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Higher circuit densities in system-on-chip (SOC) designs have led to drastic increase in test data volume. Larger test data size demands not only higher memory requirements, but also an increase in testing time. Test data compression addresses this problem by reducing the test data volume without affecting the overall system performance. This paper proposes a novel test data compression technique using bitmasks which provides a substantial improvement in the compression efficiency without introducing any additional decompression penalty. The major contributions of this paper are as follows: 1) it develops an efficient bitmask selection technique for test data in order to create maximum matching patterns; 2) it develops an efficient dictionary selection method which takes into account the bitmask based compression; and 3) it proposes a test compression technique using efficient dictionary and bitmask selection to significantly reduce the testing time and memory requirements. We have applied our method on various test data sets and compared our results with other existing test compression techniques. Our algorithm outperforms existing dictionary-based approaches by up to 30%, giving a best possible test compression of 92%.