difficulty integrating the
acquired products, personnel or technologies. These difficulties could disrupt
our ongoing business, distract our management and employees and increase our
expenses.

9
<PAGE>

Risks Related To Our Industry

Our revenues are subject to the volatility of the semiconductor industry.

The industry in which we compete and the markets that we serve are highly
volatile. We are dependent on the semiconductor industry, which is
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and margin pressures.
Segments of the semiconductor industry, including the communications,
networking, server and high-end consumer products industries, have experienced
sudden and unexpected economic downturns. During these periods, capital
spending is commonly curtailed and the number of design projects often
decreases. Our sales are dependent upon capital spending trends and new design
projects, and a substantial portion of our costs are fixed in the near term. As
a result, our future operating results may reflect substantial fluctuations
from period to period as a consequence of these industry patterns, general
economic conditions affecting the timing of orders from customers and other
factors. Any negative factors affecting the electronics industry, including
those described here, could significantly harm our business, financial
condition and results of operations.

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

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

Risks Related To This Offering

Our stock price may be volatile, and you may not be able to resell our shares
at or above the price you paid, or at all.

Prior to this offering, our common stock has not been sold in a public
market. We cannot predict the extent to which investor interest in our stock
will lead to the development of a trading market or how liquid that market
might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The trading price of our common stock could be subject to wide
fluctuations due to the factors discussed in this risk factors section and
elsewhere in this prospectus. In addition, the stock market in general, and the
Nasdaq National Market and technology companies in particular, have experienced
extreme price and volume fluctuations. These trading prices and valuations may
not be sustainable. These broad market and industry factors may decrease the
market price of our common stock, regardless of our actual operating
performance. In addition, in the past, following periods of volatility in the
overall market and the market price of a company's securities, securities class
action litigation has often been instituted against these companies. This
litigation, if instituted against us, could result in substantial costs and a
diversion of our management's attention and resources.

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

10
<PAGE>

and amount of our working capital and capital expenditure requirements may vary
significantly depending on numerous factors, including

. market acceptance of our products;

. the need to adapt to changing technologies and technical requirements;

. the existence of opportunities for expansion; and

. access to and availability of sufficient management, technical, marketing
and financial personnel.

If our capital resources are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity securities or debt
securities or obtain debt financing. The sale of additional equity securities
or debt securities would result in additional dilution to our stockholders.
Additional debt would result in increased expenses and could result in
covenants that would restrict our operations. We have not made arrangements to
obtain additional financing and there is no assurance that financing, if
required, will be available in amounts or on terms acceptable to us, if at all.

Our management will have full discretion in use of proceeds and may not
effectively utilize those funds.

We intend to apply the net proceeds primarily towards increased spending on
general corporate purposes, including working capital and capital expenditures.
Management will, however, have significant flexibility and discretion in
applying the net proceeds of the offering and they may use the proceeds in ways
with which you may disagree. In addition, we also may use a portion of the net
proceeds of this offering to acquire complementary businesses, products or
technologies.

Substantial future sales of our common stock in the public market could cause
our stock price to fall.

Additional sales of our common stock in the public market after this
offering, or the perception that such sales could occur, could cause the market
price of our common stock to decline. Upon completion of this offering, we will
have shares of common stock outstanding. All shares sold in this
offering will be freely transferable without restriction or additional
registration under the Securities Act of 1933. The remaining shares of
common stock outstanding after this offering will be available for sale,
assuming the effectiveness of lock-up agreements under which our stockholders
have agreed not to sell or otherwise dispose of their shares of common stock in
the public market, as follows:

<TABLE>
<CAPTION>
Number
of Date of Availability for
Shares Sale
------ ------------------------
<S> <C>
(date of prospectus)
(180 days after prospectus)
</TABLE>

Any or all of these shares may be released prior to expiration of the 180-day
lockup period at the discretion of Chase Securities Inc. To the extent shares
are released before the expiration of the lock-up period and these shares are
sold into the market, the market price of our common stock could decline.
Immediately following the 180-day lockup period, shares of our common
stock outstanding after this offering will become available for sale. The
remaining shares of our common stock will become available for sale at various
times thereafter upon the expiration of one-year holding periods.

Many corporate actions will be substantially controlled by officers, directors
and affiliated entities regardless of the desire of other investors to pursue
an alternative course of action.

After this offering, our directors, executive officers and their affiliated
entities will beneficially own approximately % of our outstanding common
stock. These stockholders, if they acted together, could exert substantial
control over matters requiring approval by our stockholders, including electing
directors

11
<PAGE>

and approving mergers or other business combination transactions. This
concentration of ownership may also discourage, delay or prevent a change in
control of our company, which could deprive our stockholders of an opportunity
to receive a premium for their stock as part of a sale of our company and might
reduce our stock price. These actions may be taken even if they are opposed by
our other stockholders, including those who purchase shares in this offering.

Purchasers in this offering will immediately experience substantial dilution in
net tangible book value.

Because our common stock has in the past been sold at prices substantially
lower than the initial public offering price that you will pay, you will suffer
immediate dilution of $ per share in pro forma net tangible book value,
based on an assumed initial offering price of $ per share of common stock.
The exercise of outstanding options or warrants may result in further dilution.

If we raise additional capital through the issuance of new securities at a
price lower than the initial public offering price, you will incur additional
dilution.

If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price of $ per share, you will
be subject to additional dilution. If we are unable to access the public
markets in the future, or if our performance or prospects decrease, we may need
to consummate a private placement or public offering of our capital stock at a
lower price than the initial public offering price. In addition, any new
securities may have rights, preferences or privileges senior to those
securities held by you.

An active public market for our common stock may not develop.

An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.

Delaware law and our corporate charter and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that stockholders
may consider favorable.

Provisions in our certificate of incorporation, as restated upon the closing
of this offering, may have the effect of delaying or preventing a change of
control or changes in our management. These provisions include:

. the right of the board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors;

. the ability of the board of directors to alter our bylaws without
obtaining stockholder approval;

. the ability of the board of directors to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock with terms set by the
board of directors which rights could be senior to those of common stock;
and

. the elimination of the right of stockholders to call a special meeting of
stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions may prohibit large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These
provisions in our charter, bylaws and under Delaware law could discourage
potential takeover attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the
market price being lower than they would without these provisions.

12
<PAGE>

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. The forward-looking statements are contained principally in the
sections entitled "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." These statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements. Forward-
looking statements include, but are not limited to, statements about:

. marketing and commercialization of our products under development;

. our estimates for future revenues and profitability;

. our estimates regarding our capital requirements and our needs for
additional financing;

. plans for future products and services and for enhancements of existing
products and services;

. our patent applications and licensed technology regarding our products
and technology;

. our ability to attract customers and establish license agreements; and

. sources of revenues and anticipated revenues, including licenses of our
intellectual property and software, technology development and design
contracts and postcontract customer support, and the continued viability
and duration of those agreements.

This prospectus contains statistical data regarding the semiconductor
industry that we obtained from industry publications, including reports
generated by Dataquest, the Semiconductor Industry Association and VSLI
Research. These industry publications generally indicate that they have
obtained their information from sources believed to be reliable, but do not
guarantee the accuracy and completeness of their information. Although we
believe that the publications are reliable, we have not independently verified
their data.

In some cases, you can identify forward-looking statements by terms such as
"may," "might," "will," "should," "could," "would," "expect," "believe,"
"estimate," "predict," "potential," or the negative of these terms, and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.

You should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our
actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.

13
<PAGE>

USE OF PROCEEDS

We expect that the net proceeds we will receive from the sale of the shares
of common stock offered by us will be approximately $ , based on an assumed
initial public offering price of $ per share, and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, our
net proceeds will be approximately $ . We currently intend to use the net
proceeds of this offering for general corporate purposes, including working
capital, capital expenditures and potential acquisitions. We may use a portion
of the net proceeds of this offering for the acquisition of complementary
businesses, products or technologies. While we evaluate these types of
opportunities from time to time, there are currently no agreements with respect
to any specific transaction.

We have not yet determined all of our expected expenditures, and we cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
our management will have significant flexibility in applying the net proceeds
of this offering. Pending use of the net proceeds as described above, we intend
to invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on our common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.

14
<PAGE>

CAPITALIZATION

The following table describes our capitalization as of June 30, 2000:

. on an actual basis; and

. on a pro forma as adjusted basis to give effect to:

. the automatic conversion of all of our outstanding shares of
convertible preferred stock;

. includes shares issuable upon the exercise of outstanding warrants
with terms that expire at the closing of this offering, assuming
exercise on a net issuance basis and an assumed initial public
offering price of $ per share;

. the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses; and

. the amendment of our certificate of incorporation upon the closing of
this offering to change the number of shares authorized for issuance.

You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
June 30, 2000
------------------
Pro
Forma As
Actual Adjusted
-------- --------
(in thousands, except
share data)
<S> <C> <C> <C>
Long term debt.......................................... $ $
-------- -----
Redeemable convertible preferred stock, $0.0001 par
value; 17,137,976 shares authorized, 15,061,241 shares
issued and outstanding, actual; no shares authorized,
issued or outstanding pro forma as adjusted............ 46,057
-------- -----
Stockholders' equity:
Preferred stock, $0.0001 par value; no shares
authorized, actual; 5,000,000 shares authorized, no
shares issued and outstanding, pro forma as
adjusted.............................................
Common stock, $0.0001 par value; 50,000,000 shares
authorized, 3,081,090 shares issued and outstanding,
actual; 125,000,000 shares authorized, shares
issued and outstanding, pro forma as adjusted........ --
Additional paid-in capital............................ 5,163
Deferred stock compensation........................... (2,687)
Accumulated other comprehensive income................ (46)
Accumulated deficit................................... (35,597)
-------- -----
Total stockholders' (deficit) equity................ (33,167)
-------- -----
Total capitalization.............................. $ 12,890 $
======== =====
</TABLE>

The actual and pro forma as adjusted information set forth in the table
excludes:

. shares of common stock issuable upon the exercise of stock options
outstanding as of June 30, 2000, at a weighted average exercise price of
$ per share; and

. shares of common stock available for future issuance under our 1994
and 2000 stock plans; and

. excludes shares issuable upon the exercise of outstanding warrants
that do not expire at the closing of this offering, at a weighted average
exercise price of $ per share.

15
<PAGE>

DILUTION

Our pro forma net tangible book value as of June 30, 2000 was approximately
$ , or $ per share of common stock. Pro forma net tangible book value
per share represents the amount of our pro forma total tangible assets less
total liabilities, divided by the pro forma number of shares of common stock
outstanding assuming the conversion of all shares of convertible preferred
stock and the exercise on a net issuance basis of all warrants outstanding as
of June 30, 2000 that expire at the closing of this offering into shares
of common stock, assuming an initial public offering price of $ per share.
Pro forma net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the pro forma net tangible book value per share of common
stock immediately after completion of this offering on a pro forma as adjusted
basis. After giving effect to the sale of the shares of common stock by us
at an assumed initial public offering price of $ per share, and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of June 30, 2000
would have been $ , or $ per share of common stock. This represents an
immediate increase in net tangible book value of $ per share of common
stock to existing common stockholders and an immediate dilution in pro forma
net tangible book value of $ per share to new investors purchasing shares
of common stock in this offering. The following table illustrates this per
share dilution:

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

The following table summarizes, on a pro forma basis as of June 30, 2000, the
number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.

<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- ---------------- Average Price
Number Percent Amount Percent Per Share
------ ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... % $ % $
New investors..................
--- ----- -------- -----
Total........................ 100.0% $ 100.0%
=== ===== ======== =====
</TABLE>

The table above assumes no exercise of any outstanding stock options. As of
June 30, 2000, there were shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $ per
share and shares of common stock issuable upon exercise of outstanding
warrants that do not expire at the closing of this offering at a weighted
average exercise price of $ per share. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors.

16
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data are qualified by reference
to, and should be read in conjunction with, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and related notes and other information contained in this
prospectus. The selected consolidated balance sheet data as of December 31,
1998 and 1999 and selected consolidated statements of operations data for the
years ended December 31, 1997, 1998 and 1999 are derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of June 30, 2000 and selected
consolidated statements of operations data for the six months ended June 30,
1999 and 2000 are derived from unaudited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated balance sheet
data as of December 31, 1995, 1996 and 1997 and the selected consolidated
statements of operations data for the years ended December 31, 1995 and 1996
were derived from audited consolidated financial statements not included in
this prospectus. We have prepared the unaudited information on the same basis
as the audited consolidated financial statements and have included all
adjustments, consisting of only normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results. Our historical results are not necessarily indicative of our future
results.

<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues................ $ 1,476 $ 3,418 $ 4,204 $ 3,016 $ 5,440 $ 2,124 $ 4,314
Costs and expenses:
Cost of revenues...... 944 2,577 2,767 1,020 1,343 661 1,193
Research and
development.......... 398 1,167 4,251 4,373 4,519 2,380 2,376
Sales and marketing... 1,130 1,957 4,552 4,378 5,384 2,554 3,427
General and
administrative....... 737 1,036 1,593 1,503 2,061 858 1,188
Amortization of
deferred stock
compensation......... -- -- -- 214 367 201 698
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 3,209 6,737 13,163 11,488 13,674 6,654 8,882
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,733) (3,319) (8,959) (8,472) (8,234) (4,530) (4,568)
Interest income......... -- 1 306 260 155 91 230
Other income (expense),
net.................... 21 (4) -- 18 (16) (33) (23)
Provision for income
taxes.................. (26) (19) (12) (5) (3) (3) (1)
------- ------- ------- ------- ------- ------- -------
Net loss................ (1,738) (3,341) (8,665) (8,199) (8,098) (4,475) (4,362)
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- (173) (87) (87)
------- ------- ------- ------- ------- ------- -------
Net loss attributable to
common stockholders.... $(1,738) $(3,341) $(8,665) $(8,199) $(8,271) $(4,562) $(4,449)
======= ======= ======= ======= ======= ======= =======
Net loss per share,
basic and diluted(1)... $ (0.99) $ (1.87) $ (4.75) $ (3.71) $ (3.14) $ (1.81) $ (1.51)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares, basic and
diluted(1)............. 1,760 1,782 1,824 2,212 2,631 2,517 2,944
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per
common share, basic and
diluted(2)............. $ (0.57) $ (0.24)
======= =======
Pro forma weighted
average common shares,
basic and diluted(2)... 14,273 17,881
======= =======
</TABLE>
--------
(1) The diluted net loss per share computation excludes potential shares of
common stock (convertible preferred stock, options to purchase common stock
and warrants to purchase common stock), as their effect would be
antidilutive. See Note 2 of Notes to Consolidated Financial Statements for
a detailed explanation of the determination of the shares used in computing
basic and diluted net loss per share.
(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of convertible preferred stock upon
the effectiveness of the registration statement related to this offering.
See Note 2 of Notes to Consolidated Financial Statements for a detailed
explanation of the

17
<PAGE>

determination of the shares used in computing pro forma net loss per share.
The diluted pro forma net loss per share computation excludes potential
shares of common stock (options to purchase common stock and warrants to
purchase common stock).

<TABLE>
<CAPTION>
December 31,
---------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------- ------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 636 $ 685 $ 9,202 $ 2,100 $ 3,170 $ 12,349
Working capital......... 982 783 8,554 904 1,471 11,864
Total assets............ 2,128 2,815 12,038 3,993 7,510 18,379
Redeemable convertible
preferred stock........ 4,501 7,918 24,203 24,209 31,765 46,057
Total stockholders'
deficit................ (1,119) (6,261) (14,736) (22,668) (29,500) (33,167)
</TABLE>

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations
should be read together with the financial statements and related notes that
are included elsewhere in this prospectus. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under "Risk Factors" or in
other parts of this prospectus.

Overview

We provide proprietary technologies for embedded test that enable the more
efficient design and manufacture of complex semiconductors. Our embedded test
solution allows integrated circuit designers to embed into a semiconductor
design test functionality that can be used during semiconductor production and
throughout the useful life of the chip. We incorporated in July 1992 and
engaged principally in research and development activities through 1994. We
first generated meaningful commercial revenues from the license of our initial
embedded test product in 1995. Although our revenues from licenses of our
embedded test solutions increased significantly since the beginning of 1999, we
experienced net losses in each period since inception, and, as of June 30,
2000, we had an accumulated deficit of $35.6 million.

We derive our revenues primarily from licenses of our intellectual property
and software. Our licenses typically have terms of one, two or three years. Our
pricing depends upon a number of factors, including the type of intellectual
property, number and complexity of designs and number of design teams and their
locations. Some of our license agreements include a royalty feature under which
the customer pays us additional fees for each chip design they complete that
incorporates our technology. In the future, we anticipate that the majority of
our license agreements will include a royalty feature and that revenues from
royalties will increase. We also derive revenues from technology development
and design contracts and postcontract customer support.

From 1995 to 1998, most of our customers were large systems companies, such
as Sun Microsystems, Inc., Hughes Space and Communications Company and Nortel
Networks Corporation, that used our technology in their application specific
integrated circuits as part of system development and diagnostics. Beginning in
1998, we expanded our customer base to include semiconductor companies that use
our technology for complex chip development and testing. We license our
intellectual property and software through a direct sales force in the U.S. and
Europe, and through a distributor in Japan and sales representatives in
Singapore, Korea and Taiwan.

We recognize revenues in accordance with the provisions of AICPA Statement of
Position 97-2, "Software Revenue Recognition" as amended by Statement of
Position 98-4 and Statement of Position 98-9. We recognize the full amount of
license fees upon shipment only when there is persuasive evidence of an
arrangement, shipment has occurred, the fee is fixed or determinable, and
collectibility of the sales proceeds is considered probable. When multiple
elements exist and where vendor-specific objective evidence of the fair value
of undelivered elements such as postcontract customer support exists, we apply
the residual method of accounting to the undelivered elements. When vendor-
specific objective evidence of the fair value of the undelivered element cannot
be established, and the undelivered element is postcontract customer support,
all related revenue is recognized ratably over the term of our postcontract
customer support obligations. As a result of this policy, because we are
generally unable to establish vendor-specific objective evidence of the
undelivered elements with respect to our licenses of one or two year terms, we
typically recognize the revenue from one and two year licenses ratably over the
license term. We also recognize the maintenance elements of these contracts
ratably over the period of the maintenance contract. Engineering service
revenues are generally recognized on a percentage of completion basis.

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<PAGE>

Cost of revenues consists of shipping, royalties paid to third party vendors,
and compensation and related costs associated with providing maintenance and
professional services. To the extent that our revenues increase, we expect cost
of revenues to decline as a percentage of revenues as fixed costs are allocated
over a higher revenue base.

Research and development expenses consist primarily of compensation and
related costs for personnel. All research and development costs are expensed as
incurred. We believe that a significant level of research and development
expenses will be required to be competitive in the future.

Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, marketing programs, public relations,
promotional materials, travel and related trade show expenses. We anticipate
that our sales and marketing expenses will increase in absolute dollars as we
expand our sales and marketing efforts.

General and administrative expenses consist primarily of compensation and
related costs for general management, information technology, finance and
accounting personnel, professional services and related fees and expenses. We
expect that general and administrative expenses will increase as we hire
additional personnel and incur costs related to the anticipated growth of our
business, our operation as a public company and improvements to our information
technology infrastructure.

In connection with the grant of stock options in 1998, 1999 and the first six
months of 2000, we recorded an aggregate of $4.0 million in deferred stock-
based compensation within stockholders' equity. These options were considered
compensatory because the deemed fair value was greater than the exercise prices
determined by the board of directors on the date of grant. As of June 30, 2000,
we had an aggregate of $2.7 million of deferred stock-based compensation
remaining to be amortized. This deferred stock-based compensation balance will
be amortized as follows: $879,000 during the remainder of 2000; $993,000 during
2001; $532,000 during 2002; $254,000 during 2003; and $65,000 during 2004 . We
anticipate that we will record additional stock-based compensation expense
related to options granted subsequent to June 30, 2000. We are amortizing the
deferred compensation on an accelerated basis over the vesting period of the
related options, which is generally four years. The amount of stock-based
compensation amortization actually recognized in future periods could decrease
if options for which accrued but unvested compensation has been recorded are
forfeited.

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Statements of Operations

The following table shows the percentage relationships of the listed items
from our consolidated statements of operations, as a percentage of revenues for
the periods indicated.

<TABLE>
<CAPTION>
Six Months
Years Ended Ended
December 31, June 30,
------------------ -------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues.................................. 100 % 100 % 100 % 100 % 100 %
Costs and expenses:
Cost of revenues........................ 66 34 25 31 28
Research and development................ 101 145 83 112 55
Sales and marketing..................... 108 145 99 120 79
General and administrative.............. 38 50 38 40 28
Amortization of deferred stock
compensation........................... 0 7 7 9 16
---- ---- ---- ----- -----
Total costs and expenses.............. 313 381 252 312 206
---- ---- ---- ----- -----
Total operating loss...................... (213) (281) (152) (212) (106)
Interest income........................... 7 9 3 4 5
Other income (expense), net............... -- 1 -- (2) (1)
---- ---- ---- ----- -----
Net loss.............................. (206)% (271)% (149)% (210)% (102)%
==== ==== ==== ===== =====
</TABLE>

Comparison of Six Months Ended June 30, 1999 and 2000

Revenues. Revenues for the six months ended June 30, 2000 were $4.3 million
compared to $2.1 million for the six months ended June 30, 1999, an increase of
$2.2 million, or 105%. License revenues accounted for $1.1 million of the
increase. Maintenance revenues increased $371,000 as a result of servicing an
expanding customer base, and professional service revenues increased by
$634,000 due to increases in consulting contracts.

Cost of Revenues. Cost of revenues for the six months ended June 30, 2000
increased to $1.2 million, or 28% of revenues, from $661,000, or 31% of
revenues, for the six months ended June 30, 1999. The decrease in cost of
revenues as a percentage of revenues was primarily due to increases in revenues
from licenses.

Research and Development. Research and development expenses remained constant
at $2.4 million, or 55% of revenues, for the six months ended June 30, 2000
compared to $2.4 million, or 112% of revenues, for the six months ended June
30, 1999.

Sales and Marketing. Sales and marketing expenses increased to $3.4 million,
or 79% of revenues, for the six months ended June 30, 2000 from $2.6 million,
or 120% of revenues, for the six months ended June 30, 1999. The increase in
expenses was due to an increase in sales and marketing personnel and higher
commissions associated with increased revenues.

General and Administrative. General and administrative expenses increased to
$1.2 million, or 28% of revenues, for the six months ended June 30, 2000 from
$858,000, or 40% of revenues, for the six months ended June 30, 1999. This
increase was primarily due to increases in personnel.

Interest Income. Interest income increased $139,000 to $230,000 for the six
months ended June 30, 2000 from $91,000 for the six months ended June 30, 1999.
The increase was primarily due to increased interest income from higher cash
and cash equivalent balances.

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Income Taxes. From inception through June 30, 2000, we incurred net losses
for federal and state tax purposes and have not recognized any tax benefits.

Comparison of Years Ended December 31, 1998 and 1999

Revenues. Revenues for the year ended December 31, 1999 were $5.4 million
compared to $3.0 million for the year ended December 31, 1998, an increase of
$2.4 million, or 80%. License revenues accounted for $1.9 million of the
increase. Maintenance revenues increased $172,000 as a result of servicing an
expanding customer base, and professional service revenues increased by
$320,000 due to increases in consulting contracts.

Cost of Revenues. Cost of revenues for the year ended December 31, 1999
increased to $1.3 million, or 25% of revenues, from $1.0 million, or 34% of
revenues, for the year ended December 31, 1998. The increase was primarily due
to subcontracting professional services to a third party vendor and an increase
in personnel-related expenses in support of higher maintenance activities.

Research and Development. Research and development expenses remained
relatively constant at $4.5 million, or 83% of revenues, for the year ended
December 31, 1999 compared to $4.4 million, or 145% of revenues, for the year
ended December 31, 1998.

Sales and Marketing. Sales and marketing expenses increased to $5.4 million,
or 99% of revenues, for the year ended December 31, 1999 from $4.4 million, or
145% of revenues, for the year ended December 31, 1998. The increase in
expenses was due to an increase in sales and marketing personnel, higher
commissions associated with increased revenues and higher expenses associated
with trade shows and advertising programs.

General and Administrative. General and administrative expenses increased to
$2.1 million, or 38% of revenues, for the year ended December 31, 1999 from
$1.5 million, or 50% of revenues, for the year ended December 31, 1998. The
increase was primarily due to higher payroll and related expenses and an
increase in professional services fees.

Interest Income. Interest income decreased $105,000 to $155,000 for the year
ended December 31, 1999 from $260,000 for the year ended December 31, 1998. The
decrease was primarily due to decreased interest income from reduced short-term
investments.

Income Taxes. From inception through December 31, 1999, we incurred net
losses for federal and state tax purposes and have not recognized any tax
provisions or benefits. As of December 31, 1999, we had approximately $19.4
million of federal and $7.7 million of state net operating loss carryforwards
available to offset future taxable income which expire through 2014 if not
utilized. Under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that we may use in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period.

Comparison of Years Ended December 31, 1997 and 1998

Revenues. Revenues for the year ended December 31, 1998 were $3.0 million
compared to $4.2 million for the year ended December 31, 1997. In 1997, we
completed government contracts totaling $1.2 million. We did not have any
revenues from government contracts in 1998. Total revenues from licenses,
maintenance and professional services remained relatively constant between the
two years.

Cost of Revenues. Cost of revenues for the year ended December 31, 1998 was
$1.0 million, or 34% of revenues, compared to $2.8 million, or 66% of revenues,
for the year ended December 31, 1997. In 1998,

22
<PAGE>

we did not incur costs for government contracts, and we reduced personnel and
related expenses for maintenance activities to be better aligned with the
revenue activities.

Research and Development. Research and development expenses remained
relatively constant to $4.4 million, or 145% of revenues, for the year ended
December 31, 1998 from $4.3 million, or 101% of revenues, for the year ended
December 31, 1997. In 1998, we maintained our personnel and related expenses at
approximately the same level as the prior year.

Sales and Marketing. Sales and marketing expenses remained relatively
constant at $4.4 million, or 145% of revenues, for the year ended December 31,
1998 as compared to $4.6 million, or 108% of revenues, for the year ended
December 31, 1997. Overall personnel and related expenses remained relatively
constant for the year while advertising expenses decreased.

General and Administrative. General and administrative expenses decreased
$90,000 to $1.5 million, or 50% of revenues, for the year ended December 31,
1998 from $1.6 million, or 38% of revenues, for the year ended December 31,
1997.

Interest Income. Interest income decreased $46,000 to $260,000 for the year
ended December 31, 1998 from $306,000 for the year ended December 31, 1997. The
decrease was primarily due to decreased interest income on short-term
investments.

Income Taxes. From inception through December 31, 1998, we incurred net
losses for federal and state tax purposes and have not recognized any tax
provisions or benefits.

Seasonality

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

Liquidity and Capital Resources

Since our inception, we have financed our operations through the sale of
equity securities and from revenues generated from operations. We have received
a total of approximately $46.9 million from private offerings of our equity
securities and an additional $363,000 from the exercise of stock options. As of
June 30, 2000, we had $12.3 million in cash and cash equivalents.

Cash used in operating activities was $2.7 million for the six months ended
June 30, 2000, $7.0 million in 1999, $7.0 million in 1998 and $7.2 million in
1997. Cash used in operating activities in the six months ended June 30, 2000
reflected a net loss of $4.4 million, partially offset by non-cash charges, a
decrease in accounts receivable and an increase in accounts payable. In 1999,
cash used in operating activities reflected a net loss of $8.1 million,
partially offset by non-cash charges, increases in accounts receivable of $2.4
million, deferred revenue of $1.9 million and accrued liabilities of $950,000.
In 1998, cash used in operating activities reflected a net loss of $8.2
million, partially offset by non-cash charges and a decrease in receivables. In
1997, cash used in operating activities reflected a loss of $8.7 million,
partially offset by non-cash charges and increases in deferred revenues and
accrued liabilities.

Cash used in investing activities was $2.4 million for the six months ended
June 30, 2000, $386,000 in 1999, $97,000 in 1998 and $779,000 in 1997. Cash
used in investing activities in the six months ended June 30, 2000 was
primarily due to the purchase of $2.0 million of government securities and the
purchase of computer hardware, software and other equipment. Cash used in
investing activities in 1999 and 1998 was primarily due to the purchase of
computer hardware, software and other equipment. In 1997, cash used in

23
<PAGE>

investing activities was primarily due to the purchase of computer equipment
and the completion of facility expansion.

Cash provided by financing activities was $14.3 million for the six months
ended June 30, 2000, $8.5 million in 1999, $62,000 in 1998 and $16.5 million in
1997. Cash provided by financing activities in the six months ended June 30,
2000 was primarily related to the sale of our Series I convertible preferred
stock. Cash provided by financing activities in 1999 was primarily due to net
proceeds received from the sale of our Series G and Series H convertible
preferred stock. Cash provided by financing activities in 1997 was primarily
related to net proceeds received from the sale of Series F convertible
preferred stock.

We expect to experience significant growth in our operating expenses,
particularly in research and development and sales and marketing expenses, for
the foreseeable future in order to execute our business strategy. As a result,
we anticipate that operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources. In addition, we may
utilize cash resources to fund acquisitions of, or investments in,
complementary businesses, technologies or product lines.

We believe that our existing cash and cash equivalents, together with the net
proceeds from this offering, will be sufficient to meet our anticipated cash
needs for at least the next 12 months. If our capital resources are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity securities or debt securities or obtain debt financing. The
sale of additional equity securities or convertible debt securities would
result in additional dilution to our stockholders. Additional debt would result
in increased expenses and could result in covenants that would restrict our
operations. We have not made arrangements to obtain additional financing and
there is no assurance that financing, if required, will be available in amounts
or on terms acceptable to us, if at all.

From time to time, we may evaluate acquisitions of businesses, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of equity securities that may result in
further dilution to existing stockholders.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging contracts. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. The Company will adopt SFAS No. 133 in 2001. Currently the Company does
not hold derivative instruments or engage in hedging activities.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB
101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In March
2000 the SEC issued SAB No. 101A to defer for one quarter, and in June 2000
issued SAB 101B to defer for an additional two quarters, the effective date of
implementing SAB 101, with earlier application encouraged. We are required to
adopt SAB 101 in the fourth quarter of 2000. We do not expect the adoption of
SAB 101 to have a material effect on our financial position or results of
operations.

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<PAGE>

(a) the definition of employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
FIN 44 covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying FIN 44 are recognized on a prospective basis from July 1, 2000. We
adopted the provisions of FIN 44 as of the required effective dates.

Quantitative and Qualitative Disclosures About Market Risk

Substantially all of our revenues are earned in U.S. dollars. Operating
expenses incurred by our foreign subsidiaries are denominated in local
currencies. Accordingly, we are subject to exposure from movements in foreign
currency exchange rates. To date, the effect of changes in foreign currency
exchange rates on our financial position and operating results have not been
material. We currently do not use financial instruments to hedge foreign
currency risks. We intend to assess the use of financial instruments to hedge
currency exposures on an ongoing basis.

25
<PAGE>

BUSINESS

Overview

Industry Background

Complex semiconductor designs are critical components of products that are
fueling a wide variety of high growth markets, including wireless, broadband
transport, Internet access, computing and consumer electronics. Improved
communications services and remote access have accelerated the demand for
communications access devices such as web enabled personal digital assistants
and pagers, networking products such as routers, servers and switches, and
wireless products such as wireless handsets and base stations. Dataquest
forecasts that one of the principal drivers of growth in the semiconductor
industry during the next several years will be increased sales of
semiconductors for these products. Dataquest estimates that high growth
segments of the semiconductor market, such as chips for applications including
digital cellular devices, local area network switches and routers and digital
subscriber line equipment, will grow from an aggregate of $20.6 billion in 1999
to $45.7 billion in 2003, representing a compound annual growth rate of 22%.

The Continuing Evolution of Semiconductors

Advancements in semiconductor design, manufacturing, assembly and test
technologies over the past 30 years have enabled semiconductor providers to
double the number of transistors on a chip approximately every 18 months, while
improving performance and reducing manufacturing costs. In addition, recent
advancements have enabled the integration of analog, digital and memory
functions onto a single semiconductor design, resulting in a complex, system-
on-a-chip. A system-on-a-chip improves system performance and reduces part
count, resulting in lower power consumption, lower cost and smaller size of the
end product. Moreover, the system-on-a-chip often is designed in functional
blocks that can be reused in future semiconductor designs. By creating these
functional blocks, integrated circuit designers can increase chip complexity
while reducing their time to market and improving their return on invested
capital by spreading their research and development costs over a greater number
of semiconductor designs. Dataquest

26
<PAGE>

estimates that worldwide system-on-a-chip revenues will grow from $9.5 billion
in 1998 to $47.3 billion in 2003, representing a compound annual growth rate of
38%.

Typical measures of complexity of a semiconductor design are the number of
functional groups of transistors, commonly referred to as gates, the number of
pins, the operating frequency and the presence of multiple functions. Complex
semiconductors frequently have one million gates or more, pin count in excess
of 300, operating frequency in excess of 100 megahertz, multiple clock domains
and multiple functions, including processor cores, memory and analog blocks.
Delivering these complex semiconductors will require continued advances in
semiconductor design, manufacturing, assembly and testing technologies.

The Disaggregation of the Semiconductor Industry

Historically, most semiconductor companies designed, manufactured, assembled
and tested their semiconductors in-house using proprietary equipment and tools.
As the cost of designing and manufacturing increasingly complex semiconductor
chips has increased, the semiconductor industry has become disaggregated into a
number of smaller industries, each concentrating on a particular aspect of
semiconductor production. These industries are much more narrowly focused than
the traditional semiconductor companies and as a result are also highly
efficient. These industries include the manufacturing equipment industry, the
electronic design automation industry, the foundry industry and the test,
assembly and packaging industry. Each of these industries within the overall
semiconductor industry faces its own significant challenges as semiconductor
complexity continues to increase and average selling price decreases cause
margins to continue to be under pressure. While each of these industries may be
well positioned to manage their own challenges, there are instances of
significant overall challenges that cannot be solved by one industry alone. A
significant challenge facing several of these industries, and therefore the
semiconductor industry as a whole, is the impending limit of current
semiconductor test methodology.

The Limits of External Semiconductor Test

As semiconductors become more complex, several physical and economic limits
are beginning to impact the ability of the semiconductor industry to rely on
conventional external testing methods.

Physical Limits

The physical limits of external semiconductor test manifest themselves in
three distinct manners:

. Signal Delay and Degradation. Through a complicated set of cables and
fixtures, semiconductor test equipment sends and receives very high-speed
electrical signals to and from the chip under test. The electrical
signals experience delay and degradation as they pass through the cables
and fixtures, and this delay and degradation affects the speed and
accuracy of the signals. As long as the testing is conducted from outside
the semiconductor being tested, this delay and degradation cannot be
eliminated, which impacts the speed and accuracy of the test being
performed.

. Test Equipment Not Keeping Pace with Semiconductors. According to the
Semiconductor Industry Association's 1999 International Technology
Roadmap for Semiconductors, the operating speeds of semiconductors have
increased at a compound 30% per year for the last two decades.
Semiconductor test equipment, however, has only improved 12% per year
over that same time period. As semiconductors are getting faster and
faster, the equipment that tests them is simply unable to keep up.

. Test Equipment Technology is a Generation Behind the Integrated Circuits
Being Tested. Unlike most capital equipment used in the semiconductor
industry, semiconductor testers rely on the use of semiconductor
technology itself. Consequently, manufacturers of automated test
equipment must use the current generation of available semiconductor
technology to build equipment that will test the next generation of
integrated circuits. The result of this is that the test equipment often
lags behind the actual integrated circuits being tested by at least one
generation of technology.

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<PAGE>

Economic Limits

The semiconductor industry is also quickly approaching the economic limits of
the current semiconductor test methodology.

. External Test is Resource Intensive. Using traditional external testing
methodology, design and test engineers need to generate and debug large
test pattern databases to facilitate wafer probe and final test. This
activity is time consuming and susceptible to software error. Up to six
months is typical for this activity, and changes in the test program,
which are often required as the process matures, can be cumbersome.

. Slower Time-to-Market. Current test methodology involves numerous time-
consuming engineering efforts at different steps throughout the design
and manufacturing process, creating a barrier to rapid time-to-market for
complex semiconductors. Even slight delays in getting a complex
semiconductor to market can significantly reduce market penetration of
the semiconductor and the overall revenue opportunity associated with the
product.

. Declining Production Yields. Production yields represent the percentage
of good semiconductors resulting from the manufacturing process. Yields
are declining because the accuracy of the testers being used has failed
to keep pace with the increased speed and higher number of interfaces
found on complex semiconductors, which can result in rejection of good
chips. In its Roadmap, the Semiconductor Industry Association predicted
that due to the physical limits of external test, yields for complex
semiconductors would decline from 84% in 2001 to 73% in 2005.

. Increasing Test Equipment Costs. According to VSLI Research, the cost of
high-end semiconductor test equipment for the test of complex
semiconductors has increased at a 18% compound annual growth rate from
1994 to 1999 and is forecasted to increase from $3.78 million per tester
to $8.02 million per tester from 1999 to 2003, a 21% compound annual
growth rate. This rapid increase in cost is driven in large part by the
demand for more advanced equipment that tests systems-on-a-chip and
semiconductors with very high speeds.

While semiconductor design, manufacturing and assembly technology has
continued to evolve, resulting in more complex and less expensive
semiconductors, the semiconductor industry rapidly is approaching the physical
and economic limits of external semiconductor test. In its Roadmap, the
Semiconductor Industry Association predicts that the cost of test will actually
exceed the cost of fabrication by 2010. We believe that for high complexity
integrated circuit designs, many of our customers already face this problem.
Advances in test equipment alone can no longer enable the progression to higher
speed and system-on-a-chip devices. An innovative, comprehensive testing
solution which addresses all aspects of the semiconductor lifecycle is needed
in order to overcome the limits of external test and permit the continued
evolution of semiconductors.

The LogicVision Solution

We offer a comprehensive embedded test solution that can be used during every
stage of complex semiconductor production and throughout the useful life of the
semiconductor to overcome the limits of external test that arise as
semiconductors become more complex. Our proprietary technology enables
semiconductor companies to embed self-testers into a semiconductor design. Our
comprehensive solution addresses each key stage of a complex semiconductor's
life cycle, including: design; wafer-level testing, known as wafer probe;
reliability testing under varying environmental conditions, known as burn-in;
final test; system test; and in-field diagnostics. Our patented test
methodology enables complex semiconductors to be tested at their operating
speeds and more comprehensively than traditional external testing methods. Our
software automates the embedding of testers within semiconductors and is
designed to significantly reduce the need for creating time consuming and
costly traditional external test programs.

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<PAGE>

Our solution is designed to provide our customers with the following
benefits:

Enable faster and more powerful semiconductors. Our technology enables the
more efficient design and cost-effective manufacture of complex semiconductors
with higher performance levels, including higher speeds and increased
functionality, higher levels of integration and modular design methodology. Our
embedded test solution is able to test semiconductors at their operating speeds
and is also able to simultaneously test multiple functions, including logic,
memory, intellectual property cores and phase-locked-loops. Because our
solution can embed test modules within each functional block of a system-on-a-
chip, functions can be tested simultaneously and efficiently.

Reduce time-to-market. We have designed our solution not only to enable more
efficient design and cost-effective manufacture of complex semiconductors but
also to enable our customers to bring these semiconductors to market more
quickly. Semiconductor product life cycles have been shrinking due to rapid
technological change, thereby reducing the window of opportunity within which
each product can generate revenues. Our embedded test solution can reduce time-
to-market through each stage, including design, transition to manufacturing,
volume production ramp and system bring-up. Embedded test simplifies the
verification and debug of individual blocks, easing the transition from
manufacturing to test. In addition, our technology eliminates the need for
traditional, time-consuming, manual test program creation, enabling further
reductions in time-to-market.

Reduce overall manufacturing cost. Our solution can also significantly reduce
manufacturing costs by improving yields and by reducing test equipment cost,
the amount of time and expense involved in the development of software test
programs, and, frequently, test time. Our solution allows testing at the
semiconductor's operating speed, increasing test accuracy and improving yields
and quality. Our embedded test solution is also designed to decrease costs by
detecting a greater percentage of defective semiconductors at wafer probe,
prior to incurring unnecessary packaging and assembly costs. Embedded test
allows for more cost-effective and efficient testing by enabling simultaneous
testing of multiple functional blocks. Our solution also can extend the useful
life of existing test equipment by minimizing the requirements placed on the
external tester. By moving high complexity test functionality into the
integrated circuit, tests of next generation semiconductors can continue to be
performed on existing equipment, reducing the need for costly upgrades and new
equipment.

Enable system level test and field diagnostics. In addition to streamlining
test throughout the design and manufacturing process, our embedded test also
enables system level test and field diagnostics. As semiconductors are
incorporated into boards, systems and end products, initial customers and
downstream customers can use our embedded test solutions to develop, diagnose
and test their products. Once deployed in the field, our embedded test solution
enables system self-test and debug at installation and on a continuing basis
throughout the product's life. For example, some of our customers are using our
embedded test in application specific integrated circuit designs for field
testing and diagnostics.

Strategy

Our objective is to be the leading provider of embedded test solutions by
establishing our proprietary technology as the industry standard for complex
semiconductor designs. Key elements of our strategy include the following:

Continue to target customers in high-growth markets. We target companies in
industries that we believe represent our greatest revenue opportunities. We
intend to continue to focus our sales and marketing efforts on companies in
high-growth communications markets, such as wireless, broadband transport,
Internet access, computing and consumer electronics because these industries
are rapidly deploying complex semiconductors.

Drive continued adoption of our embedded test solution by working with
industry leaders. We intend to proliferate our intellectual property among
leading integrated device manufacturers, fabless companies

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<PAGE>

and systems companies. We focus on the leading companies in each of these
market segments because they tend to be influential in setting standards. We
have established customer relationships with leading integrated device
manufacturers such as Fujitsu Limited, LSI Logic Corporation, National
Semiconductor Corporation and Texas Instruments Incorporated, fabless
semiconductor companies such as S3 Incorporated and TranSwitch Corporation and
systems providers such as Cisco Systems, Inc., Ericsson, Hughes Space and
Communications Company, Lucent Technologies Inc., Nortel Networks Corporation
and Sun Microsystems, Inc. We focus considerable attention on systems providers
because their use of our technology can drive adoption down the supply chain,
by requiring their semiconductor suppliers to implement our solutions in their
products. We also target leading semiconductor providers as they can drive
adoption up the supply chain to their systems customers. We believe that by
targeting leaders in multiple key market segments, we can drive broad industry
acceptance of our solution.

Expand relationships with leading providers of complementary technologies. We
intend to strengthen and expand our relationships with complementary technology
providers in key design and manufacturing stages of semiconductor production.
By ensuring that our technologies are compatible with those offered by such
companies, we can increase customer acceptance of our solution. We are working
with complementary technology providers, including semiconductor design tool
vendors, such as Cadence Design Systems, Inc., Magma Design Automation, Inc.,
Model Technology, Inc. and Synopsys, Inc., semiconductor intellectual property
providers, such as Artisan Components, Inc. and Virage Logic Corporation, and
automated test equipment vendors, such as Credence Systems Corporation and
Teradyne, Inc., to provide a total solution for our customers. We are also
focusing on developing relationships with other critical manufacturing
technology and service providers, including emerging low cost automated test
equipment companies, system test companies, foundries and contract test and
assembly companies. We believe these industry relationships will help to
establish our technologies as the industry standard.

Extend our technology leadership position. We believe that we are the first
company to commercialize a reusable and portable embedded test solution that
enables integrated self-testing and diagnostics throughout a semiconductor's
entire life cycle. We believe our technology is a significant breakthrough that
will substantially change the way semiconductor providers approach design and
manufacturing. We plan to capitalize on our leadership in the embedded test
market by actively pursuing design wins with industry-leading customers. We
intend to continue to enhance our solution by adding more advanced and broader
self-testing and diagnostic capability.

Drive revenue growth through licenses and royalties. We believe that as our
technology becomes more widely accepted, revenue from royalties will increase.
We intend to charge a per design or per unit royalty depending on the
customer's business and requirements.

Technology

Embedded Test

We believe that the fundamental solution to the limits of semiconductor test
lies in embedded test technology. Our embedded test technology exploits
strategically placed proprietary circuit structures within an integrated
circuit to test and diagnose the chip at its intended operating speed.
Conventional test is performed solely with external equipment, while embedded
test is performed primarily using circuitry resident in the semiconductor
design. By embedding test circuit structures on the semiconductor itself, our
embedded test solution eliminates many of the key limitations associated with
conventional external testing. Our embedded test software automatically
analyzes the structure of complex circuits to determine requirements for at-
speed testing and diagnostics. Our embedded test technology creates and
integrates our proprietary circuits with the existing design functions to
address these requirements. Our technology also enables integrated circuit
debug, board and system level diagnostics, system bring-up and in-field testing
and diagnostics.

30
<PAGE>

Design Phase

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

. access management--necessary scan chains, shared isolation collars,
boundary scan and test points to enable access to any point within
complex designs;

. timing management--proprietary functionality for clock skew management,
multiple cycle paths and multiple frequencies;

. test signal generation and analysis--proprietary functionality created
for each design block to algorithmically generate and analyze circuit
test data; and

. external control--IEEE 1149.1 compliant test access port.

Manufacturing Phase

Because our embedded test circuits are incorporated in semiconductor designs,
they are manufactured as part of the semiconductor. Our embedded testers
facilitate at-speed test during wafer probe. Semiconductor devices that pass
wafer probe test are then packaged, and our embedded testers are used again for
final test. Our embedded test circuits are designed to be activated with simple
external test signals applied through the industry standard IEEE 1149.1 test
access port.

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

Debug and Diagnostic Functions. Our embedded test provides a number of
diagnostic modes to facilitate debug and diagnosis.

Implementation Technologies

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

. design automation algorithms and implementation for embedded test;

. hierarchical isolation, access and assembly technologies;

. embedded test design verification technologies;

. high-performance circuit fault simulation algorithms and automation
technologies;

. capture-by-domain for multiple-clock timing;

. at-speed, multi-frequency, multi-clock logic embedded test technology;

. fault-insertion technology for system diagnostics;

. at-speed, embedded and external memory test technologies;

. at-speed interconnect test technology; and

. test and measurement technologies for embedded phase-locked-loops.

31
<PAGE>

Products

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

Technology Products

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

Software Products

We provide a suite of highly integrated software products for embedded test
implementation on application specific integrated circuits and system-on-a-chip
designs. We provide design software that automatically analyzes the structure
of complex circuits to determine requirements for at-speed testing and
diagnostics. Our software creates and integrates our proprietary circuits with
the existing design circuits to address these requirements. We provide access
and control software for use during chip and system test program development
and manufacturing test. This enables user interaction with the embedded test
circuits to evaluate and diagnose chip- and board-level failures during
manufacturing. This includes pass-fail testing and basic failure diagnostics.

Product Offerings

We currently offer our embedded test circuits, design software and
manufacturing software products bundled together for each integrated circuit
function. Our key embedded test products and their capabilities are described
below.

<TABLE>
<CAPTION>
Products Applications
<C> <S>
ChiptestAssemble . Embedded test intellectual property for IEEE 1149.1 Test Access
Port and Boundary Scan functionality.
. Automates the integration and control of all embedded test
functions in a given integrated circuit.
. Can support up to 2048 scan chains and 30 embedded test
controllers per design.
. Includes manufacturing tools for integrated circuit and system
test and diagnosis of input/outputs.
-------------------------------------------------------------------------------------
IC Memory BIST . Provides intellectual property for flexible, area-optimized, at-
speed, memory embedded test functionality.
. Supports single and multiport SRAMs, DRAMs and ROMs.
. Supports any size memory manufacturable in given technology.
. Provides manufacturing tools for integrated circuit and system
test and diagnosis of embedded memories.
-------------------------------------------------------------------------------------
LogicBIST . Provides intellectual property for at-speed, multi-frequency
logic self-test and scan test functionality.
. Automates analysis, generation, assembly and verification of
logic test intellectual property.
. Supports high-speed multiple clock domains, including those in
excess of 100 megahertz, pipelining and multi-cycle paths.
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
Products Applications
<C> <S>
Embedded Logic Test . Embedded test intellectual property for
hierarchical, at-speed, embedded logic core test
functionality.
. Automates a complete, hierarchical methodology for
system-on-a-chip design and test.
. Supports design partitioning and core reuse for
concurrent engineering.
. Facilitates transportable embedded test for
functional block re-use.
-------------------------------------------------------------------------------
CoreTest . Provides intellectual property for direct test
access and isolation of legacy core functionality.
. Automates generation, assembly and verification of
legacy core test collars and buses.
. Supports a dedicated test bus per core and sharing
of input/output pins for test and diagnosis.
. Provides manufacturing tools for integrated circuit
test and diagnosis of legacy cores.
-------------------------------------------------------------------------------
PLL BIST . Embedded test intellectual property for accurate,
specification-driven test of phase-locked-loop
functionality.
. Automates generation, assembly and verification of
embedded test circuitry for phase-locked-loops.
. Supports measurement-based tests of jitter, loop-
gain and lock-range specifications.
. Measurement resolution to 0.125 of a gate delay.

-------------------------------------------------------------------------------

External Memory Test . Provides intellectual property for flexible, high-
speed, board-level memory module test functionality.
. Supports timing and algorithms for use with SRAMs,
DRAMs, SDRAMs and others.
. Automates generation, assembly and verification of
external memory embedded test controller.
. Includes manufacturing tools for system-level test
and diagnosis of board-level memories.

-------------------------------------------------------------------------------

At-Speed Interconnect . Provides intellectual property for at-speed, IEEE
Test 1149.1 compliant, board-level interconnect test
functionality.
. Supports at-speed interconnect testing using
existing low-speed, test patterns.
. Automates generation, integration and verification
of at-speed interconnect test intellectual property.
. Provides manufacturing tools for system-level test
and diagnosis of board-level interconnects.
</TABLE>

Services

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

Technology Development Contracts. As a part of our strategy to make embedded
test technology more applicable to custom designs, such as microprocessors, we
enter into time-limited development contracts with industry leaders for
specific projects. Our development contracts include developing new embedded

33
<PAGE>

test capabilities and appropriate modifications to our standard automation
software. These contracts help our customers and partners to rapidly adopt our
technologies.

Sales and Marketing

The majority of our sales are facilitated by a direct sales force. We have
sales offices located throughout major cities in the United States, including
San Jose, Los Angeles, San Diego, Dallas, Raleigh and Boston. Internationally
we have offices in Ottawa and the United Kingdom. Our sales in Asia are handled
by distributors or sales representatives in Japan, Taiwan, Korea and Singapore.
Field personnel consist of account managers who are responsible for all
business aspects of the customer relationship, field application engineers who
manage all the technical pre-sales issues and corporate application engineers
who support customers post sales. As of June 30, 2000, we had 29 employees
involved in sales and marketing.

The main goal of our sales force is to work with major systems and
semiconductor companies who have the expertise to implement our technology
today. We focus on leading companies because they are influential in setting
standards. Examples of these companies include Sun Microsystems, LSI Logic and
Motorola. We focus on developing customer relationships with companies in the
areas of cellular, wireline and satellite communications, computer servers and
graphics. Additionally, as systems companies use our technology, they often
require their component suppliers to supply semiconductors with embedded test
already designed in for their system use. In this way we can create both push
and pull demand for our technology.

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

Customers

We license our proprietary technologies and software products to companies in
key markets within the semiconductor and systems industries. Our customers
include application specific integrated circuit or system-on-a-chip designers
in system companies, fabless companies and integrated device manufacturers. The
following customers accounted for license, maintenance and technical service
revenues of more than $100,000 since the beginning of 1999:

<TABLE>
<CAPTION>
Integrated Device Manufacturers,
Fabless and Application Specific
Systems Companies Integrated Circuit Vendors
---------------------------------------- ----------------------------------------
<S> <C>
Alcatel Fujitsu Limited
Ascend Communications, Inc. Infineon Technologies AG
Cabletron Systems, Inc. Lara Networks, Inc.
Cisco Systems, Inc. Level One Communications, Inc.
Ericsson LSI Logic Corporation
Hal Computer Systems, Inc. National Semiconductor Corporation
Hughes Space and Communications Company NEC Corporation
Lucent Technologies Inc. S3 Incorporated
Motorola, Inc. Texas Instruments Incorporated
Nortel Networks Corporation TranSwitch Corporation
Raytheon Company
Seagate Technology, Inc.
Sharp Electronics Corporation
Sun Microsystems, Inc.
TRW, Inc.
</TABLE>

34
<PAGE>

Research and Development

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

As of July 1, 2000 our engineering team comprised 37 employees, 21 of whom
have advanced degrees, and most of whom have extensive industry experience in
one or more of the aforementioned areas of expertise. Our engineering team is
organized into three development groups, each focusing on one of these three
areas of expertise, and each contributing the related portion to the bundled
product offerings. The development groups are:

. Integrated Circuit Design--Our integrated circuit design team focuses on
the overall embedded test intellectual property architecture and its
implementation and verification.

. Design Software--Our design software team focuses on developing the
software that analyzes, generates, assembles, and verifies an integrated
circuit design with embedded test.

. Manufacturing Software--Our manufacturing software team focuses on
developing software for enabling test and diagnostic in manufacturing.

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

Competition

The semiconductor and system industries are highly competitive and
characterized by rapidly changing technology. The market for embedded test is
still evolving and we expect competition to continue to emerge.

Design

In the design phase of product development, we face competition from
traditional broad line electronic design automation providers like Mentor
Graphics and Synopsys, and from smaller test tool providers like the Fluence
subsidiary of Credence, Genesis and Syntest. These companies provide competing
design-for- test technologies and some level of built-in self-test. We also
face competition from methodologies developed internally at large integrated
device manufacturers and systems companies, like IBM and Lucent.

Manufacturing

Because embedded test has the potential to impact the external test market,
we believe traditional hardware tester manufacturers like Advantest, Agilent,
Credence, Schlumberger Limited and Teradyne all view embedded test and
LogicVision as competition. Many of these companies are devoting significant
resources to developing external solutions to testing complex integrated
circuits, including working closely with some of our current and potential
customers. Their efforts may result in the development of solutions that
compete with our embedded test solution.

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

35
<PAGE>

Intellectual Property

We have a large portfolio of intellectual property covering the areas of test
and diagnosis of logic, memory and mixed-signal circuits with focus on
embedded, at-speed and parametric aspects. Both design and manufacturing
methods are covered. Part of this intellectual property is a portfolio of 6
U.S. patents and 13 pending U.S. patent applications for technology that we
have developed, as of June 30, 2000, and two patents we have licensed from
Nortel Networks. After 2002, we will not be required to make any royalty
payments on these Nortel patents. We also have two issued Canadian patents, two
allowed Canadian applications and five pending Canadian applications. Our
patents, and the Nortel patents we license, cover technology intended to
address problems considered fundamental to embedded test, such as timing, power
consumption and parametric testing.

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

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

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. This often results in significant and often protracted and
expensive litigation. From time to time third parties may notify us of
intellectual property infringement claims. If it is necessary or desirable, we
may seek licenses under these third party patents or intellectual property
rights. However, we cannot be sure that third parties will offer licenses to us
or that we will find acceptable the terms of any offered licenses.

If we fail to obtain a license from a third party for proprietary
technologies that we use, we could incur substantial liabilities, or suspend
sales of our products or our use of processes requiring the technologies.
Litigation could cause us to incur significant expenses, harm our sales of the
challenged technologies or products and divert the efforts of our technical and
management personnel, whether or not a court decides the litigation is in our
favor. In the event we receive an adverse result in any litigation, we could be
required to pay substantial damages, cease sale of infringing products, expend
significant resources to develop or acquire non-infringing technology and
discontinue the use of processes requiring the infringing technology or obtain
licenses to the infringing technology. We may not be successful in the
development or acquisition of intellectual property, or the necessary licenses
may not be available under reasonable terms, and any development, acquisition
or license could require us to expend a substantial amount of time and other
resources. Any of these developments would harm our business.

Employees

As of June 30, 2000, we employed 81 full time employees, including 29 in
sales and marketing, six in customer service and operations, 34 in research and
development, and 12 in finance and administration. Our employees are not
covered by any collective bargaining agreements, and we consider our relations
with our employees to be good.

36
<PAGE>

Properties

Our principal executive offices are currently located in San Jose,
California, where we lease approximately 17,690 square feet. We believe that
these offices will be adequate to meet our requirements for the next
twelve months. We have research and development offices in Montreal and Ottawa,
Canada. We have domestic sales offices in Redondo Beach, California; Solana
Beach, California; Cary, North Carolina; Franklin, Massachusetts; and Addison,
Texas. Our European headquarters are in the United Kingdom.

Legal Proceedings

From time to time, we may be involved in litigation relating to claims
arising out of the ordinary course of business. As of the date of this
prospectus, there are no material legal proceedings pending or, to our
knowledge, threatened against us.

37
<PAGE>

MANAGEMENT

Executive Officers and Directors

The following table shows information about our executive officers and
directors as of August 11, 2000:

<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Vinod K. Agarwal, 48
Ph.D................... President, Chief Executive Officer, Director and Secretary
John H. Barnet.......... 65 Vice President of Finance and Chief Financial Officer
Michael Howells......... 38 Vice President of Engineering
Mukesh J. Mowji......... 42 Vice President of Manufacturing Business
Benoit Nadeau-Dostie, 43
Ph.D................... Chief Scientist
Dale Olstinske.......... 45 Vice President of Sales
Rodger Sykes, Ph.D...... 44 Vice President of Marketing and Business Development
Navindra Jain, 49
Ph.D.(1)............... Chairman of the Board
Richard C. Black(1)(2).. 32 Director
D. James Guzy(2)........ 64 Director
David L. Sulman......... 57 Director
Jon D. Tompkins(2)...... 60 Director
</TABLE>
--------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee

Vinod K. Agarwal, Ph.D., founded LogicVision in 1992 and has served as our
President, Chief Executive Officer and a director since 1992. Prior to founding
LogicVision, Dr. Agarwal was the Nortel/NSERC Industrial Research Chair
Professor at McGill University in Montreal and served as a consultant to Nortel
Networks Corporation, Hitachi, Ltd. and Eastman Kodak Company for developing
their design-for-test/embedded test environment. In 1992, Dr. Agarwal was
elected to be a Fellow of The Institute of Electrical and Electronics
Engineers, Inc., or IEEE, for his contributions to built-in self-test and
fault-tolerant computing. Dr. Agarwal is a co-inventor of several U.S. patents
on embedded test technology. He holds a B.E. in Electronics from Birla
Institute of Technology and Science, Pilani, India, an M.S. in Electrical
Engineering from University of Pittsburgh and a Ph.D. in Electrical Engineering
from Johns Hopkins University.

John H. Barnet has served as Vice President of Finance and Chief Financial
Officer since September 1999, after having served as a financial consultant
since January 1999. From 1996 to 1998, Mr. Barnet was a member of the Office of
the President, Vice President of Finance and Administrations, and Chief
Financial Officer of ESS Technology, Inc., a fabless semiconductor company.
From 1992 to 1996, Mr. Barnet served as Executive Vice President, Finance and
Chief Financial Officer for Trimble Navigation, Ltd., a manufacturer of global
positioning satellite instruments. Prior to 1992, he held Vice President of
Finance and Chief Financial Officer positions with Centex Telemanagement, Inc.,
Philips-Signetics Corporation, Teledyne Semiconductor and Acurex Corporation.
Mr. Barnet holds a B.S. in Industrial Engineering from Stanford University and
an M.B.A. from Columbia University.

Michael C. Howells has served as our Vice President of Engineering since 1994
and joined us as our Director of Marketing in 1993. Prior to joining
LogicVision, Mr. Howells was a Senior Product Marketing Engineer with
Mitsubishi Electronics America in their application specific integrated circuit
group. While at Mitsubishi, Mr. Howells was involved in marketing deep sub-
micron application specific integrated circuits, as well as development of
related design flows and electronic design automation tools, and was also
responsible for Mitsubishi's Ottawa application specific integrated circuit
design center. He holds a B.Eng. and an M.Eng. in Electrical Engineering from
McGill University.

Mukesh J. Mowji has served as our Vice President of Manufacturing Business
since August 2000, responsible for business development and marketing in
semiconductor manufacturing. From 1988 to 2000

38
<PAGE>

Mr. Mowji held various senior positions in marketing, sales, and field
operations at LTX Corporation, and, from 1979 to 1988, Mr. Mowji held various
senior positions in engineering, operations and sales with the test equipment
division of Schlumberger Limited's test equipment business. He holds a B.S. in
Electrical Engineering from San Francisco State University.

Benoit Nadeau-Dostie, Ph.D., has served as our Chief Scientist since 1994. He
was the primary architect of Bell-Northern Research and Northern Telecom's, now
Nortel Networks, design-for-test/embedded test program that resulted in several
key patents related to built-in self-test. He has been published in numerous
journals, magazines and conference proceedings, specifically in the areas of
memory, logic and printed circuit board embedded test. Dr. Nadeau-Dostie is an
active member of several conference program committees, and is on the editorial
board of Design & Test of Computers magazine. He is also a senior member of the
IEEE 1149.1 Standard Working Group. He was elected a senior member of the IEEE
based on his contributions in embedded test and design-for-test. Dr. Nadeau-
Dostie has been co-inventor of several of our issued patents and the editor of
Design for At-Speed Test, Diagnosis and Measurement. He holds a B.S. and a
Ph.D. from Universite de Sherbrooke.

Dale S. Olstinske has served as our Vice President of Sales since April 1998.
He has directed and managed worldwide sales and marketing efforts for
electronics companies in areas of design tools, electronic components, system-
level products and application specific integrated circuit foundry services.
Prior to joining LogicVision, Mr. Olstinske held the position of Executive Vice
President at Frequency Technology, Inc. from August 1996 to April 1998. From
February 1991 to August 1996, he held senior sales management and general
management positions at LSI Logic Corporation. Prior to that, he held senior
sales management and general management positions at Martan, Inc., Ready
Systems and Intel Corporation. He holds a B.S. in Electrical and Computer
Engineering from the University of Wisconsin.

Rodger W. Sykes has served as our Vice President of Marketing and Business
Development since July 1999. Prior to joining LogicVision, Dr. Sykes was the
Marketing and Business Development Director for Philips Semiconductors, a
division of Royal Dutch Philips, in the Windows Systems IC business unit from
April 1997 to June 1999. While at Philips, he also managed the Paradise
Multimedia business unit and prior to that was a lead member of the
semiconductor strategic executive group. Prior to serving at Philips, Dr. Sykes
spent 13 years at Texas Instruments Incorporated in Europe and the U.S. in
various technical, marketing and business management roles in the ASIC sector.
He holds a B.S. in Electronics and Applied Physics and a Ph.D. in Semiconductor
Device Physics from Durham University, U.K.

Navindra Jain, Ph.D., has served on our Board of Directors since our
inception in 1992 and has been Chairman of the Board since January 1996. In
1982, Dr. Jain co-founded Excelan Inc., a manufacturer of networking products,
and was its Vice President of Engineering until it was acquired by Novell, Inc.
in 1989. At Novell he served as Vice President and General Manager of the
Internetworking and Network Management Divisions. In 1993 Dr. Jain resigned to
pursue his personal interests, including investments in high-tech industries.
Dr. Jain holds a B.S. in Electrical Engineering from Birla Institute of
Technology and Science, Pilani, India and a Ph.D. in Electrical Engineering
from Carnegie Mellon University.

Richard C. Black has served on our Board of Directors since August 1994. Mr.
Black is a Vice President with Helix Investments (Canada), Inc. and has been
with Helix since May 1991. He also serves on the board of directors of Open
Text Corporation, CRS Robotics Corporation and numerous private companies and
on the advisory boards of Royal Bank Capital Partners and the Longtitude Fund
L.P. Mr. Black holds an H.B.A. from the School of Business at the University of
Western Ontario.

D. James Guzy has served on our Board of Directors since February 1999.
Mr. Guzy has served on the board of directors of Intel Corporation since 1969
and as President of the Arbor Company, a limited partnership engaged in the
electronics and computer industry, since 1969. Mr. Guzy also serves on the
board of directors of Cirrus Logic, Inc., Micro Component Technology, Inc.,
Novellus Systems, Inc.,

39
<PAGE>

Davis Selected Group of Mutual Funds, Alliance Capital Management Technology
Fund and PLX Technology. Mr. Guzy holds a B.S. from the University of Minnesota
and an M.S. from Stanford University.

David L. Sulman has served on our Board of Directors since July 1999. Mr.
Sulman is a Senior Vice President of Teradyne, Inc., a supplier of automatic
test equipment and software for the electronics and telecommunications
industries. Since joining Teradyne as a design engineer in 1974, he has led the
initial development of the assembly test division's L200 board-test product
line and the engineering effort behind Teradyne's A5/Catalyst family of mixed-
signal and system-on-a-chip tests. He served as General Manager of the
Industrial/Consumer Division from 1992 to March 2000. Mr. Sulman holds a B.A.
from Yale University and an M.S. in Electrical Engineering from the
Massachusetts Institute of Technology.

Jon D. Tompkins has served on our Board of Directors since July 1999. In June
1999, Mr. Tompkins retired as Chairman of the Board of KLA-Tencor Corporation,
a supplier of process diagnostic system and yield management solutions to the
semiconductor and data storage industries, where he also served as Chief
Executive Officer from May 1997 to June 1998. Prior to the merger of KLA and
Tencor, Mr. Tompkins served as Chairman of the Board, Chief Executive Officer
and President of Tencor Instruments from April 1991 to May 1997. Mr. Tompkins
serves on the board of directors of KLA-Tencor, Credence Systems Corporation,
Cymer, Inc. and Electro Scientific Industries, Inc. He also served as Chairman
of the Board of SEMI/SEMATECH from June 1998 to June 1999. Mr. Tompkins holds a
B.S. in Electrical Engineering from the University of Washington and an M.B.A.
from Stanford University.

Board of Directors

We currently have authorized seven directors. All directors are elected to
hold office until the next annual meeting of our stockholders and until their
successors have been elected. There are no family relationships among any of
our directors or executive officers.

Board Committees

Our board of directors has a compensation and an audit committee. Our
compensation committee is responsible for, among other things, determining
salaries, incentives and other forms of compensation for directors, officers
and employees and administering various incentive compensation and benefit
plans. Messrs. Black and Jain are the current members of our compensation
committee. Our audit committee reviews our annual audit and meets with our
independent auditors to review our internal accounting procedures and financial
management practices. Messrs. Black, Guzy and Tompkins are the current members
of our audit committee.

Director Compensation

Except as we otherwise describe below, we have not paid any cash compensation
to members of our board of directors for their services as directors.

We reimburse the directors for reasonable expenses in connection with
attendance at board and committee meetings. Directors also are eligible to
receive stock options under our 1994 and 2000 stock plans.

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other entity, nor has any interlocking relationship existed in the past.

40
<PAGE>

Executive Compensation

The following table summarizes all compensation paid to our chief executive
officer and to our four other most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000, for services rendered in all
capacities to us during the fiscal year ended December 31, 1999.

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------ -----------------
Salary Shares Underlying
Name and Position(s) ($) Bonus ($) Options (#)
-------------------- -------- --------- -----------------
<S> <C> <C> <C>
Vinod K. Agarwal, Ph.D. .................. $239,000 $50,000 150,000
Chief Executive Officer and President

John H. Barnet............................ 163,333 -- 245,000
Vice President of Finance and Chief
Financial Officer(1)

Michael Howells........................... 165,000 30,000 75,000
Vice President of Engineering

Dale Olstinske............................ 204,628 10,000 --
Vice President of Sales(2)
</TABLE>
--------
(1) Includes amounts earned as a consultant. Mr. Barnet commenced employment in
September 1999.
(2) Includes sales commissions.

Stock Options

The following tables set forth certain information for the fiscal year ended
December 31, 1999 with respect to stock options granted to and exercised by the
individuals named in the Summary Compensation Table above. The percentage of
total options granted is based on an aggregate of 1,618,750 options granted in
1999.

Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Shares Options Exercise Appreciation For
Underlying Granted to Price Option Term(3)
Options Employees Per Expiration ---------------------
Name Granted in 1999 Share(1) Date(2) 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Vinod K. Agarwal,
Ph.D.(4)............... 150,000 9.3% $0.88 10/5/2009 $ $
John H. Barnet(5)....... 25,000 1.5 0.88 6/11/2009
200,000 12.4 0.88 8/31/2009
20,000 1.2 0.88 8/31/2009
Michael Howells(6)...... 75,000 4.6 0.88 10/5/2009
Dale Olstinske.......... -- -- -- --
</TABLE>
--------
(1) The exercise price for each grant is equal to 100% of the fair market value
of our common stock on the date of grant.
(2) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(3) The 5% and 10% assumed rates of appreciation are suggested by the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price. There can be no assurance that
any of the values reflected in the table will be achieved.
(4) The options will vest in full on October 6, 2004, but will vest earlier as
to 150,000 shares in the event we achieve specified financial performance
goals.

41
<PAGE>

(5) Options to purchase 37,500 shares are vested. Options to purchase 200,000
shares vest as to 12,500 shares every three months beginning August 31,
1999. The remaining options to purchase 20,000 shares vest in full at
September 1, 2004, subject to accelerated vesting in full upon achieving
financing for us.
(6) The options granted vest as to 9,375 shares every six months beginning
October 5, 1999.

Aggregated Option Exercises in 1999 and Year-End Option Values

The value realized is based on the difference between the fair market value
of the common stock on December 31, 1999, and the exercise price of the option,
multiplied by the number of shares issuable upon exercise of the option.

<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End at Fiscal Year-End
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Vinod K. Agarwal,
Ph.D. ................. -- $ -- 1,000,000/150,000
John H. Barnet.......... 25,000 -- 12,500/207,500
Michael Howells......... -- -- 25,000/75,000
Dale Olstinske.......... -- -- 80,000/120,000
</TABLE>

Stock Plans

1994 Flexible Stock Incentive Plan

Our 1994 Stock Plan provides for the granting of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, to employees, officers and employee directors and the granting of
nonstatutory stock options and stock purchase rights to employees, officers,
directors, including non-employee directors, and consultants. As of June 30,
2000, shares of common stock have been issued upon exercise of options
granted under our 1994 Stock Plan and options to purchase shares of common
stock were outstanding. Options granted under the 1994 Stock Plan generally
become exercisable at the rate of 1/4 of the total number of shares subject to
the options twelve months after the vesting commencement date, and 1/8 of the
total number of shares subject to the options every six months thereafter. The
1994 Stock Plan provides that in the event we are involved in a merger or sale
of assets following which our stockholders would hold less than 50% of the
voting power of the surviving or acquiring corporation, we will make
appropriate adjustments in order to preserve the benefits of options
outstanding under the plan. Options granted under the 1994 Stock Plan terminate
immediately prior to the effective date of such a merger or asset sale, unless
the surviving or acquiring company assumes them. Our 2000 Stock Plan is
intended to serve as a successor to the 1994 Stock Plan. When our 2000 Stock
Plan becomes effective, as described below, no further grants will be made
under the 1994 Stock Plan.

2000 Stock Incentive Plan

In August 2000, our board of directors adopted the LogicVision, Inc. 2000
Stock Incentive Plan. We plan to submit it for approval by our stockholders
prior to the completion of this offering. A total of 2,000,000 shares of common
stock are currently reserved for issuance under the 2000 Stock Plan pursuant to
the direct award or sale of shares or the exercise of options granted under the
2000 Stock Plan. If any option granted under the 2000 Stock Plan expires or
terminates for any reason without having been exercised in full, then the
unpurchased shares subject to that option will once again be available for
additional option grants. Also, if any option granted under the 2000 Stock Plan
expires or terminates for any reason without having been exercised in full,
then the number of shares available for issuance under the 2000 Stock Plan will
be increased by a number equal to the unpurchased shares subject to that
option.

42
<PAGE>

Under the 2000 Stock Plan, all of our employees, outside directors and
consultants are eligible to purchase shares of common stock and to receive
awards of shares or grants of nonstatutory options. Employees are also eligible
to receive grants of incentive stock options, or ISOs, intended to qualify
under Section 422A of the Internal Revenue Code of 1986, as amended, or the
Code. The 2000 Stock Plan is administered by the Compensation Committee of our
the Board of Directors, which selects the persons to whom shares will be sold
or awarded or options will be granted, determines the number of shares to be
made subject to each sale, award or grant, and prescribes other terms and
conditions, including the type of consideration to be paid to us upon sale or
exercise and vesting schedules in connection with each sale, award or grant.

The exercise price under the nonstatutory options generally must be at least
85% of the fair market value of the common stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the common stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of the Company, not less than 110%
of such fair market value. The term of an option cannot exceed 10 years, and
the term of an ISO granted to a holder of more than 10% of our voting power
cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment or twelve months following the optionee's
death or permanent disability.

401(k) Plan

Effective November 1, 1995, we established a tax-qualified employee savings
and retirement plan for which our employees will generally be eligible. Under
the LogicVision, Inc. 401(k) Plan, employees may elect to reduce their current
compensation and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan permits, but does not require, additional matching
contributions to the 401(k) Plan by us on behalf of all participants in the
401(k) Plan. To date, we have made no matching contributions. The 401(k) Plan
is intended to qualify under Section 401 of the Code, so that contributions to
the 401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by
us, if any, will be deductible by us when made.

43
<PAGE>

RELATED PARTY TRANSACTIONS

In August 1996, we loaned Michael Howells, our Vice President of Engineering,
$75,000 in connection with his relocation to San Jose. The loan bears simple
interest at the rate of 8.0% per year. We agreed to forego interest on this
loan for five years and to reimburse Mr. Howells for taxes on such foregone
interest. The loan is secured by 100,000 shares of our common stock. On June
19, 2001, Mr. Howells will have the option to pay the loan in full, enter into
a 10-year interest amortization schedule at 8.0% per year, or forfeit the
collateral.

In April 1997, we borrowed $1,000,000 from Navindra Jain, the chairman of our
board of directors. In connection with this loan, we issued Dr. Jain warrants
to purchase up to 42,735 shares of Series F Convertible Preferred Stock at an
exercise price of $4.25. We repaid this loan in full in May 1997.

In April 1997, we borrowed $500,000 from Phillippi Investments Ltd. In
connection with this loan, we issued Phillippi Investments warrants to purchase
up to 21,368 shares of Series F Convertible Preferred Stock at an exercise
price of $4.25 per share. Richard Black, one of our directors, was an officer
of Phillippi Investments. We repaid this loan in full in May 1997.

From January 1997 through January 2000, we sold shares of our preferred stock
in private financings as follows:

. 4,217,139 shares of Series F Convertible Preferred Stock and warrants to
purchase 603,578 shares of Series F Convertible Preferred Stock for
aggregate consideration of $17,871,320 in May and July 1997;

. 1,211,765 shares of Series G Convertible Preferred Stock and warrants to
purchase 848,235 shares of common stock, for aggregate consideration of
$5,150,001, in January and March 1999;

. 775,236 shares of Series H-1 Convertible Preferred Stock and warrants to
purchase 542,620 shares of Series H-2 Convertible Preferred Stock, for
aggregate consideration of $3,294,753, in May and June 1999;

. 3,431,538 shares of Series I Convertible Preferred Stock and warrants to
purchase 45,695 shares of Series I Convertible Preferred Stock, for
aggregate consideration of 14,584,080, in January, March and June 2000.

Each share of Series F Convertible Preferred Stock will convert into 1.06
shares of common stock upon the closing of this offering. Each share of Series
G, H-1, H-2 and I Convertible Preferred Stock will convert into one share of
common stock upon the closing of this offering. The purchasers of the preferred
stock include the following directors, officers, holders of 5% of our
securities and their affiliated entities:

<TABLE>
<CAPTION>
Warrants to
Shares of Preferred Stock Purchase Capital Stock
------------------------------------ --------------------------
Series Series Common Series
Investor Series F G Series H-1 I Stock F Series H-2
-------- --------- ------- ---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Citicorp................ 1,000,000 117,647 -- 705,882 82,353 150,000 --
CG Asian-American Fund,
L.P.................... 470,588 28,235 -- -- 19,765 70,589 --
Citi Growth Fund II
Offshore L.P........... 470,588 28,235 -- -- 19,765 70,589 --
Navindra Jain(1)........ -- 235,294 -- -- 164,705 -- --
Princeton Global Fund,
L.P.................... 234,824 14,118 -- -- 9,882 35,224 --
Jon D. Tompkins(2)...... -- -- 15,000 -- -- -- 10,499
</TABLE>
--------
(1) Dr. Jain is one of our directors.
(2) Mr. Tompkins is one of our directors.

44
<PAGE>

The purchasers of the above shares of preferred stock are entitled to
registration rights. See "Description of Capital Stock--Registration Rights."

We believe that the transactions described above were on terms no less
favorable than could be obtained from unaffiliated parties.

For information concerning indemnification of directors and officers, see
"Description of Capital Stock--Limitation of Liability and Indemnification
Matters."

45
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of August 1, 2000 about the
number of shares of common stock beneficially owned and the percentage of
common stock beneficially owned before and after the completion of this
offering by:

. each executive officer named above under "Executive Compensation";

. each of our directors;

. each person known to us to be the beneficial owner of more than 5% of our
common stock; and

. all of our directors and executive officers as a group.

Unless otherwise noted below, the address of each beneficial owner listed in
the table is c/o LogicVision, Inc., 101 Metro Drive, Third Floor, San Jose,
California 95110.

We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the table below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws.

There were shares of common stock outstanding on August 1, 2000,
which assumes the conversion of all outstanding shares of preferred stock and
all outstanding warrants into shares of common stock, and, for purposes of the
table below, we have assumed that shares of common stock will be
outstanding upon completion of this offering. In computing the number of shares
of common stock beneficially owned by a person and the percentage ownership of
that person, we deemed outstanding shares of common stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of August 1, 2000. We did not deem these shares outstanding,
however, for the purpose of computing the percentage ownership of any other
person.

<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Owned
Number of Shares -----------------
of Common Stock Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Directors and Named Executive Officers:
Vinod K. Agarwal, Ph.D.(1)............... 9.3% %
Navindra Jain, Ph.D.(2).................. 7.9
Richard C. Black(3)(11).................. 15.1
D. James Guzy(4)......................... *
David L. Sulman(5)....................... 8.3
Jon D. Tompkins(6)....................... *
John H. Barnet(7)........................ *
Michael Howells(8)....................... 2.8
Dale Olstinske(9)........................ *
All directors and executive officers as a
group (12 persons)...................... 43.2

5% Stockholders:
Helix (PEI), Inc.(10)(3)................. 15.0
Citicorp(11)............................. 8.0
Entities affiliated with Citi Growth
Funds(12)............................... 7.6
</TABLE>
--------
* Less than 1%.
(1) Includes shares subject to options.

46
<PAGE>

(2) Includes shares subject to warrants and shares subject to
options.
(3) Includes shares held by Helix (PEI), Inc. Mr. Black is the Vice
President of Helix. Mr. Black disclaims beneficial ownership of the shares
held by Helix, except to the extent of his pecuniary interest therein.
(4) Includes shares held by the Arbor Company and shares subject
to warrants held by the Arbor Company. Mr. Guzy is the chairman of the
Arbor Company.
(5) Includes shares held by Teradyne, Inc. and shares subject to
warrants held by Teradyne. Mr. Sulman is a vice president and a general
manager of Teradyne. Mr. Sulman disclaims beneficial ownership of the
shares held by Teradyne except to the extent of his pecuniary interest
therein. The address for Teradyne is 321 Harrison Avenue, MS-H108, Boston,
MA 02118.
(6) Includes shares subject to options.
(7) Includes shares subject to options.
(8) Includes shares subject to options.
(9) Includes shares subject to options.
(10) The address for Helix (PEI), Inc. is 99 Yorkville Avenue, Suite 210,
Toronto, Ontario M5R 3K5, Canada.
(11) The address for Citicorp Investments is 399 Park Avenue, 14th Floor, Zone
8, New York, New York 10022. Includes shares subject to warrants.
(12) Includes shares and shares subject to warrants held by Citi
Growth Fund II Offshore, L.P.; shares and shares subject to
warrants held by GC Asian-American Fund, L.P.; and shares and
shares subject to warrants held by Princeton Global Fund, L.P.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

The following description of our securities and provisions of our restated
certificate of incorporation and bylaws is only a summary. You should also
refer to the copies of our restated certificate of incorporation and bylaws
that have been filed with the Securities and Exchange Commission as exhibits to
our registration statement, of which this prospectus forms a part, and to the
provisions of Delaware law.

Upon the closing of this offering, our authorized capital stock, after giving
effect to the conversion of all outstanding preferred stock into common stock,
and the amendment of our certificate of incorporation, will consist of
125,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of
preferred stock, $0.0001 par value.

Common Stock

As of June 30, 2000, there were shares of common stock outstanding
held by approximately 170 stockholders of record, assuming the exercise of all
warrants and the automatic conversion of each outstanding share of preferred
stock upon the closing of this offering.

The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose. Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably dividends, if any, as may be declared by our board of directors out of
funds legally available therefor. See "Dividend Policy." Upon our liquidation,
dissolution or winding up, the holders of common stock will be entitled to
share ratably in the net assets legally available for distribution to
stockholders after the payment of all of our debts and other liabilities,
subject to the prior rights of any preferred stock then outstanding. Holders of
common stock have no preemptive or conversion rights or other subscription
rights and there are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and the common stock
to be outstanding upon completion of this offering will be, fully paid and
nonassessable.

Preferred Stock

Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into common stock. See Note 5 of Notes to Consolidated
Financial Statements for a description of the currently outstanding preferred
stock. Following the conversion, our certificate of incorporation will be
restated to delete all references to the prior series of preferred stock, and
5,000,000 shares of undesignated preferred stock will be authorized. The board
of directors has the authority, without further action by the stockholders, to
issue from time to time the preferred stock in one or more series and to fix
the number of shares, designations, preferences, powers, and other rights of
those shares. The preferences, powers, rights and restrictions of different
series of preferred stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
us. We have no present plans to issue any shares of preferred stock.

Warrants

Upon the closing of this offering, we will have outstanding warrants to
purchase an aggregate of shares of our common stock at exercise prices
ranging from zero to $ , or a weighted average exercise price of $ .
These warrants expire on dates ranging from to and may expire earlier
upon a sale of the company, as defined in the warrants.

48
<PAGE>

Registration Rights

After this offering, the holders of shares of common stock issued upon
conversion of the preferred stock are entitled to contractual rights to require
us to register those shares under the Securities Act. If we propose to register
any of our securities under the Securities Act for our own account, holders of
those shares are entitled to include their shares in our registration,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in the registration.
These holders have waived their rights to include their shares in this
offering. One hundred and eighty days after the effective date of the
registration statement of which this prospectus is a part, and subject to
limitations and conditions specified in the investor rights agreement with the
holders, holders of at least 33% of all or part of those shares may require us
to prepare and file a registration statement under the Securities Act at our
expense covering those shares, provided that the shares to be included in the
registration have an anticipated aggregate public offering price of at least
$10,000,000. We are not obligated to effect more than two of these stockholder-
initiated registrations. Holders of those shares may also require us to file
additional registration statements on Form S-3, subject to limitations
specified in the investor rights agreement.

Delaware Anti-Takeover Law and Selected Charter Provisions

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns, or within three years prior
did own, 15% or more of the corporation's voting stock.

Upon the closing of this offering, our certificate of incorporation will
provide that our bylaws may be repealed or amended only by a two-thirds vote of
the board of directors or a two-thirds stockholder vote. Further, the
certificate of incorporation will require that all stockholder action be taken
at a stockholders' meeting. In addition, those provisions of the certificate of
incorporation may only be amended or repealed by the holders of at least two-
thirds of the voting power of all the then-outstanding shares of stock entitled
to vote generally for the election of directors voting together as a single
class. The provisions described above, together with the ability of the board
of directors to issue preferred stock as described above, may have the effect
of deterring a hostile takeover or delaying a change in our control or
management.

Limitation of Liability and Indemnification Matters

We have adopted provisions in our certificate of incorporation that limit the
liability of our directors for monetary damages for breach of their fiduciary
duty as directors, except for liability that cannot be eliminated under the
Delaware General Corporation Law. Delaware law provides that directors of a
company will not be personally liable for monetary damages for breach of their
fiduciary duty as directors, except for liability

. for any breach of their duty of loyalty to us or our stockholders,

. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,

. for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided Section 174 of the Delaware General Corporation
Law, or

. for any transaction from which the director derived an improper personal
benefit.

Any amendment or repeal of these provisions requires the approval of the
holders of shares representing at least two-thirds of our shares entitled to
vote in the election of directors, voting as one class.

49
<PAGE>

Our certificate of incorporation and bylaws also provide that we will
indemnify our directors and officers to the fullest extent permitted by
Delaware law. We have entered into separate indemnification agreements with our
directors and executive officers that could require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. We
believe that the limitation of liability provision in our certificate of
incorporation and the indemnification agreements will facilitate our ability to
continue to attract and retain qualified individuals to serve as directors and
officers.

Nasdaq Symbol

We propose to list our common stock on the Nasdaq National Market under the
symbol LGVN.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is
.

50
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock.
We cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. As described below, only a limited number of shares will be
available for sale shortly after this offering due to contractual and legal
restrictions on resale. Nevertheless, sales of our common stock in the public
market after the restrictions lapse, or the perception that those sales may
occur, could cause the prevailing market price to decrease or to be lower than
it might be in the absence of those sales or perceptions.

Sale of Restricted Shares

Upon completion of this offering, we will have outstanding shares of
common stock. The shares of common stock being sold in this offering
will be freely tradable, unless they are purchased by any of our "affiliates,"
as that term is defined in Rule 144 under the Securities Act, in which case
they may only be sold in compliance with the limitations described below. The
remaining shares are "restricted shares" within the meaning of Rule 144 under
the Securities Act. These remaining shares are eligible for public sale only if
registered under the Securities Act or sold in accordance with Rule 144 or Rule
701 under the Securities Act, which are summarized below.

As a result of the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, the restricted shares will be available for sale in
the public market as follows:

. No shares will be eligible for sale prior to 180 days after the date of
this prospectus;

. shares will be eligible for sale upon the expiration of
the lock-up agreements, described above, beginning 180 days after the
date of this prospectus; and

. shares will be eligible for sale upon the exercise of
vested options 180 days after the date of this prospectus.

Lock-Up Agreements

Our directors, executive officers and most of our stockholders, who
collectively hold an aggregate of shares of common stock, have agreed
that they will not sell any common stock owned by them without the prior
written consent of the Chase Securities Inc. for a period of 180 days from the
date of this prospectus. Chase Securities Inc. may, in its sole discretion and
at any time without notice, release some or all of the shares subject to lock-
up agreements prior to the expiration of the 180-day period.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous year, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of:

. 1% of the then outstanding shares of common stock, or approximately
shares immediately after this offering, assuming no exercise of the
underwriters' over-allotment option, or

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.

Sales under Rule 144 are subject to requirements relating to manner of sale,
notice and availability of current public information about us. However, if a
person, or persons whose shares are aggregated, is not deemed to have been our
affiliate at any time during the 90 days immediately preceding the sale, he or
she

51
<PAGE>

may sell his or her restricted shares under Rule 144(k) without regard to the
limitations described above, if at least two years have elapsed since the later
of the date the shares were acquired from us or from our affiliate.

Rule 701

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement, of
Rule 144. Any employee, officer or director or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell those shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait 90 days after the
date of this prospectus before selling such shares. However, all shares issued
by us pursuant to Rule 701 are subject to lock-up agreements and will only
become eligible for sale upon the expiration of the lock-up agreements.

Stock Options

We intend to file a registration statement under the Securities Act covering
approximately shares of common stock reserved for issuance under the our
stock plans. This registration statement is expected to be filed soon after the
date of this prospectus and will automatically become effective upon filing.
Accordingly, shares registered under this registration statement will be
available for sale in the open market, unless those shares are subject to
vesting restrictions with us or the contractual restrictions described above.

Registration Rights

In addition, after this offering, the holders of approximately shares
of common stock will be entitled to rights to cause us to register the sale of
those shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares, other than shares purchased by our
affiliates, becoming freely tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration. See "Description of
Capital Stock--Registration Rights."

52
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
FleetBoston Robertson Stephens Inc. and SG Cowen Securities Corporation, have
severally agreed to purchase from us the following numbers of shares of common
stock:

<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc............................................
FleetBoston Robertson Stephens Inc..............................
SG Cowen Securities Corporation.................................
----
Total.........................................................
====
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are conditioned on the absence of any material adverse change in our business
and the receipt of certificates, opinions and letters from us, our counsel and
our independent auditors. The underwriters are committed to purchase all shares
of common stock offered in this prospectus if any shares are purchased.

The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers.
After the public offering of the shares, the underwriters may change the
offering price and other selling terms. The representatives of the underwriters
have informed us that the underwriters do not intend to confirm discretionary
sales in excess of 5% of the shares of common stock offered by this prospectus.

We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional shares
of common stock at the public offering price, less the underwriting discount
set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of common stock offered in this
prospectus.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. The underwriting discount
will be determined based on an arms' length negotiation between the
representatives of the underwriters and LogicVision. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by LogicVision
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>

We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . The
offering of the shares is made for delivery when, as

53
<PAGE>

and if accepted by the underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offering without notice. The
underwriters reserve the right to reject an order for the purchase of shares in
whole or in part.

We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those liabilities.

Our directors, executive officers and most of the holders of common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants
or other rights to purchase common stock for a period of 180 days after the
date of this prospectus without the prior written consent of Chase Securities
Inc. All other stockholders and option holders are subject to contractual
agreements with LogicVision obligating them to abide by substantially identical
restrictions, and we have agreed with the underwriters that we will not release
any of our stockholders from such restrictions without the prior written
consent of Chase Securities Inc. We have agreed that we will not, without the
prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of
common stock during the 180-day period following the date of this prospectus,
except that we may issue shares upon the exercise of options granted prior to
the date of this prospectus and may grant additional options under our stock
plans.

At our request, the underwriters have reserved up to shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our directors, officers, employees, business associates such
as customers and suppliers and persons related to, or affiliated with the
foregoing persons. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered by this prospectus.

During the course of the offering, the underwriters may create a syndicate
short position by making short sales of our common stock. Short sales occur
when the underwriters sell a greater number of shares of our common stock than
they are required to purchase in the offering. Short sales may be either
covered or naked. Covered short sales are sales made in an amount not greater
than the underwriters' over-allotment option to purchase additional shares from
us in the offering. Naked short sales are sales in excess of the over-allotment
option. The representatives have advised us that, pursuant to Regulation M
under the Securities Act, some persons participating in the offering may engage
in transactions that have the effect of stabilizing or maintaining the market
price of our common stock at a level above that which might otherwise prevail
in the open market. These transactions include syndicate covering transactions,
stabilizing bids or the imposition of penalty bids. The representatives have
advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.

A syndicate covering transaction is a bid for, or the purchase of, our common
stock on behalf of the underwriters to reduce a syndicate short position. If
the underwriters create a syndicate short position, they may choose to reduce
or cover this position by either exercising all or part of the over-allotment
option to purchase additional shares from us or by engaging in syndicate
covering transactions. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. However, they must close out any naked short position by
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option.

54
<PAGE>

A stabilizing bid is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price
of our common stock. A penalty bid is an arrangement that permits the
representatives to reclaim the selling concession from an underwriter or a
syndicate member if the representatives purchase the shares allotted to such
underwriter or syndicate member in a syndicate covering transaction. The
representatives reclaim the selling concession because the shares they purchase
from an underwriter or a syndicate member would not have effectively placed.

Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our
business potential and prospects, the present state of our business operations,
our management and other factors deemed relevant.

55
<PAGE>

LEGAL MATTERS

Selected legal matters with respect to the validity of the common stock
offered by this prospectus will be passed upon for us by Pillsbury Madison &
Sutro LLP, San Francisco and Palo Alto, California. Selected legal matters
relating to the offering will be passed upon for the underwriters by Gray Cary
Ware & Freidenrich LLP, San Diego, California.

EXPERTS

The financial statements as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 included in this Prospectus
have been so included in reliance upon the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. Please refer to the registration
statement, exhibits and schedules for further information with respect to the
common stock offered by this prospectus. Statements contained in this
prospectus regarding the contents of any contract or other document are not
necessarily complete. With respect to any contract or document filed as an
exhibit to the registration statement, you should refer to the exhibit for a
copy of the contract or document, and each statement in this prospectus
regarding that contract or document is qualified by reference to the exhibit. A
copy of the registration statement and its exhibits and schedules may be
inspected without charge at the SEC's public reference room, located at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference room. Our SEC filings are
also available to the public from the SEC's website at www.sec.gov.

Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.

56
<PAGE>

LOGICVISION, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Operations...................................... F-4

Consolidated Statements of Stockholders' Deficit........................... F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

The reincorporation described in Note 2 to the financial statements has not
been consummated at April 7, 2000. When it has been consummated, we will be in
a position to furnish the following report:

"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' deficit and
of cash flows present fairly, in all material respects, the financial
position of LogicVision, Inc. and its subsidiaries at December 31, 1998 and
1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above."

/s/ PricewaterhouseCoopers LLP

San Jose, California
April 7, 2000

F-2
<PAGE>

LOGICVISION, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
-------------------------- June 30, Equity
1998 1999 2000 June 30, 2000
------------ ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 2,099,512 $ 3,170,307 $ 12,349,062
Marketable
securities........... -- -- 1,967,258
Accounts receivable... 572,616 2,894,595 2,368,484
Unbilled revenue...... 40,406 -- --
Prepaid expenses and
other current
assets............... 310,632 504,644 371,159
------------ ------------ ------------
Total current
assets.............. 3,023,166 6,569,546 17,055,963
Property and equipment,
net.................... 790,101 753,509 1,011,596
Notes receivable,
related parties........ 125,000 125,000 105,000
Other long-term assets.. 55,121 62,119 206,341
------------ ------------ ------------
Total assets......... $ 3,993,388 $ 7,510,174 $ 18,378,900
============ ============ ============
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Trade accounts
payable.............. $ 194,517 $ 353,253 $ 783,033
Contracts payable..... 250,000 -- --
Deferred revenue...... 310,089 2,425,984 2,192,245
Accrued compensation.. 381,149 1,149,309 646,908
Accrued royalties..... 700,000 781,788 834,316
Other accrued
liabilities.......... 283,397 388,247 735,184
------------ ------------ ------------
Total current
liabilities......... 2,119,152 5,098,581 5,191,686
Deferred revenue........ 333,331 145,997 297,339
------------ ------------ ------------
Total liabilities.... 2,452,483 5,244,578 5,489,025
------------ ------------ ------------
Commitments (Note 4)
Redeemable convertible
preferred stock, no par
value: Authorized:
11,000,000, 17,137,976
and 17,137,976 shares
in 1998, 1999 and June
30, 2000 (unaudited),
respectively Issued and
outstanding: 9,642,692,
11,629,693 and
15,061,241 shares in
1998, 1999 and June 30,
2000 (unaudited),
respectively, and none
pro forma (Aggregate
liquidation value of
$26,217,089,
$34,661,843 and
$49,208,174 in 1998,
1999 and June 30, 2000
(unaudited),
respectively).......... 24,209,238 31,765,265 46,056,937
------------ ------------ ------------
Stockholders' equity
(deficit)
Common stock, $0.0001
par value:
Authorized:
30,000,000,
50,000,000 and
50,000,000 shares in
1998 and 1999, and
June 30, 2000
(unaudited),
respectively,
125,000,000 shares
pro forma
Issued and
outstanding:
2,374,255, 2,837,716
and 3,081,090 shares
in 1998, 1999 and
June 30, 2000
(unaudited),
respectively, and
18,413,038 pro forma
(unaudited)......... 238 284 308 $ 184
Additional paid-in
capital.............. 693,330 2,347,274 5,163,324 51,220,385
Deferred stock based
compensation......... (197,750) (576,569) (2,687,741) (2,687,741)
Accumulated other
comprehensive
income............... (26,529) (35,510) (45,713) (45,713)
Accumulated deficit... (23,137,622) (31,235,148) (35,597,240) (35,597,240)
------------ ------------ ------------ ------------
Total stockholders'
equity (deficit).... (22,668,333) (29,499,669) (33,167,062) $ 12,889,875
------------ ------------ ------------ ============
Total liabilities,
redeemable
convertible
preferred stock and
stockholders' equity
(deficit)........... $ 3,993,388 $ 7,510,174 $ 18,378,900
============ ============ ============
</TABLE>

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

F-3
<PAGE>

LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Six Months
For the Years Ended December 31, Ended June 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 4,204,011 $ 3,016,423 $ 5,440,442 $ 2,123,563 $ 4,313,608
Costs and expenses:
Cost of revenues...... 2,767,351 1,019,982 1,343,538 661,091 1,193,091
Research and
development.......... 4,250,797 4,372,763 4,518,990 2,379,543 2,376,078
Sales and marketing... 4,552,323 4,378,124 5,384,304 2,553,610 3,427,046
General and
administrative....... 1,593,087 1,503,400 2,060,639 858,000 1,187,850
Amortization of
deferred stock
compensation*........ -- 214,229 366,942 200,861 698,423
----------- ----------- ----------- ----------- -----------
Total costs and
expenses........... 13,163,558 11,488,498 13,674,413 6,653,105 8,882,488
----------- ----------- ----------- ----------- -----------
Loss from operations.... (8,959,547) (8,472,075) (8,233,971) (4,529,542) (4,568,880)
Interest income......... 306,004 260,530 155,251 90,671 230,410
Other income (expense),
net.................... 268 18,112 (16,018) (32,936) (22,822)
----------- ----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (8,653,275) (8,193,433) (8,094,738) (4,471,807) (4,361,292)
Provision for income
taxes.................. (11,565) (5,294) (2,788) (2,788) (800)
----------- ----------- ----------- ----------- -----------
Net loss................ (8,664,840) (8,198,727) (8,097,526) (4,474,595) (4,362,092)
Accretion of redeemable
convertible preferred
stock.................. -- -- (173,571) (86,786) (86,786)
----------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders.... $(8,664,840) $(8,198,727) $(8,271,097) $(4,561,381) $(4,448,878)
=========== =========== =========== =========== ===========
Net loss per common
share, basic and
diluted................ $ (4.75) $ (3.71) $ (3.14) $ (1.81) $ (1.51)
=========== =========== =========== =========== ===========
Weighted average common
shares, basic and
diluted................ 1,823,514 2,212,030 2,630,607 2,517,281 2,944,164
=========== =========== =========== =========== ===========
Pro forma net loss per
common share, basic and
diluted (unaudited).... $ (0.57) $ (0.24)
=========== ===========
Pro forma weighted
average common shares,
basic and diluted
(unaudited)............ 14,272,595 17,881,182
=========== ===========
--------
*Amortization of deferred stock compensation:

Cost of revenues....... $ -- $ 6,152 $ 6,749 $ 2,580 $ 20,096
Research and
development........... -- 104,420 92,919 69,871 185,117
Sales and marketing.... -- 34,823 92,207 75,740 140,963
General and
administrative........ -- 68,834 175,067 52,670 352,247
----------- ----------- ----------- ----------- -----------
$ -- $ 214,229 $ 366,942 $ 200,861 $ 698,423
=========== =========== =========== =========== ===========
</TABLE>

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

F-4
<PAGE>

LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Accumulated
Additional Deferred Other Total
Paid-in Stock Based Accumulated Comprehensive Stockholders'
Common Stock Capital Compensation Deficit Income Deficit
----------------- ---------- ------------ ------------ ------------- -------------
Shares Amount
--------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 1,808,113 $181 $ 13,211 $ -- $ (6,274,055) $ -- $ (6,260,663)
Stock options
exercised.............. 70,516 7 10,083 -- -- -- 10,090
Fair value of warrants
issued with preferred
stock.................. -- -- 179,228 -- -- -- 179,228
Net loss................ -- -- -- -- (8,664,840) -- (8,664,840)
--------- ---- ---------- ----------- ------------ -------- ------------
Balances, December 31,
1997................... 1,878,629 188 202,522 -- (14,938,895) -- (14,736,185)
Stock options
exercised.............. 515,626 52 78,827 -- -- -- 78,879
Stock cancellation...... (20,000) (2) 2 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- (26,529) (26,529)
Deferred stock based
compensation........... -- -- 411,979 (411,979) -- -- --
Amortization of deferred
stock based
compensation........... -- -- -- 214,229 -- -- 214,229
Net loss................ -- -- -- -- (8,198,727) -- (8,198,727)
--------- ---- ---------- ----------- ------------ -------- ------------
Balances, December 31,
1998................... 2,374,255 238 693,330 (197,750) (23,137,622) (26,529) (22,668,333)
Stock options
exercised.............. 463,461 46 180,956 -- -- 181,002
Foreign currency
translation
adjustment............. -- -- -- -- -- (8,981) (8,981)
Deferred stock based
compensation........... -- -- 761,581 (761,581) -- -- --
Stock options
cancelled.............. -- -- (15,820) 15,820 -- -- --
Amortization of deferred
stock based
compensation........... -- -- -- 366,942 -- -- 366,942
Fair value of warrants
issued with preferred
stock.................. -- -- 900,798 -- -- -- 900,798
Accretion of redeemable
preferred stock........ -- -- (173,571) -- -- -- (173,571)
Net loss................ -- -- -- -- (8,097,526) -- (8,097,526)
--------- ---- ---------- ----------- ------------ -------- ------------
Balances, December 31,
1999................... 2,837,716 284 2,347,274 (576,569) (31,235,148) (35,510) (29,499,669)
Stock options exercised
(unaudited)............ 243,374 24 93,241 -- -- -- 93,265
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- -- (10,203) (10,203)
Deferred stock based
compensation
(unaudited)............ -- -- 2,809,595 (2,809,595) -- -- --
Amortization of deferred
stock based
compensation
(unaudited)............ -- -- -- 698,423 -- -- 698,423
Accretion of redeemable
preferred stock........ -- -- (86,786) -- -- -- (86,786)
Net loss (unaudited).... -- -- -- -- (4,362,092) -- (4,362,092)
--------- ---- ---------- ----------- ------------ -------- ------------
Balances, June 30, 2000
(unaudited)............ 3,081,090 $308 $5,163,324 $(2,687,741) $(35,597,240) $(45,713) $(33,167,062)
========= ==== ========== =========== ============ ======== ============
</TABLE>

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

F-5
<PAGE>

LOGICVISION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the
Six Months Ended
For the Years Ended December 31, June 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(8,664,840) $(8,198,727) $(8,097,526) $(4,474,595) $(4,362,092)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 421,051 382,308 422,786 185,718 191,380
Amortization of
deferred stock
compensation......... -- 214,229 366,942 200,861 698,423
Bad debt expense...... -- -- 35,955 35,955 --
Loss on disposal of
assets............... -- 4,004 -- -- --
Changes in operating
assets and
liabilities:
Accounts
receivable......... 100,442 479,045 (2,357,934) (114,244) 526,111
Inventory........... 31,012 -- -- -- --
Unbilled revenue.... (445,861) 405,455 40,406 (100,000) --
Prepaid expenses and
other current
assets............. (16,930) (257,627) (194,012) 136,338 133,485
Notes receivable,
related parties.... (67,500) 47,500 -- -- 20,000
Other long-term
assets............. 49,695 (21,267) (6,998) (3,975) (144,222)
Trade accounts
payable............ (75,548) (66,212) 158,736 142,819 429,780
Deferred revenue.... 433,028 (57,099) 1,928,561 264,829 (82,397)
Deferred rent....... (36,094) -- -- -- --
Contracts payable... 250,000 -- (250,000) -- --
Accrued
compensation,
royalties and other
accrued
liabilities........ 819,029 28,140 954,798 222,471 (102,936)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities....... (7,202,516) (7,040,251) (6,998,286) (3,503,823) (2,692,468)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (785,638) (97,136) (386,194) (191,940) (449,467)
Disposals of property
and equipment......... 6,838 -- -- -- --
Purchase of marketable
securities............ -- -- -- -- (1,967,258)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities....... (778,800) (97,136) (386,194) (191,940) (2,416,725)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of preferred stock,
net of issuance
costs................. 16,487,499 (16,991) 8,283,254 8,230,801 14,204,886
Proceeds from issuance
of common stock on
exercise of options... 10,090 78,879 181,002 91,252 93,265
Proceeds from issuance
of loans.............. 1,500,000 -- -- -- --
Repayment of loans..... (1,500,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities....... 16,497,589 61,888 8,464,256 8,322,053 14,298,151
----------- ----------- ----------- ----------- -----------
Effect of exchange
rates on cash......... -- (26,529) (8,981) 9,690 (10,203)
----------- ----------- ----------- ----------- -----------
Net (decrease) increase
in cash and cash
equivalents........... 8,516,273 (7,102,028) 1,070,795 4,635,980 9,178,755
Cash and cash
equivalents, beginning
of period............. 685,267 9,201,540 2,099,512 2,099,512 3,170,307
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period................ $ 9,201,540 $ 2,099,512 $ 3,170,307 $ 6,735,492 $12,349,062
=========== =========== =========== =========== ===========
Supplemental
disclosures of cash
flow information:
Cash paid during the
period for:
Taxes................. $ 11,556 $ 5,294 $ 2,788 $ 2,788 $ 800
=========== =========== =========== =========== ===========
</TABLE>

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

F-6
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:

LogicVision, Inc., (the "Company") was incorporated on July 23, 1992. The
Company provides proprietary technologies for embedded test that enable the
more efficient design and manufacture of complex semiconductors. The embedded
test solution allows integrated circuit designers to embed into a semiconductor
design test functionality that can be used during semiconductor production and
throughout the useful life of the chip. The technology also allows integrated
circuits to be tested after they have been assembled onto boards and systems.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Reincorporation

In July 2000, the Company's Board of Directors authorized the reincorporation
of the Company in the state of Delaware. As a result of the reincorporation,
the Company will be authorized to issue 125,000,000 shares of $0.0001 par value
common stock and 5,000,000 shares of $0.0001 par value Preferred Stock.

Interim financial data

The accompanying consolidated financial statements as of June 30, 2000 and
for the six months ended June 30, 1999 and 2000 are unaudited. In the opinion
of management, these interim statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The financial and other data disclosed in these
notes to the financial statements for these periods are also unaudited. The
results of the operations for the interim periods are not necessarily
indicative of the results to be expected for any future periods.

Basis of presentation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all intercompany accounts
and transactions.

Reclassifications

Certain prior year balances have been reclassified to conform with the
current year presentation.

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 and 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.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of three
months or less from the date of acquisition to be cash equivalents.

F-7
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and equipment

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

Stock-based compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and Financial Accounting Standards Board Interpretation ("FIN")
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans," and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
SFAS No. 123 defines a "fair value" based method of accounting for an employee
stock option or similar equity investment. The pro forma disclosures of the
difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented in Note 6. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services".

Revenue recognition

The Company's revenue consists of software and intellectual property
licenses, maintenance, service and engineering service revenues.

The Company derives revenues from licenses generally with one to three year
terms, which are charged for the right to use the Company's software and
intellectual property. Maintenance revenues include postcontract customer
support ("PCS"). PCS includes telephone support, bug fixes and upgrade
privileges on a when and-if available basis. Services are generally
installation and training. Engineering service revenues typically consist of
charges for development and design contracts.

The Company accounts for its revenues under the provisions of AICPA Statement
of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") as amended by SOP
98-4 and SOP 98-9. The Company recognizes license revenues upon shipment only
when there is persuasive evidence of an arrangement, shipment has occurred, the
fee is fixed or determinable, and collectibility of the sales proceeds is
considered probable. The Company applies the residual method to those
arrangements that include multiple elements, where vendor-specific objective
evidence ("VSOE") of fair value of the undelivered elements exists.

When VSOE of the undelivered elements cannot be established and the
undelivered element is PCS, the entire revenue is recognized ratably over the
term of the PCS. The maintenance elements of these contracts are recognized
ratably over the period of the maintenance contract and services are recognized
when they are performed. When payment terms under these arrangements are
extended the revenue is recognized when the payments become due.

Engineering service revenues are generally recognized on a percentage of
completion basis.

F-8
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Research and development

Research and development costs are charged to operations as incurred.

Software development costs

Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs for any periods presented.

Certain risks and concentrations

The Company's cash and cash equivalents are maintained at four financial
institutions, one in the United States, the others in Canada, France and the
United Kingdom. Deposits in these institutions may exceed the amount of
insurance provided on such deposits.

For accounts receivable, management of the Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. Based on the expected collectibility of the
accounts receivable balance, the Company does not maintain an allowance for
doubtful accounts. At December 31, 1999, three customers accounted for
approximately 48% of net accounts receivable and five customers accounted for
approximately 38% of total revenues (none exceeded 10%). At December 31, 1998,
two customers accounted for approximately 44% of net accounts receivable and
one customer accounted for approximately 27% of total revenues.

The Company operates in one industry segment. The following is a summary of
the Company's revenue by geographic operations. Revenues are attributed to the
countries in which the products and services are delivered.

<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
United States............................... $3,538,009 $2,897,367 $5,035,409
Japan....................................... 33,001 -- 234,019
Canada...................................... 572,001 10,041 --
Italy....................................... -- -- 88,000
Sweden...................................... -- 85,000 72,000
Other....................................... 61,000 24,015 11,014
---------- ---------- ----------
$4,204,011 $3,016,423 $5,440,442
========== ========== ==========
</TABLE>

For all periods presented, substantially all of the Company's long-lived
assets were located in the United States.

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

F-9
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's products include components subject to rapid technological
change. Significant technological change could adversely affect the Company's
future operating results. While the Company has ongoing programs to minimize
the adverse effect of such changes and considers technological change in
estimating its allowances, such estimates could change in the future.

Income taxes

The Company accounts for income taxes using the liability method under which
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.

Foreign currency translation

The Company has foreign subsidiaries whose financial statements are
denominated in the local currency. Foreign exchange gains and losses, which
result from the process of remeasuring foreign currency financial statements
into U.S. dollar, have been included on the balance sheet in the cumulative
foreign currency translation adjustment.

Fair value of financial instruments

Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, marketable securities, accounts receivable, accounts
payable and other accrued liabilities approximate fair value due to their short
maturities.

Net loss per share

The basic net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of the common shares outstanding during the period. The diluted net loss
per share is the same as the basic net loss per share for the periods presented
because common equivalent shares, composed of common shares issuable upon the
exercise of stock options and warrants and upon conversion of convertible
preferred shares, are considered when their effect would be dilutive.

Pro forma net loss per share (unaudited)

Pro forma net loss per share for the year ended December 31, 1999 and the six
months ended June 30, 2000 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of redeemable convertible preferred shares into common shares
effective upon the closing of the Company's initial public offering on an as-
if-converted basis. Pro forma diluted net loss per share is computed using the
pro forma weighted average number of common and common equivalent shares
outstanding. Common equivalent shares, composed of common shares issuable upon
the exercise of stock options and warrants, are not included in pro forma
diluted net loss per share as such shares are antidilutive.

Pro forma June 30, 2000 balance sheet (unaudited)

Upon consummation of the offering, all shares of redeemable convertible
preferred stock outstanding will convert into an aggregate of 7,665,974 shares
of common stock. The effect of this conversion has been reflected in the
accompanying unaudited pro forma consolidated balance sheet as of June 30,
2000.

F-10
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Recent accounting pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging contracts. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. The Company will adopt SFAS No. 133 in 2001. Currently, the Company does
not hold derivative instruments or engage in hedging activities.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In March 2000 the SEC issued SAB No. 101A to defer for one quarter, and in June
2000 issued SAB 101B to defer for an additional two quarters, the effective
date of implementing SAB 101, with earlier application encouraged. The Company
is required to adopt SAB 101 in the fourth quarter of fiscal 2000. The Company
does not expect the adoption of SAB 101 to have a material effect on its
financial position or results of operations.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, Accounting for Certain Transactions involving
Stock Compensation--an interpretation of APB Opinion No. 25, which clarifies
the application of Accounting Principles Board Opinion No. 25, Stock Issued to
Employees, for certain stock-based compensation issues. Among other issues,
this Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occur after either December 15, 1998, or January
12, 2000. To the extent that FIN 44 covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying FIN 44 are recognized on a prospective
basis from July 1, 2000. We adopted the provisions of FIN 44 as of the required
effective dates.

NOTE 3--PROPERTY AND EQUIPMENT:

Property and equipment comprise:

<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Computer equipment and
software....................... $ 1,583,672 $ 1,937,419 $ 2,318,138
Office equipment and leasehold
improvements................... 345,579 378,026 446,773
----------- ----------- -----------
1,929,251 2,315,445 2,764,911
Less: Accumulated depreciation
and amortization............... (1,139,150) (1,561,936) (1,753,315)
----------- ----------- -----------
$ 790,101 $ 753,509 $ 1,011,596
=========== =========== ===========
</TABLE>

F-11
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 4--COMMITMENTS:

Operating leases

Both the Company and its subsidiaries in Canada and the United Kingdom rent
office facilities under noncancelable operating leases which expire through
March 2005. They are all responsible for certain maintenance costs, taxes and
insurance under the leases.

At December 31, 1999, total future minimum payments under operating leases
are as follows:

<TABLE>
<S> <C>
2000.............................................................. $ 754,632
2001.............................................................. 782,687
2002.............................................................. 729,430
2003.............................................................. 757,091
2004.............................................................. 783,746
Thereafter........................................................ 191,049
----------
$3,998,635
==========
</TABLE>

Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$452,099, $452,099 and $768,501, respectively.

NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK:

In 1999, the Company issued Series G and Series H Convertible Preferred Stock
for $5,038,808 and $3,244,446, respectively, net of issuance costs. There was
no preferred stock issued in 1998. In connection with the issuance of the
Series G and Series H Convertible Preferred Stock, warrants for common stock
valued at $900,798 (see Note 6), using the Black-Scholes pricing model, were
issued to the preferred shareholders. The fair value of the warrants has been
reflected as a discount to the preferred stock and is being accreted as a
dividend charge over the redemption period. The dividend accretion during the
year ended December 31, 1999 and six months ended June 30, 1999 and 2000
(unaudited) was $173,571, $86,786 and $86,786, respectively.

In 2000, the Company completed its Series I convertible preferred stock
financing. The Company issued 3,431,548 shares of Series I convertible
preferred stock at $4.25 per share. Proceeds from the financing were
$14,204,886, net of issuance costs of $341,445. In conjunction with this
offering the Company issued 45,695 warrants to purchase Series I convertible
preferred stock at $4.25 per share.

F-12
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At June 30, 2000, the designated series and shares issued were as follows:

<TABLE>
<CAPTION>
Shares Issued and
Number of Outstanding Minimum
Shares ---------------------- Liquidation
Authorized Shares Value Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Series A..................... 1,000,000 1,000,000 $ 100,000 $ 100,000
Series B..................... 844,754 844,754 528,088 844,754
Series C-1................... 1,000,000 1,000,000 947,484 1,000,000
Series C-2................... 666,667 666,667 999,999 1,000,000
Series C-3................... 333,000 333,000 999,999 999,999
Series D..................... 787,800 787,800 1,966,261 1,969,500
Series E..................... 793,332 793,332 2,376,127 2,379,996
Series F..................... 4,820,717 4,217,139 16,291,280 17,922,840
Series G..................... 1,211,765 1,211,765 4,431,315 5,150,001
Series H-1................... 988,235 775,236 3,211,498 3,294,753
Series H-2................... 691,706 -- -- --
Series I..................... 4,000,000 3,431,548 14,204,886 14,584,079
---------- ---------- ----------- -----------
Balances, June 30, 2000
(unaudited)................. 17,137,976 15,061,241 $46,056,937 $49,245,922
========== ========== =========== ===========
</TABLE>

Dividends

The holders of Series A, B, C, D, E, F, G, H and I convertible preferred
stock are entitled to receive cash dividends, if, when and as declared by the
Board of Directors. Any dividends that may be declared but are not so declared
shall be non-cumulative.

After payment of the preferred dividends to the holders of other Series of
preferred stock, the holders of shares of Series A and B convertible preferred
stock are entitled to receive dividends at a rate of $0.006 and $0.06 per share
per annum, respectively, out of any assets legally available, prior and in
preference to any declaration or payment of any dividend on the common stock of
the Company. Such dividends are payable when, as and if declared by the Board
of Directors, and are not cumulative.

Liquidation preference

In the event of any liquidation, the holders of the preferred stock are
entitled to receive a per share distribution in preference to the holders of
the Common Stock. In order of preference, this distribution is equal to $4.25
for the Series I Preferred Stock, $4.25 for the Series H-1 Preferred Stock,
$2.43 for the Series H-2 Preferred Stock, $4.25 for the Series G Preferred
Stock, $4.25 for the Series F Preferred Stock, $3.00 for the Series E Preferred
Stock, $2.50 for the Series D Preferred Stock, $1.00 for the Series C-1, $1.50
for the Series C-2 Preferred Stock, $3.003 for the Series C-3, $1.00 for the
Series B Preferred Stock, $0.10 for the Series A Preferred Stock, plus any
declared but unpaid dividends.

After payment has been made to the holders of Series A, B, C, D, E, F, G, H
and I convertible preferred stock, any remaining assets and funds are to be
distributed among the holders of common stock pro rata based on the number of
shares of common stock held by each shareholder.

Mergers

A merger, reorganization, or sale of all, or substantially all, of the assets
of the Company in which more than 50% of the voting power of the Company is
disposed of after the transaction shall be deemed to be a liquidation,
dissolution or winding up.

F-13
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Voting

The holder of each share of Series A, B, C, D, E, F, G, H and I convertible
preferred stock is entitled to the number of votes equal to the number of
shares of common stock into which each share of Series A, B, C, D, E, F, G, H
and I convertible preferred stock could be converted on the record date for the
vote or consent of shareholders, except as otherwise required by law, and has
voting rights and powers equal to the voting rights and powers of the common
stock.

Conversion

Each share of Series A, B, C , D, E, F, G, H and I convertible preferred
stock, at the option of the holder, is convertible into the number of shares of
common stock which results from dividing the conversion price per share in
effect for the preferred stock at the time of conversion into the per share
conversion value of such shares. The initial conversion price per share and the
per share conversion value of the preferred stock is as follows Series A:
$0.10, Series B: $1.00, Series C-1: $1.00, Series C-2: $1.50, Series C-3:
$3.003, Series D: $2.50, Series E: $3.00, Series F: $4.25, Series G: $3.50,
Series H-1: $3.50, Series H-2: $2.43 and Series I: $4.25. The initial
conversion price is subject to adjustment from time to time based on certain
events.

For Series A, B, C, D, E, F, G, H and I convertible preferred stock,
conversion is automatic at its then effective conversion rate immediately upon
the closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of common stock in which (i) the public offering
price per share equals or exceeds $8.50 per share, (ii) the aggregate proceeds
raised, equal or exceed $15,000,000, or (iii) upon the affirmative vote from at
least two-thirds of the outstanding Series A, B, C, D, E, F, H and I
convertible preferred stock, voting together as a single class. With respect to
the Series G it will also convert upon the affirmative vote from at least two-
thirds of the Series G voting as a separate class.

Redemption

The holder(s) of not less than a majority of the outstanding Series G
redeemable convertible preferred stock may require the Company to redeem the
outstanding stock in three equal installments on December 31, 2003, December
31, 2004 and December 31, 2005. The redemption price for each share of Series G
redeemable convertible preferred stock shall be $4.25 plus any accrued but
unpaid dividends.

NOTE 6--STOCK OPTION PLANS:

Under the Company's 1994 Flexible Stock Option Plan (the "Plan"), the Company
may grant options to purchase common stock to officers and employees of the
Company. Options under the Plan generally have a term of ten years. In general,
one eighth of the options granted under the Plan become exercisable at the end
of each six month period following the grant date until all of the shares have
become exercisable, with the exception of initial grants. Options grants to a
new employee generally vest 25% at the first anniversary of the hire date with
one sixth of the remaining options becoming exercisable at the end of each six
month period for the following three years.

F-14
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Activity under the Plan is as follows:

<TABLE>
<CAPTION>
Weighted
Shares Number of Average
Available Shares Exercise Aggregate Exercise
for Grant Outstanding Price Price Price
---------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 191,362 1,484,450 $0.10-$0.30 $ 251,505 $0.169
Options authorized...... 750,000
Options granted......... (702,404) 702,404 $0.30-$0.50 242,132 $0.345
Options exercised....... -- (37,113) $0.15-$0.30 (7,590) $0.205
Options cancelled....... 146,262 (146,262) $0.15-$0.30 (38,641) $0.250
---------- --------- ----------- ---------- ------
Balances, December 31,
1997................... 385,220 2,003,479 $0.10-$0.50 447,406 $0.223
Options authorized...... 1,000,000
Options granted......... (870,500) 870,500 $0.50 434,250 $0.500
Options exercised....... -- (515,626) $0.10-$0.50 (89,129) $0.173
Options cancelled....... 418,766 (418,766) $0.10-$0.50 (116,380) $0.278
---------- --------- ----------- ---------- ------
Balances, December 31,
1998................... 933,486 1,939,587 $0.10-$0.50 676,147 $0.349
Options authorized...... 1,000,000
Options granted......... (1,618,750) 1,618,750 $0.50-$1.28 1,303,000 $0.805
Options exercised....... -- (463,461) $0.10-$0.88 (172,502) $0.372
Options cancelled....... 161,333 (161,333) $0.25-$0.88 (78,312) $0.485
---------- --------- ----------- ---------- ------
Balances, December 31,
1999................... 476,069 2,933,543 $0.10-$1.28 1,728,333 $0.589
Options authorized
(unaudited)............ 1,000,000
Options granted
(unaudited)............ (651,540) 1,066,540 $1.28-$1.80 961,995 $1.476
Options exercised
(unaudited)............ -- (243,374) $0.10-$0.88 (93,265) $0.383
Options cancelled
(unaudited)............ 61,438 (61,438) $0.30-$1.28 (35,729) $0.582
---------- --------- ----------- ---------- ------
Balances, June 30, 2000
(unaudited)............ 885,967 3,695,271 $0.10-$1.80 $2,561,334 $0.781
========== ========= =========== ========== ======
</TABLE>

At December 31, 1998 and 1999 and June 30, 2000 (unaudited), options under
the Plan to purchase 815,306, 1,047,597 and 1,193,454 shares of common stock,
respectively, were exercisable.

In addition to the options granted under the Plan, 1,371,000 non-qualified
options were granted outside the Plan in 1996, at an exercise price of $0.25
per share, all of which were vested and outstanding at December 31, 1998 and
1999, respectively. An additional 40,000 non-qualified options were issued in
1999, at an exercise price of $0.88 per share.

Unearned stock compensation

In connection with certain stock option grants during 1998, 1999 and 2000
(unaudited), the Company recorded unearned stock compensation cost totaling
$411,979, $761,581 and $2,809,595 during 1998, 1999 and six months ended June
30, 2000 (unaudited), respectively, for the difference between the deemed fair
market value of the Company's common stock and the exercise price of the
options on the date of grant. This compensation charge was based on a weighted
average per share value of common stock options granted during 1998, 1999 and
2000 (unaudited) of $0.56, $0.45 and $3.52, respectively. Amortization expense
associated with unearned stock compensation totaled $214,229, $366,942,
$200,861 and $698,423 in 1998, 1999 and the six months ended June 30, 1999 and
2000 (unaudited), respectively.

Had compensation cost for the plan been determined based on the fair value of
the options at the grant date for awards in 1997, 1998 and 1999 consistent with
the provisions of SFAS No. 123, the Company's net

F-15
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

loss would have increased immaterially. The fair value of each option grant is
estimated on the date of grant using the minimum value method with the
following weighted-average assumptions used for grants in 1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected average life of option...................... 4 years 4 years 4 years
Risk-free interest rate.............................. 5.15% 5.15% 5.55%
Expected dividends................................... -- -- --
</TABLE>

The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Number Exercise
Exercise Price Number (Years) Price Exercisable Price
-------------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10-$0.15......... 310,000 4.8 $0.12 310,000 $0.12
$0.25-$0.50......... 2,768,293 6.9 $0.34 1,963,410 $0.29
$0.88-$1.28......... 1,266,250 9.6 $0.88 145,187 $0.88
--------- --- ----- ---------
4,344,543 7.5 $0.48 2,418,597 $0.30
========= === ===== =========
</TABLE>

Warrants

At June 30, 2000 (unaudited), the Company has warrants outstanding to
preferred stockholders as follows:

<TABLE>
<CAPTION>
Number of Expiration Exercise
Outstanding Date Price
----------- ------------ --------
<C> <C> <S> <C>
667,681 May 2002 $4.25
848,235 January 2009 $0.50
542,620 May 2004 $2.43
45,695 January 2005 $4.25
---------
2,104,231
=========
</TABLE>

NOTE 7--INCOME TAXES:

The components of the net deferred tax asset as follows:

<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 5,848,000 $ 7,057,000
Research and development credit................. 640,000 838,000
Capitalized research and development............ 748,000 2,913,000
Reserves and allowances......................... 391,000 792,000
Capitalized start-up costs and other
depreciation................................... 158,000 227,000
----------- ------------
7,785,000 11,827,000
Less: Valuation allowance....................... (7,785,000) (11,827,000)
----------- ------------
Net deferred tax asset........................ $ -- $ --
=========== ============
</TABLE>

F-16
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has established a full valuation allowance on its deferred tax
assets since it is not certain that a benefit can be realized in the future due
to the Company's recurring operating losses.

The difference between the statutory rate of approximately 39% (34% federal
and 5% state, net of federal tax benefits) and the tax benefit of zero recorded
by the Company is primarily due to the Company not recording the benefit
received from the accumulation of their net deferred tax assets.

At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $19,434,000 and state net operating loss
carryforwards of approximately $7,696,000, available to offset future regular
and alternative minimum taxable income. The Company's federal and state net
operating loss carryforwards expire through 2014, if not utilized.

The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situation where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carryforwards could be restricted.

NOTE 8--COMPREHENSIVE INCOME:

The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), "Reporting Comprehensive Income," which requires that
unrealized gains or losses on investments and foreign currency translation
adjustments be included in other comprehensive income. The components of
comprehensive loss are as follows:

<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss................ $(8,664,840) $(8,198,727) $(8,097,526) $(4,474,595) $(4,362,092)
Change in cumulative
translation
adjustments............ -- (26,529) (8,981) 9,690 (10,203)
----------- ----------- ----------- ----------- -----------
Total comprehensive
loss................. $(8,664,840) $(8,225,256) $(8,106,507) $(4,464,905) $(4,372,295)
=========== =========== =========== =========== ===========
</TABLE>

NOTE 9--BENEFIT PLAN:

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

NOTE 10--RELATED PARTY TRANSACTIONS

The Company has loans outstanding to officers of the Company. The loans are
collateralized by either stock in the Company or options to purchase stock in
the Company. The interest rates on these loans range from 6% to 8%. The
repayment schedules on these loans range from 2 to 15 years. As of December 31,
1998, December 31, 1999 and June 30, 2000, the total outstanding on these loans
were $125,000, $125,000 and $105,000, respectively.

F-17
<PAGE>

LOGICVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 11--SUBSEQUENT EVENTS (Unaudited)

2000 Employee Stock Option Plan

On August 10, 2000, the Board of Directors authorized the establishment of
the 2000 Employee Stock Option Plan with 2,000,000 shares reserved for grant
under the plan. The plan will become effective upon the closing of the IPO, and
is subject to approval by the shareholders of the Company.

F-18
<PAGE>

[INSIDE BACK COVER]

Text: LogicVision customers and Partners include:

At the top right of the page is the text:
System
Alcatel, Ascend, Cabletron, Cisco,
Ericson, Hal Computers, Hughes,
Lucent, Motorola, Nortel, Raythcon,
Seagate, Sharp, Sun, TRW

Under the text is a picture of a cellular phone.

At the top left of the page is the text:
Integrated Device Manufactures
Fujitsu, Infineon, LSI Logic, National
Semiconductor, NEC, Texas Instruments.

Under this text is a picture of a complex semiconductor chip.

In the center of the page is the LogicVision logo

On the bottom of right of the page is text:
<PAGE>

Fabless
Lara Networks, Level One,
S3 Transwitch

Beneath the text is a picture of a personal computer.

In the bottom left corner of the page is the text:

Partners
Artisan Components,
Cadence, Credence, Magnia,
Model Technology, Synopsys,
Teradyne, Virage Logic

Beneath the text is a picture of engineers working at a computer aided
engineering work station and a tester.
<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

LogicVision, Inc.

[LOGO]

Common Stock

------------

PROSPECTUS
------------

Chase H&Q

Robertson Stephens

SG Cowen

------------

, 2000
------------

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.

Until , 2000, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee and the Nasdaq National Market listing fee.

<TABLE>
<S> <C>
SEC registration fee.............................................. $13,200
National Association of Securities Dealers, Inc. filing fee....... 5,500
Nasdaq National Market listing fee................................
Blue Sky fees and expenses........................................
Accounting fees and expenses......................................
Legal fees and expenses...........................................
Printing and engraving expenses...................................
Registrar and Transfer Agent's fees...............................
Miscellaneous fees and expenses...................................
-------
Total........................................................... $
=======
</TABLE>

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article VIII of the
Registrant's Restated Certificate of Incorporation (Exhibit 3(i).3 hereto) and
Article 5 of the Registrant's Bylaws (Exhibit 3(ii).3 hereto) provide for
indemnification of the Registrant's directors, officers, employees and other
agents to the extent and under the circumstances permitted by the Delaware
General Corporation Law. The Registrant has also entered into agreements with
our directors and officers that will require the Registrant, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers to the fullest extent not
prohibited by law.

The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, our directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.

Item 15. Recent Sales of Unregistered Securities

1. On various dates between January 1997 and June 30, 2000, we issued
2,444,922 shares of our common stock to employees and directors
pursuant to the exercise of options granted under our 1994 Flexible Stock
Option Plan. The exercise prices per share ranged from $ to
$ , for an aggregate consideration of $ .

2. In May and July 1997, we issued 4,217,139 shares of Series F Convertible
Preferred Stock and warrants to purchase an additional 597,602 shares of Series
F Convertible Preferred Stock for aggregate consideration of $17,871,320 to 45
accredited investors and warrants to purchase an additional 5,976 shares to the
placement agent in partial consideration for its services as a placement agent.

3. In May 1997, we issued warrants to purchase 64,103 shares of our Series F
Convertible Preferred Stock to one of our directors and an affiliate of another
of our directors in connection with loans from these persons.

II-1
<PAGE>

4. In January and March 1999, we issued an aggregate of 1,211,765 shares of
Series G Convertible Preferred Stock and warrants to purchase 848,235 shares of
common stock for aggregate consideration of $5,150,001 to eight accredited
investors.

5. In May and June 1999, we issued an aggregate of 775,236 shares of Series
H-1 Convertible Preferred Stock and warrants to purchase 542,620 shares of
Series H-2 Convertible Preferred Stock for aggregate consideration of
$3,294,753 to six accredited investors.

6. In January and May 2000, we issued an aggregate of 3,431,548 shares of
Series I Convertible Preferred Stock for aggregate consideration of $14,584,080
to 34 accredited investors and warrants to purchase an additional 45,695 shares
of Series I Convertible Preferred Stock to the placement agent in partial
consideration for its services as a placement agent.

The sales of the above securities were considered to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions under compensatory benefit plans
and contracts relating to compensation as provided under Rule 701. The
recipients of securities in each of these transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in these transactions. All
recipients had adequate access, through their relationship with the registrant,
to information about the registrant.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit No. Exhibit
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3(i).1 Articles of Incorporation of the Registrant.
3(i).2* Form of Restated Certificate of Incorporation of the Registrant, to
be filed following our reincorporation under Delaware law.
3(i).3* Form of Restated Certificate of Incorporation of the Registrant, to
be filed upon the closing of the offering to which this Registration
Statement relates.
3(ii).1 Bylaws of the Registrant.
3(ii).2* Restated Bylaws of the Registrant, to be effective following our
reincorporation under Delaware law.
3(ii).3* Restated Bylaws of the Registrant, to be effective upon the closing
of the offering to which this Registration Statement relates.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1 1994 Flexible Stock Incentive Plan and form of agreements thereunder.
10.2* 2000 Stock Incentive Plan and form of agreements thereunder.
10.3* Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.4 Sixth Amended and Restated Investors' Rights Agreement dated as of
January 28, 2000.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.

(b) Financial Statement Schedules

Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.

II-2
<PAGE>

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time it
was declared effective.

(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) It will provide to the underwriters at the closing(s) specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 11th day of August, 2000.

LOGICVISION, INC.

/s/ Vinod K. Agarwal
By __________________________________
Vinod K. Agarwal
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Vinod K. Agarwal and John H. Barnet, and each of
them, his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-
effective amendments, to this Registration Statement, and any registration
statement relating to the offering covered by this Registration Statement and
filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<S> <C> <C>
</TABLE>
Name Title Date

/s/ Vinod K. Agarwal President and Chief August 11, 2000
----------------------------------- Executive Officer
Vinod K. Agarwal (Principal Executive
Officer), Director and
Secretary

/s/ John H. Barnet Vice President of FinanceAugust 11, 2000
----------------------------------- and Chief Financial
John H. Barnet Officer
(Principal Financial and
Accounting Officer)

/s/ Navindra Jain Chairman of the August 11, 2000
----------------------------------- Board
Navindra Jain

/s/ Richard C. Black Director August 11, 2000
-----------------------------------
Richard C. Black

II-4
<PAGE>

<TABLE>
<S> <C> <C>
</TABLE>
Name Title Date

August , 2000
Director
-----------------------------------
D. James Guzy
August 11, 2000

/s/ David L. Sulman Director
-----------------------------------
David L. Sulman
August 11, 2000

/s/ Jon D. Tompkins Director
-----------------------------------
Jon D. Tompkins

II-5
<PAGE>

EXHIBIT INDEX