UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
                                    FORM 10-Q
                            ------------------------

[X]      QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

                                       OR

[_]      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 0-30903

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

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

           DELAWARE                                       38-3171505
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                             411 BOREL AVENUE, 100S
                        SAN MATEO, CALIFORNIA 94402-3116
                                 (650) 573-3210
    (Address, including zip code, and telephone number, including area code,
                of the registrant's principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

         The number of  outstanding  shares of the  registrant's  Common  Stock,
$0.001 par value, was 20,978,790 as of February 2, 2003.

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

                                  VIRAGE, INC.

                                      INDEX

                                                                            PAGE

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

   Condensed Consolidated Balance Sheets - December 31, 2002 and
     March 31, 2002 .......................................................  1

   Condensed Consolidated Statements of Operations -- Three and
     Nine Months Ended December 31, 2002 and 2001 .........................  2

   Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
     December 31, 2002 and 2001 ...........................................  3

   Notes to Condensed Consolidated Financial Statements ...................  4

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations ......................................... 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 37

Item 4. Controls and Procedures ........................................... 37


PART II: OTHER INFORMATION

Item 1. Legal Proceedings ................................................. 38

Item 2. Changes in Securities and Use of Proceeds ......................... 38

Item 3. Defaults Upon Senior Securities ................................... 39

Item 4. Submission of Matters to a Vote of Security Holders ............... 39

Item 5. Other Information ................................................. 39

Item 6. Exhibits and Reports on Form 8-K .................................. 40

Signature ................................................................. 41

Certifications ............................................................ 42

<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


                                  VIRAGE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
                                   (unaudited)


                                                       December 31,   March 31,
                                                          2002          2002
                                                        ---------     ---------
                           ASSETS

Current assets:
  Cash and cash equivalents ........................    $   2,923     $   4,586
  Short-term investments ...........................       15,949        26,108
  Accounts receivable, net .........................        2,037         2,366
  Prepaid expenses and other current assets ........          498           220
                                                        ---------     ---------
      Total current assets .........................       21,407        33,280

Property and equipment, net ........................        1,931         3,701
Other assets .......................................        2,389         2,571
                                                        ---------     ---------
      Total assets .................................    $  25,727     $  39,552
                                                        =========     =========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .................................    $     444     $     831
  Accrued payroll and related expenses .............        1,455         2,376
  Accrued expenses .................................        2,645         2,946
  Deferred revenue .................................        3,235         3,050
                                                        ---------     ---------
      Total current liabilities ....................        7,779         9,203

Deferred rent ......................................           --           290

Commitments and contingencies

Stockholders' equity:
  Preferred stock ..................................           --            --
  Common stock .....................................           21            21
  Additional paid-in capital .......................      121,427       121,387
  Deferred compensation ............................       (1,070)       (2,425)
  Accumulated deficit ..............................     (102,430)      (88,924)
                                                        ---------     ---------
      Total stockholders' equity ...................       17,948        30,059
                                                        ---------     ---------
      Total liabilities and stockholders' equity ...    $  25,727     $  39,552
                                                        =========     =========

                             See accompanying notes.

                                       1
<PAGE>

                                  VIRAGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                      Three Months Ended                     Nine Months Ended
                                                                          December 31,                          December 31,
                                                                  ---------------------------           ---------------------------
                                                                    2002               2001               2002               2001
                                                                  --------           --------           --------           --------
<S>                                                               <C>                <C>                <C>                <C>
Revenues:
  License revenues .....................................          $  1,339           $  1,478           $  4,623           $  6,292
  Service revenues .....................................             1,975              3,290              5,203              7,000
  Other revenues .......................................                --                 20                 --                232
                                                                  --------           --------           --------           --------
    Total revenues .....................................             3,314              4,788              9,826             13,524

Cost of revenues:
  License revenues .....................................               195                202                542                534
  Service revenues(1) ..................................             1,090              2,122              3,308              7,059
  Other revenues .......................................                --                  5                 --                153
                                                                  --------           --------           --------           --------
    Total cost of revenues .............................             1,285              2,329              3,850              7,746
                                                                  --------           --------           --------           --------
Gross profit ...........................................             2,029              2,459              5,976              5,778

Operating expenses:
  Research and development(2) ..........................             1,781              2,117              6,607              6,934
  Sales and marketing(3) ...............................             2,357              3,858              9,104             12,720
  General and administrative(4) ........................               963              1,284              3,174              3,946
  Stock-based compensation .............................               291                719              1,026              2,257
                                                                  --------           --------           --------           --------
    Total operating expenses ...........................             5,392              7,978             19,911             25,857
                                                                  --------           --------           --------           --------
Loss from operations ...................................            (3,363)            (5,519)           (13,935)           (20,079)
Interest and other income, net .........................               101                315                429              1,295
                                                                  --------           --------           --------           --------
Net loss ...............................................          $ (3,262)          $ (5,204)          $(13,506)          $(18,784)
                                                                  ========           ========           ========           ========

Basic and diluted net loss per share ...................          $  (0.16)          $  (0.26)          $  (0.65)          $  (0.93)
                                                                  ========           ========           ========           ========

Shares used in computation of basic and
  diluted net loss per share ...........................            20,899             20,366             20,786             20,249
                                                                  ========           ========           ========           ========
</TABLE>

(1)      Excluding $5 and $15 in amortization of employee  deferred  stock-based
         compensation  for the three and nine months  ended  December  31, 2002,
         respectively ($56 and $199 for the three and nine months ended December
         31, 2001, respectively).

(2)      Excluding $24 and $70 in amortization of employee deferred  stock-based
         compensation  for the three and nine months  ended  December  31, 2002,
         respectively  ($102  and  $321 for the  three  and  nine  months  ended
         December 31, 2001, respectively).

(3)      Excluding $28 and $83 in amortization of employee deferred  stock-based
         compensation  for the three and nine months  ended  December  31, 2002,
         respectively  ($211  and  $670 for the  three  and  nine  months  ended
         December 31, 2001, respectively).

(4)      Excluding  $234  and  $858  in   amortization   of  employee   deferred
         stock-based  compensation  for the three and nine months ended December
         31, 2002,  respectively  ($350 and $1,067 for the three and nine months
         ended December 31, 2001, respectively).

                             See accompanying notes.

                                       2
<PAGE>

                                  VIRAGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                            Nine Months Ended
                                                                                                               December 31,
                                                                                                       ----------------------------
                                                                                                         2002                 2001
                                                                                                       --------            --------
<S>                                                                                                    <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................................           $(13,506)           $(18,784)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization ............................................................              1,870               2,223
  Loss on disposal of assets ...............................................................                106                 263
  Amortization of deferred compensation related to
    stock options and issuance of stock options to consultants .............................              1,113               2,781
  Amortization of technology right .........................................................                 27                  26
  Amortization of warrant fair values ......................................................                 11                 657
  Changes in operating assets and liabilities:
    Accounts receivable ....................................................................                329                 (30)
    Prepaid expenses and other current assets ..............................................               (278)                 37
    Other assets ...........................................................................                155                  --
    Accounts payable .......................................................................               (387)               (167)
    Accrued payroll and related expenses ...................................................               (921)               (372)
    Accrued expenses .......................................................................               (301)                  8
    Deferred revenue .......................................................................                185                (216)
    Deferred rent ..........................................................................               (290)                145
                                                                                                       --------            --------
Net cash used in operating activities ......................................................            (11,887)            (13,429)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .........................................................               (206)               (361)
Purchase of short-term investments .........................................................            (52,500)            (53,508)
Sales and maturities of short-term investments .............................................             62,659              53,837
                                                                                                       --------            --------
Net cash provided by (used in) investing activities ........................................              9,953                 (32)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of repurchases ................................                 80                   3
Proceeds from employee stock purchase plan .................................................                191                 766
                                                                                                       --------            --------
Net cash provided by financing activities ..................................................                271                 769
                                                                                                       --------            --------
Net decrease in cash and cash equivalents ..................................................             (1,663)            (12,692)
Cash and cash equivalents at beginning of period ...........................................              4,586              19,680
                                                                                                       --------            --------
Cash and cash equivalents at end of period .................................................           $  2,923            $  6,988
                                                                                                       ========            ========

SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Book value of equipment write-downs ........................................................           $    476            $    506
Accumulated depreciation of equipment write-downs ..........................................           $    370            $    243
Deferred compensation related to stock options .............................................           $     69            $    123
Reversal of deferred compensation upon employee termination ................................           $    398            $    761
</TABLE>

                             See accompanying notes.

                                       3
<PAGE>

                                  VIRAGE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2002
                                   (unaudited)


1.       Summary of Significant Accounting Policies

Basis of Presentation

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information and in accordance  with the  instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments  (consisting  of normal  recurring  accruals)  necessary  for a fair
presentation of the financial  statements at December 31, 2002 and for the three
and nine month periods ended December 31, 2002 and 2001 have been included.

         The condensed consolidated financial statements include the accounts of
Virage, Inc. (the "Company") and its wholly-owned  subsidiaries,  Virage Europe,
Ltd. and Virage GmbH. All  significant  intercompany  balances and  transactions
have been eliminated in consolidation.

         Results for the three and nine months  ended  December 31, 2002 are not
necessarily  indicative of results for the entire fiscal year or future periods.
These financial  statements  should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's Annual
Report  on Form  10-K,  dated  June 14,  2002 as filed  with the  United  States
Securities and Exchange Commission.  The accompanying balance sheet at March 31,
2002 is derived from the Company's audited consolidated  financial statements at
that date.

Revenue Recognition

         The  Company  enters  into  arrangements  for the sale of  licenses  of
software products and related maintenance  contracts,  application  services and
professional   services  offerings;   and  also  receives  revenues  under  U.S.
government  agency  research  grants.  Service  revenues  include  revenues from
maintenance contracts,  application services,  and professional services.  Other
revenues are primarily U.S. government agency research grants.

         The Company's  revenue  recognition  policy is in  accordance  with the
American  Institute  of Certified  Public  Accountants'  ("AICPA")  Statement of
Position No. 97-2 ("SOP 97-2"),  "Software Revenue  Recognition",  as amended by
Statement  of Position No. 98-4,  "Deferral of the  Effective  Date of SOP 97-2,
"Software  Revenue  Recognition""  ("SOP  98-4"),  and Statement of Position No.
98-9,  "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP
98-9") and is also  consistent  with the  Securities  and Exchange  Commission's
Staff   Accounting   Bulletin  No.  101,   "Revenue   Recognition  in  Financial
Statements." For each arrangement, the Company determines whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection  is  probable.  If  any  of  these  criteria  are  not  met,  revenue
recognition  is deferred  until such time as all  criteria  are met. The Company
considers all arrangements with payment terms extending beyond twelve months and
other  arrangements  with  payment  terms  longer than normal not to be fixed or
determinable.   If  collectibility  is  not  considered  probable,   revenue  is
recognized  when the fee is collected.  Generally,  no customer has the right of
return.

                                       4
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         Arrangements consisting of license and maintenance. For those contracts
that consist solely of license and maintenance,  the Company  recognizes license
revenues  based  upon  the  residual   method  after  all  elements  other  than
maintenance  have  been  delivered  as  prescribed  by  SOP  98-9.  The  Company
recognizes  maintenance  revenues over the term of the  maintenance  contract as
vendor  specific  objective  evidence of fair value for maintenance  exists.  In
accordance with paragraph ten of SOP 97-2, vendor specific objective evidence of
fair value of  maintenance  is determined by reference to the price the customer
will be required to pay when it is sold separately  (that is, the renewal rate).
Customers that enter into  maintenance  contracts have the ability to renew such
contracts at the renewal rate.  Maintenance  contracts are typically one year in
duration.  Revenue is recognized on a per copy basis for licensed  software when
each copy of the license requested by the customer is delivered.

         Revenue is recognized on licensed  software on a per user or per server
basis for a fixed fee when the  product  master is  delivered  to the  customer.
There is no right of  return  or price  protection  for  sales to  domestic  and
international  distributors,   system  integrators,  or  value  added  resellers
(collectively,  "resellers").  In  situations  where the reseller has a purchase
order or other  contractual  agreement  from  the end user  that is  immediately
deliverable  upon,  the  Company  recognizes  revenue  on  the  shipment  to the
reseller,  if other  criteria in SOP 97-2 are met, since the Company has no risk
of  concessions.  The Company  defers  revenue on  shipments to resellers if the
reseller does not have a purchase order or other  contractual  agreement from an
end user that is immediately  deliverable upon or other criteria in SOP 97-2 are
not met. The Company  recognizes  royalty revenues upon receipt of the quarterly
reports from the vendors.

         When  licenses and  maintenance  are sold  together  with  professional
services such as consulting and implementation, license fees are recognized upon
shipment,  provided  that (1) the criteria in the previous  paragraph  have been
met, (2) payment of the license fee is not dependent upon the performance of the
professional   services,  and  (3)  the  services  do  not  include  significant
alterations to the features and functionality of the software.

         Should  professional  services be essential to the functionality of the
licenses in a license arrangement that contains  professional services or should
an arrangement not meet the criteria  mentioned above, both the license revenues
and  professional  service  revenues  are  recognized  in  accordance  with  the
provisions  of the AICPA's  Statement  of Position  No.  81-1,  "Accounting  for
Performance of Construction  Type and Certain  Production Type Contracts"  ("SOP
81-1").  When  reliable  estimates  are  available  for the  costs  and  efforts
necessary  to  complete  the  implementation  services  and  the  implementation
services do not include contractual milestones or other acceptance criteria, the
Company  accounts  for the  arrangements  under  the  percentage  of  completion
contract  method pursuant to SOP 81-1 based upon input measures such as hours or
days.  When such estimates are not available,  the completed  contract method is
utilized.  When an  arrangement  includes  contractual  milestones,  the Company
recognizes  revenues as such milestones are achieved provided the milestones are
not subject to any additional acceptance criteria.

         Application  services.  Application services revenues consist primarily
of web  design and  integration  fees,  video  processing  fees and  application
hosting fees. Web design and  integration  fees are recognized  ratably over the
contract term,  which is generally six to twelve months.  The Company  generates
video processing fees for each hour of video that a customer deploys. Processing
fees are recognized as encoding,  indexing and editorial  services are performed
and are based upon time-based rates of video content.  Application  hosting fees
are generated by and based upon the number of video queries  processed,  subject
in  most  cases  to  monthly  minimums.   The  Company  recognizes  revenues  on
transaction  fees that are  subject to monthly  minimums  based upon the monthly
minimum rate since the Company has no further obligations, the payment terms are
normal and each month is a separate measurement period.

         Professional  Services. The Company provides professional services such
as consulting,  implementation and training services to its customers.  Revenues
from such services,  when not sold in  conjunction  with product  licenses,  are
generally  recognized as the services are  performed  provided all other revenue
recognition criteria are met.

                                       5
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         Other revenues.  Other revenues  consist  primarily of U.S.  government
agency    research   grants   that   are   best   effort    arrangements.    The
software-development   arrangements  are  within  the  scope  of  the  Financial
Accounting   Standards  Board's  ("FASB")  Statement  of  Financial   Accounting
Standards No. 68,  "Research  and  Development  Arrangements."  As the financial
risks associated with the software-development  arrangement rest solely with the
U.S. government agency, the Company is recognizing  revenues as the services are
performed.  The cost of these  services are included in cost of other  revenues.
The Company's contractual  obligation is to provide the required level of effort
(hours), technical reports, and funds and man-hour expenditure reports.

Use of Estimates

         The preparation of the accompanying  unaudited  condensed  consolidated
financial  statements requires management to make estimates and assumptions that
affect the amounts reported in these financial statements.  Actual results could
differ from those estimates.

Cash Equivalents and Short-Term Investments

         The Company  invests its excess cash in money market  accounts and debt
instruments and considers all highly liquid debt  instruments  purchased with an
original  maturity of three months or less to be cash  equivalents.  Investments
with an  original  maturity  at the time of  purchase  of over three  months are
classified as short-term  investments  regardless of maturity  date, as all such
instruments are classified as  available-for-sale  and can be readily liquidated
to meet current  operational  needs.  At December 31, 2002, all of the Company's
cash    equivalents    and   short-term    investments    were   classified   as
available-for-sale  and  consisted  of  obligations  issued  by  U.S.  or  state
government agencies and multinational corporations, maturing within one year.

Comprehensive Net Loss

         The Company has adopted the FASB's  Statement of  Financial  Accounting
Standards  No.  130,  "Reporting  Comprehensive  Income"  ("FAS  130").  FAS 130
establishes  standards  for the reporting  and display of  comprehensive  income
(loss) and its components in a full set of general purpose financial statements.
To date, unrealized gains and losses have been insignificant and the Company has
had no other significant comprehensive income (loss), and consequently, net loss
equals total comprehensive net loss.

Net Loss per Share

         Basic and diluted net loss per share are  computed in  conformity  with
the FASB's Statement of Financial  Accounting  Standards No. 128,  "Earnings Per
Share" ("FAS 128"), for all periods presented, using the weighted average number
of common shares outstanding less shares subject to repurchase.

                                       6
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         The following  table presents the  computation of basic and diluted net
loss per share (in thousands, except per share data):

                                    Three Months Ended      Nine Months Ended
                                        December 31,           December 31,
                                   --------------------    --------------------
                                      2002        2001        2002        2001
                                   --------    --------    --------    --------
Net loss .......................   $ (3,262)   $ (5,204)   $(13,506)   $(18,784)
                                   ========    ========    ========    ========
Weighted-average shares of
  common stock outstanding .....     20,902      20,474      20,797      20,400
Less weighted-average shares of
  common stock subject to
  repurchase ...................         (3)       (108)        (11)       (151)
                                   --------    --------    --------    --------
Weighted-average shares used in
  computation of basic and
  diluted net loss per share ...     20,899      20,366      20,786      20,249
                                   ========    ========    ========    ========

Basic and diluted net loss per
  share ........................   $  (0.16)   $  (0.26)   $  (0.65)   $  (0.93)
                                   ========    ========    ========    ========


         The Company has excluded all  outstanding  stock options,  warrants and
shares subject to repurchase  from the calculation of basic and diluted net loss
per share because these securities are  antidilutive for all periods  presented.
Such  securities,  had they  been  dilutive,  would  have been  included  in the
computation of diluted net loss per share using the treasury stock method.

Impact of Recently Issued Accounting Standards

         In August  2001,  the FASB issued  Statement  of  Financial  Accounting
Standards  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets ("FAS 144")," which addresses financial  accounting and reporting for the
impairment  or  disposal of  long-lived  assets and  supersedes  FAS 121 and the
accounting and reporting  provisions of Accounting  Principles Board Opinion No.
30,  "Reporting  the  Results of  Operations  for a  Disposal  of a Segment of a
Business."  The Company  adopted  FAS 144 as of April 1, 2002 and, to date,  the
adoption of this  statement  has not had a  significant  impact on the Company's
financial  position  and  results  of  operations.   The  Company  monitors  its
long-lived assets,  primarily its property and equipment,  for impairment issues
as part of its on-going financial  processes and the provisions of FAS 144 could
result in the Company recording additional charges in the future.

         In  November   2001,  the  FASB  issued  a  Staff   Announcement   (the
"Announcement"),   Topic  D-103,  which  concluded  that  the  reimbursement  of
"out-of-pocket"  expenses  should be  classified  as revenue in the statement of
operations. The Company adopted the Announcement in its fiscal fourth quarter of
its year  ended  March 31,  2002 and the  Announcement  did not have a  material
affect on the Company's operations, financial position or cash flows.

         In July  2002,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 146,  "Accounting  for Costs  Associated  with Exit and  Disposal
Activities  ("FAS 146")." This  statement  revises the  accounting  for exit and
disposal  activities  under the FASB's  Emerging  Issues  Task Force Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  ("EITF  94-3")," by spreading out the reporting of expenses
related to restructuring activities. Commitment to a plan to exit an activity or
dispose of  long-lived  assets will no longer be sufficient to record a one-time
charge for most  anticipated  costs.  Instead,  companies  will  record  exit or
disposal costs when they are  "incurred" and can be measured at fair value,  and
they will  subsequently  adjust the recorded  liability for changes in estimated
cash flows. Companies may not restate previously issued financial statements for
the  effect  of the  provisions  of  FAS  146  and  liabilities  that a  company
previously recorded under EITF 94-3 are grandfathered.

                                       7
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         During the three months ended  December  31,  2002,  the Company  early
adopted FAS 146.  The Company  also adopted a plan that calls for the Company to
consolidate certain  headquarters  facilities in March 2003. As a result of this
early adoption of FAS 146,  approximately  $1,858,000 of charges  related to the
Company's  planned  facility  consolidation  will be recorded as of the date the
Company  ceases use of the space it intends to abandon  (March 2003)  instead of
the plan adoption date (December 2002) as prescribed under EITF 94-3. Based upon
the facts and  circumstances  around charges that the Company  historically  has
been required to record, the Company currently believes that the adoption of FAS
146 may  affect  the  timing  of,  but  ultimately  will not  have a  materially
different impact on, its operations, financial position or cash flows.

         In November 2002, a consensus was reached regarding the FASB's Emerging
Issues  Task Force  Issue  00-21,  "Accounting  for  Revenue  Arrangements  with
Multiple   Deliverables   ("EITF   00-21")."  EITF  00-21   prescribes  that  if
deliverables in a multi-element  arrangement meet certain criteria,  arrangement
consideration  should be allocated among the separate units of accounting  based
on each unit's relative fair values.  Applicable  revenue  recognition  criteria
should be considered separately for separate units of accounting. EITF 0-21 will
be applicable to agreements  entered into in fiscal periods beginning after June
15, 2003. The Company does not believe EITF 00-21 will have a material effect on
its operations, financial position or cash flows.

         In December  2002,  the FASB issued  Statement of Financial  Accounting
Standards No. 148,  "Accounting  for  Stock-Based  Compensation--Transition  and
Disclosure  ("FAS  148")."  FAS 148 amends  Statement  of  Financial  Accounting
Standards No. 123,  "Accounting  for Stock-Based  Compensation  ("FAS 123")," to
provide  alternative  methods of  transition  to FAS 123's fair value  method of
accounting  for  stock-based  employee  compensation.  FAS 148 also  amends  the
disclosure  provisions of FAS 123 and Accounting  Principles Board's Opinion No.
28,  "Interim  Financial  Reporting,"  to require  disclosure  in the summary of
significant  accounting policies of the effects of an entity's accounting policy
with respect to  stock-based  employee  compensation  on reported net income and
earnings (loss) per share in annual and interim  financial  statements.  FAS 148
does not require  companies to account for employee stock options using the fair
value  method of  accounting  (ie. the  expensing  of stock  option  grants in a
company's statement of operations). The Company will adopt FAS 148 in its fiscal
fourth  quarter  of its  year  ended  March  31,  2003.  FAS 148 will not have a
material effect on the Company's operations, financial position or cash flows as
the Company  will  continue  to account for  employee  stock  options  using the
intrinsic value method of accounting.  However,  the Company will be required to
provide additional  disclosures with its interim and annual financial statements
regarding  the  impact of  employee  stock  options as if it had  accounted  for
employee stock options using the fair value method of accounting.

         In December 2002, the FASB issued  Interpretation No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others  ("FIN 45")." FIN 45  elaborates  on the
disclosures  to be made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize,  at the inception of a
guarantee,  a  liability  for the fair  value of the  obligation  undertaken  in
issuing the guarantee.  The Company has adopted the disclosure  requirements  of
FIN 45 as of December  31, 2002.  In addition,  the Company is required to adopt
the initial  recognition  and  measurement  of the fair value of the  obligation
undertaken in issuing the guarantee on a  prospective  basis for all  guarantees
issued or modified  after December 31, 2002. The Company does not believe FIN 45
will have a material effect on the Company's  operations,  financial position or
cash flows.

                                       8
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

2.       Commitments and Contingencies

         In the normal course of business, the Company is subject to commitments
and contingencies,  including  operating leases,  restructuring  liabilities and
litigation  including  securities-related  litigation  and  other  claims in the
ordinary course of business. The Company records accruals for such contingencies
based  upon  its  assessment  of  the   probability  of  occurrence  and,  where
determinable,  an estimate of the liability.  The Company considers many factors
in making these  assessments  including  past history and the  specifics of each
matter.  The estimate of the liability  necessarily  requires  assumptions to be
made with respect to certain internal and external  variables,  which may affect
the ultimate actual amount of liability. However, actual results may differ from
these estimates if such assumptions later prove inaccurate.  The Company reviews
its assessment of the  likelihood of loss on any  outstanding  contingencies  as
part of its on-going financial processes.

Commitments

         In December  2002, the Company  amended its lease for its  headquarters
(the "Lease Amendment").  The Lease Amendment reduces,  from December 2002 until
December  2003,  the Company's rent rate to half of what the rent rate was under
the original  operating  lease  agreement.  In December 2003, and on each annual
anniversary  thereafter  through the Amendment's  termination  date of September
2006,  the  Company's  rent rate will be adjusted to fair market  value as to be
mutually  determined by the Company and its landlord,  subject to a minimum rate
that is equivalent to the Lease Amendment's initial reduced rate discussed above
(the "Minimum Rate").

         In addition, the Company and its landlord will use best efforts to have
the landlord lease, to a third party,  certain space that the Company intends to
abandon in March 2003.  If the space is leased to a third party,  the space will
be excluded  from the Lease  Amendment as of the date an agreement for the third
party lease is executed,  subject to the Company  guaranteeing  its landlord the
Minimum Rate for the leased space. This guarantee will continue for a minimum of
24 months after the date of execution for the leased space.

         Furthermore,  if the Company is acquired by an  unrelated  entity,  the
acquiror may terminate the lease  obligation for a termination  fee equal to 67%
of the total minimum  monthly rent payable for the  remaining  term of the lease
subsequent to such acquisition.

         In  consideration  for the above,  the  Company  issued its  landlord a
warrant to purchase  200,000  shares of the Company's  common stock at $0.57 per
share (see Note 3). In addition, the Company will pay its landlord $1,250,000 on
January 2, 2003.  On March 30,  2003,  the  landlord  will  release  back to the
Company  $1,250,000 of $2,000,000 of  restricted  cash used to  collateralize  a
letter of  credit.  The  Company  will also  forego  approximately  $240,000  of
security  deposits by March 31, 2003.  The  $2,000,000  of  restricted  cash and
$240,000 of security  deposits are  classified  as other assets on the Company's
condensed  consolidated  balance  sheets as of  December  31, 2002 and March 31,
2002.

         The Company will be obligated  to remit an  additional  $750,000 to its
landlord if its  landlord is able to lease this excess  space for the benefit of
the Company. Should this occur, the Company's landlord will cancel the Company's
letter of credit in its  entirety and release the final  $750,000 of  restricted
cash back to the Company. The Company estimates it will also incur approximately
$325,000 of other  various  expenses  relating to certain  provisions  set forth
within the Lease Amendment.

         In  addition,  the  landlord,  under  certain  limited  conditions  and
exceptions  specified in the Lease Amendment,  may have the option to extend the
term of the Lease Amendment for an additional five (5) years, with the base rent
for the renewal term based on fair market value.

                                       9
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         The Company  began  amortizing  the  $2,565,000  of payments  and other
expenses  described above as rent expense over the life of the lease in December
2002. In March 2003, the Company  anticipates  abandoning  approximately half of
its  headquarters  facility  to  facilitate  the leasing of the space to a third
party. As a result of this and the Company's early adoption of FAS 146 (see Note
1), the Company expects to incur charges of approximately  $1,858,000 during the
three months ended March 31, 2003.  The charges are related to the  write-off of
approximately  half of the unamortized  portion of the $2,565,000 of anticipated
payments  described above and the accrual of approximately  $750,000 relating to
the  expected  leasing  of the excess  space to a third  party at a rate that is
below the Minimum Rate guarantee.

         At  December  31,  2002,  the Company has  contractual  and  commercial
commitments  not  included on its  balance  sheet  primarily  for its San Mateo,
California  facility that it has an obligation to lease through  September 2006.
For the remainder of the fiscal year ended March 31, 2003,  the Company's  total
commitments  amount to $2,290,000.  Future full fiscal year  commitments  are as
follows:  $3,166,000  in  2004,  $1,972,000  in  2005,  $1,715,000  in 2006  and
$1,057,000 in 2007  ($10,200,000 in total  commitments as of December 31, 2002).
The  aforementioned  amounts  include  estimates of expected  fair market rental
rates in fiscal  years  ending March 31, 2004 to March 31, 2007 and the payments
of cash and forfeiture of other  collateral of $1,489,000 and $1,076,000 for the
years  ending  March 31,  2003 and  2004,  respectively,  pursuant  to the Lease
Amendment described above.

Guarantees

         The Company generally provides a warranty for its software products and
services  to its  customers  for a  period  of 90  days  and  accounts  for  its
warranties under the FASB's Statement of Financial  Accounting  Standards No. 5,
"Accounting  for  Contingencies."  The Company's  software  products'  media are
generally  warranted to be free of defects in materials  and  workmanship  under
normal  use and the  products  are also  generally  warranted  to  substantially
perform as described in certain Company  documentation.  The Company's  services
are  generally  warranted  to be  performed  in a  professional  manner  and  to
materially  conform  to the  specifications  set  forth in a  customer's  signed
contract.  In the  event  there is a failure  of such  warranties,  the  Company
generally  will  correct  or provide a  reasonable  work  around or  replacement
product.  The Company's  warranty  accrual as of December 31, 2002 and March 31,
2002 was not significant  and, to date, the Company's  product  warranty expense
has not been significant.

         At December 31, 2002 and March 31, 2002, the Company has two letters of
credit that collateralize certain operating lease obligations of the Company and
total  approximately  $2,018,000.  The Company  collateralizes  these letters of
credit with cash deposits made with certain of its  financial  institutions  and
has  classified  these cash  deposits as other assets on the  Company's  balance
sheet as of December 31, 2002 and March 31, 2002.  The  Company's  landlords are
able to  withdraw  on each  respective  letter of  credit in the event  that the
Company is found to be in default of its obligations under each of its operating
leases.

         The Company  generally does not enter into  indemnification  agreements
that contingently  require the Company to make payments directly to a party that
is  indemnified  by  the  Company  (an  "Indemnified   Party").   The  Company's
indemnification  agreements  generally defend and indemnify an Indemnified Party
against adverse situations such as, for example, defense against plaintiffs in a
lawsuit  brought  by a third  party.  In all such cases the  Company  would make
payments  to such  third  party  and/or  attorneys  if such a third  party  were
successful in such litigation. Historically, the expenses relating to or arising
from the Company's indemnification agreements have not been significant.

                                       10
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

Restructuring

         During the three and nine months ended  December 31, 2002,  the Company
implemented additional restructuring programs to better align operating expenses
with anticipated revenues.  The Company recorded a $940,000 restructuring charge
(the  significant  majority of which was recorded  during the three months ended
June 30,  2002),  which  consisted of $834,000 in employee  severance  costs and
$106,000 in equipment  write-downs  across most of the expense line items in the
Company's  consolidated  statement  of  operations  for the  nine  months  ended
December 31, 2002. The  restructuring  programs resulted in a reduction in force
across all company  functions of approximately 50 employees.  At March 31, 2002,
the  Company  had  $763,000  of accrued  restructuring  costs  (the  significant
majority of which were  recorded  during the three  months ended March 31, 2002)
related  to  monthly  rent for  excess  facility  capacity,  employee  severance
payments and other exit costs. The Company expects to pay out all  restructuring
amounts accrued as of December 31, 2002 over the course of the next 12 months.

         During the three  months ended  December 31, 2002,  the Company made an
adjustment of $66,000 to its accrued excess facilities costs, which affected its
results of operations for the three and nine months ended December 31, 2002. The
excess  facility  accrual was  originally  recorded  pursuant to EITF 94-3.  The
adjustment is a result of the Company's expectation that, in March 2003, it will
re-occupy  certain space it had previously  written-off  and had not intended to
use until April 2003.

         The following table depicts the restructuring  activity during the nine
months ended December 31, 2002 (in thousands):

<TABLE>
<CAPTION>
                                               Balance at                           Expenditures                        Balance at
                                                March 31,                       ---------------------                   December 31,
        Category                                  2002        Additions         Cash         Non-cash     Adjustments      2002
        --------                                 ------       ---------         ----         --------     -----------     ------
<S>                                              <C>            <C>            <C>            <C>          <C>            <C>
Excess facilities ........................       $  460         $   --         $  361         $   --         $   66       $   33
Employee severance .......................          259            834          1,093             --             --           --
Equipment write-downs ....................           --            106             --            106             --           --
Other exit costs .........................           44             --              9             --             --           35
                                                 ------         ------         ------         ------         ------       ------
  Total ..................................       $  763         $  940         $1,463         $  106         $   66       $   68
                                                 ======         ======         ======         ======         ======       ======
</TABLE>


         During the nine months ended December 31, 2001, the Company implemented
restructuring  programs to better  align  operating  expenses  with  anticipated
revenues.  The Company  recorded a $847,000  restructuring  charge  ($397,000 of
which was  recorded  during the three months ended June 30, 2001 and $450,000 of
which was recorded  during the three months ended  September  30,  2001),  which
consisted of $345,000 in facility exit costs and $502,000 in employee  severance
costs  across  most of the  expense  line  items in the  Company's  consolidated
statement  of  operations  for the nine months  ended  December  31,  2001.  The
restructuring  programs  resulted  in a  reduction  in force  across all company
functions of approximately  45 employees.  At December 31, 2001, the Company had
$148,000  of accrued  restructuring  costs  related  to monthly  rent for excess
facility capacity, employee severance payments and other exit costs. The Company
paid these  accrued  amounts out over the course of the 12 months  subsequent to
December 31, 2001.

         The following table depicts the restructuring  activity during the nine
months ended December 31, 2001 (in thousands):

                                                                     Balance at
                                                          Cash      December 31,
       Category                           Additions   Expenditures      2001
       --------                           ---------       ----          ----
Excess facilities ....................      $345          $284          $ 61
Employee severance ...................       502           415            87
                                            ----          ----          ----
  Total ..............................      $847          $699          $148
                                            ====          ====          ====

                                       11
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         The Company has invested  significant  resources  into  developing  and
marketing its recently  introduced  application  products.  The Company believes
that these  application  products  broaden  the value  proposition  to  business
software  application users and expects to derive future revenues as a result of
these product  introductions.  The market for the Company's application products
is in a relatively  early stage.  The Company  cannot predict how the market for
its application  products will develop, and part of its strategic challenge will
be to convince enterprise  customers of the productivity,  communications,  cost
and other benefits of its application  products.  The Company's  future revenues
and  revenue  growth  rates will depend in large part on its success in creating
market acceptance for its application  products.  If the Company fails to do so,
its products and services will not achieve widespread market acceptance, and may
not generate significant revenues to offset its development, sales and marketing
costs,  which will hurt its  business.  This could  lead to the  Company  taking
additional  restructuring actions in order to reduce costs and bring staffing in
line with then anticipated requirements.

Litigation

         Beginning on August 22, 2001,  purported  securities fraud class action
complaints  were  filed in the United  States  District  Court for the  Southern
District of New York.  The cases were  consolidated  and the  litigation  is now
captioned as In re Virage, Inc. Initial Public Offering  Securities  Litigation,
Civ. No.  01-7866 (SAS)  (S.D.N.Y.),  related to In re Initial  Public  Offering
Securities  Litigation,  21 MC 92 (SAS) (S.D.N.Y.).  On or about April 19, 2002,
plaintiffs  electronically served an amended complaint. The amended complaint is
brought  purportedly on behalf of all persons who purchased the Company's common
stock from June 28, 2000 through  December 6, 2000. It names as  defendants  the
Company;  one  current  and one  former  officer  of the  Company;  and  several
investment  banking firms that served as underwriters  of the Company's  initial
public offering. The complaint alleges liability under Sections 11 and 15 of the
Securities Act of 1933 and Sections  10(b) and 20(a) of the Securities  Exchange
Act of 1934, on the grounds that the registration statement for the offering did
not disclose that: (1) the underwriters had agreed to allow certain customers to
purchase shares in the offerings in exchange for excess  commissions paid to the
underwriters;  and (2) the  underwriters  had arranged for certain  customers to
purchase  additional  shares in the  aftermarket at  predetermined  prices.  The
amended  complaint  also alleges  that false  analyst  reports  were issued.  No
specific damages are claimed.

         The Company is aware that similar  allegations  have been made in other
lawsuits filed in the Southern  District of New York  challenging over 300 other
initial  public  offerings and secondary  offerings  conducted in 1999 and 2000.
Those cases have been  consolidated  for pretrial  purposes before the Honorable
Judge Shira A.  Scheindlin.  On July 15, 2002, the Company (and the other issuer
defendants)  filed a motion to  dismiss.  This  motion was heard on  November 1,
2002. The Company  believes that the  allegations  against it and the individual
defendants are without merit, and intends to contest them vigorously.

         From time to time, the Company may become involved in litigation claims
arising from its ordinary  course of business.  The Company  believes that there
are no  claims or  actions  pending  or  threatened  against  it,  the  ultimate
disposition  of which  would have a  material  adverse  effect on the  Company's
consolidated financial position, results of operations or cash flows.

                                       12
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

NASDAQ National Market Trading Requirements

         The Company's stock is currently  traded on the NASDAQ National Market.
Under NASDAQ's listing  maintenance  standards,  if the closing bid price of the
Company's common stock is under $1.00 per share for 30 consecutive trading days,
NASDAQ may choose to notify the Company that it may delist its common stock from
the NASDAQ  National  Market.  On October 31, 2002, the Company  received notice
from NASDAQ  that it is not in  compliance  with  NASDAQ's  listing  maintenance
standards and that it has until January 29, 2003 to regain compliance. If at any
time before January 29, 2003 the bid price of the Company's  common stock closes
at $1.00 per share or more for a minimum of 10 consecutive  trading days, NASDAQ
will  consider  notifying  the  Company  that it complies  with the  maintenance
standards.  If the Company is unable to meet this minimum bid price  requirement
by January 29, 2003, the Company  expects to have the option of  transferring to
the NASDAQ  SmallCap  Market,  which makes available a 180 calendar day extended
grace period for the minimum  $1.00 bid price  requirement  (instead of a 90 day
grace  period as provided  by the NASDAQ  National  Market).  In  addition,  the
Company  expects that it may also be eligible for an additional 180 calendar day
grace period on the NASDAQ SmallCap Market (ie. until October 27, 2003) provided
that the Company meets the other non-bid price related listing criteria.  If the
Company transfers to the NASDAQ SmallCap Market, the Company expects that it may
be  eligible  to transfer  back to the NASDAQ  National  Market if its bid price
maintains the $1.00 per share requirement for 30 consecutive trading days and it
has maintained  compliance with all other continued listing requirements for the
NASDAQ  National  Market.  There can be no assurance  that the Company's  common
stock will  remain  eligible  for trading on the NASDAQ  National  Market or the
NASDAQ SmallCap Market. If the Company's stock were delisted, the ability of the
Company's stockholders to sell any of the Company's common stock at all would be
severely, if not completely, limited.


3.       Stockholders' Equity

Voluntary Stock Option Cancellation and Re-grant Program

         In  February  2002,  the  Company  offered  a  voluntary  stock  option
cancellation and re-grant program to its employees.  The plan allowed  employees
with stock options at exercise prices of $5.00 per share and greater to cancel a
portion or all of these unexercised stock options effective February 6, 2002, if
they so chose, provided that should an employee participate,  any option granted
to that  employee  within the six  months  preceding  February  6, 2002 was also
automatically   cancelled.   On  February  6,  2002,  2,678,250  shares  with  a
weighted-average  exercise price of $9.54 per share were  cancelled  pursuant to
this program. As a result of this program, the Company was required to grant its
employees stock options on August 7, 2002 at the closing market price as of that
date. On August 7, 2002, the Company issued  2,538,250 shares at $0.59 per share
to  employees  that  participated  in  the  Company's   Voluntary  Stock  Option
Cancellation and Re-grant Program.

         In  addition,  the  Company  had two  employees  that were  eligible to
participate  in this  program that did not meet  certain  employee  definitional
criteria  pursuant  to APB  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees," as interpreted by the FASB's  Interpretation No. 44, "Accounting for
Certain  Transactions  involving Stock  Compensation,  an  interpretation of APB
Opinion No. 25."  Accordingly,  the Company had to account for the option grants
to these two  participants  as though they were  non-employees  pursuant to EITF
Issue 96-18,  "Accounting for Equity  Instruments  That Are Issued to Other Than
Employees for  Acquiring,  or in Conjunction  with Selling,  Goods or Services,"
resulting in the Company recording non-cash,  stock-based charges of $87,000 for
the nine months ended December 31, 2002.

                                       13
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

Warrants

         In  December  2002,  the  Company  entered  into an  amendment  for its
headquarters'   operating   lease  (see  Note  2)  and  issued  an   immediately
exercisable,  non-forfeitable warrant to purchase 200,000 shares of common stock
at $0.57 per share.  The  warrant  expires in  December  2005.  The value of the
warrant was estimated to be $86,000 and was based upon a Black-Scholes valuation
model  with the  following  assumptions:  risk free  interest  rate of 1.9%,  no
dividend yield, volatility of 130%, expected life of three years, exercise price
of $0.57  and fair  market  value of $0.57.  The  non-cash  amortization  of the
warrant's  value is being  recorded as rent  expense over the life of the lease.
During the three and nine months ended December 31, 2002,  the Company  recorded
$2,000 as rent expense related to this warrant.

         In December 2000, the Company entered into a services  agreement with a
customer  and  issued an  immediately  exercisable,  non-forfeitable  warrant to
purchase  200,000 shares of common stock at $5.50 per share. The warrant expires
in December  2003. The value of the warrant was estimated to be $648,000 and was
based upon a Black-Scholes valuation model with the following assumptions:  risk
free interest rate of 7.0%, no dividend yield,  volatility of 90%, expected life
of three  years,  exercise  price of $5.50 and fair market  value of $5.38.  The
non-cash  amortization  of the  warrant's  value was  recorded  against  service
revenues as revenues from services were  recognized  over the one-year  services
agreement.  During the three months and nine months ended December 31, 2001, the
Company recorded $216,000 and $648,000, respectively, as contra-service revenues
representing   the  pro-rata   amortization  of  the  warrant's  value  for  the
aforementioned  periods (none during the three or nine months ended December 31,
2002).


4.       Segment Reporting

         The  Company has two  reportable  segments:  the sale of  software  and
related software  support services  ("software") and the sale of its application
and  professional  services which includes  set-up fees,  professional  services
fees,  video  processing fees, and application  hosting fees  ("application  and
professional  services").  The Company's Chief Operating Decision Maker ("CODM")
is the Company's Chief Executive Officer who evaluates performance and allocates
resources based upon total revenues and gross profit (loss).  Discrete financial
information  for each segment's  profit and loss and each segment's total assets
is not provided to the Company's CODM, nor is it tracked by the Company.

                                       14
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

         Information on the Company's reportable segments for the three and nine
months ended December 31, 2002 and 2001 are as follows (in thousands):

                                       Three Months Ended     Nine Months Ended
                                           December 31,          December 31,
                                       ------------------    ------------------
                                         2002       2001       2002       2001
                                       -------    -------    -------    -------
Software:

Total revenues ....................    $ 2,002    $ 2,158    $ 6,635    $ 8,536

Total cost of revenues ............        375        361      1,107      1,121
                                       -------    -------    -------    -------
Gross profit ......................    $ 1,627    $ 1,797    $ 5,528    $ 7,415
                                       =======    =======    =======    =======

Application and Professional Services:

Total revenues ....................    $ 1,312    $ 2,630    $ 3,191    $ 4,988

Total cost of revenues ............        910      1,968      2,743     (6,625)
                                       -------    -------    -------    -------
Gross profit (loss) ...............    $   402    $   662    $   448    $(1,637)
                                       =======    =======    =======    =======


         The Company  expects to incur a charge of  $1,858,000  during the three
months ended March 31, 2003  related to a planned  facility  consolidation  (see
Note 2). Of this amount,  the Company  expects that  approximately  $93,000 will
relate to the Company's software segment and approximately  $261,000 will relate
to the Company's application and professional services segment.


5.       Income Taxes

         The  Company  has not  recorded a  provision  for  federal and state or
foreign  income taxes for the three and nine months  ended  December 31, 2002 or
2001 because the Company has experienced net losses since inception,  which have
resulted in deferred tax assets. The Company has recorded a valuation  allowance
against  all  deferred  tax assets as a result of  uncertainties  regarding  the
realization  of the  balances,  which  only may  occur  through  future  taxable
profits.

                                       15
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                December 31, 2002
                                   (unaudited)

6.       Subsequent Events

NASDAQ National Market Trading Requirements

         On January 30, 2003,  the NASDAQ  Stock Market  submitted a proposal to
the U.S.  Securities and Exchange Commission ("SEC") to extend its pilot program
governing bid price rules for all companies listed on the NASDAQ National Market
and also proposed  additional  bid price rules for all  companies  listed on the
NASDAQ SmallCap Market.  Under the National Market proposal,  NASDAQ will extend
the bid price grace period of its pilot program for all National  Market issuers
from 90 calendar days to 180 calendar  days.  In addition,  the NASDAQ Small Cap
Market has proposed to increase its pilot program by an additional 180 day grace
period  to gain  compliance  with the  minimum  bid price  listing  requirements
(provided  that certain  other  non-bid  price  related  criteria are met by the
registrant).  The SEC must  approve all of the NASDAQ's  proposals  prior to the
proposals becoming effective.

         As described in Note 2 above,  the Company received a letter on October
31,  2002 that it was not in  compliance  with the  NASDAQ's  minimum  bid price
listing requirement.  Based upon NASDAQ's proposed changes,  which still require
SEC approval,  the Company believes that it may have until  approximately  April
29, 2003 to regain compliance with the minimum bid price listing requirement. If
the Company is unable to meet this  minimum  bid price  listing  requirement  by
April 29, 2003, the Company  expects that it may have the option of transferring
to the NASDAQ SmallCap  Market.  Based upon a separate NASDAQ proposal that also
requires SEC approval, the NASDAQ SmallCap market would make available up to two
additional  180 calendar day extended  grace  periods (ie.  until  approximately
April 23,  2004) to meet the minimum  $1.00 bid price  requirement  provided the
Company is able to meet  certain  financial  related  criteria.  If the  Company
transfers  to the NASDAQ  SmallCap  Market,  the Company  expects that it may be
eligible  to  transfer  back to the  NASDAQ  National  Market  if its bid  price
maintains the $1.00 per share requirement for 30 consecutive trading days and it
has maintained  compliance with all other continued listing requirements for the
NASDAQ National Market.

         Should the SEC not approve the  NASDAQ's  proposals  and/or  should the
Company  receive a letter from  NASDAQ  informing  the  Company  that it will be
delisted  due to  noncompliance  with the  National  Market's  minimum bid price
requirement,  the Company  believes it will have the  opportunity to transfer to
the NASDAQ Small Cap Market. From the date of receipt of such a NASDAQ delisting
letter,  the  Company  believes  it  would  have 90 days to  attempt  to  regain
compliance while trading on the NASDAQ SmallCap Market. In addition, the Company
expects  that it may also be eligible for an  additional  180 calendar day grace
period on the NASDAQ  SmallCap  Market provided that the Company meets the other
non-bid price related listing criteria.

         There can be no assurance that the SEC will approve NASDAQ's proposals,
that the Company will comply with other non-bid price related  listing  criteria
or that the  Company's  common  stock will  remain  eligible  for trading on the
NASDAQ  National Market or the NASDAQ  SmallCap  Market.  If the Company's stock
were  delisted,  the ability of the  Company's  stockholders  to sell any of the
Company's common stock at all would be severely, if not completely, limited.

                                       16
<PAGE>

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

         The following  discussion  and analysis of our financial  condition and
results  of  operations  should  be  read  in  conjunction  with  the  "Selected
Consolidated  Financial Data", the condensed  consolidated  financial statements
and related notes contained  herein.  This discussion  contains  forward-looking
statements  within the meaning of Section 27A of the  Securities Act and Section
21E of the Exchange  Act. We may identify  these  statements by the use of words
such  as  "believe",  "expect",  "anticipate",   "intend",  "plan"  and  similar
expressions.   These  forward-looking   statements  involve  several  risks  and
uncertainties.  Our actual results may differ materially from those set forth in
these forward-looking  statements as a result of a number of factors,  including
those described under the caption "Risk Factors" herein.  These  forward-looking
statements  speak only as of the date of this report,  and we caution you not to
rely on these statements  without also  considering the risks and  uncertainties
associated with these statements and our business as addressed elsewhere in this
report.

         Virage, Inc. is a provider of software products,  professional services
and  application  services that enable owners of rich-media  and video assets to
more effectively  communicate,  manage, retrieve and distribute these rich-media
assets  for  improved  productivity  and  communications.   Depending  on  their
particular needs and resources,  our customers may elect to license our software
products or employ our  application  or  professional  services.  Our  customers
include  media  and  entertainment  companies,  other  corporations,  government
agencies and educational institutions.

Recent Events

Application Products

         During the past year, we introduced new software  application  products
that are  targeted  toward a  broadened  user base  within our key  markets.  VS
Publishing is an  application  that offers media and  entertainment  customers a
streamlined workflow for rich-media web publishing, including a simple editorial
control and greater  website  programming  capabilities.  VS  Webcasting  allows
corporations  to  self-produce  live and  on-demand  webcasting  events  such as
executive  communications,  human resource broadcasts and webinars.  Finally, VS
Production  is an  integrated  software  solution  for media  and  entertainment
enterprises  that  automates  the  professional  video  production  process from
acquisition to distribution.

         Though we have sold each of these  products  to date,  early  demand is
strongest  for  our VS  Webcasting  product,  particularly  from  our  corporate
enterprise customers. However, our VS Publishing and VS Production products were
released  at a later  date  than  VS  Webcasting,  and we  continue  to  monitor
anticipated  market demand and sales  success for these  products as we evaluate
the allocation and  prioritization of our available  resources.  We may discover
that the  marketplace  for our  application  products is not as robust as we had
expected and we may react to this by leaving the  development of a product at an
early stage or combining key features of one or more of our application products
into a single product.

         We continue to believe  that the success of our  application  products,
particularly VS Webcasting,  is critical to our future and have heavily invested
our resources in the  development,  marketing,  and sale of them. The market for
our application  products is in a relatively  early stage. We cannot predict how
much the market  for our  application  products  will  develop,  and part of our
strategic   challenge   will  be  to  convince   enterprise   customers  of  the
productivity,  communications,  cost, and other benefits of these products.  Our
future  revenues  and  revenue  growth  rates  will  depend in large part on our
success  in  creating  market  acceptance  for one or  more  of our  application
products.

                                       17
<PAGE>

Facility Lease Amendment

         In December 2002, we amended our lease for our headquarters (the "Lease
Amendment").  The Lease  Amendment  reduces,  from December 2002 until  December
2003,  our rent  rate to half of what  the rent  rate  was  under  our  original
operating  lease  agreement.  In December 2003,  and on each annual  anniversary
thereafter through the Amendment's  termination date of September 2006, our rent
rate will be adjusted to fair market  value as to be mutually  determined  by us
and our  landlord,  subject to a minimum  rate that is  equivalent  to the Lease
Amendment's initial reduced rate discussed above (the "Minimum Rate").

         In  addition,  we and our  landlord  will use best  efforts to have our
landlord  lease,  to a third party,  certain  space that we intend to abandon in
March 2003. If the space is leased to a third party,  the space will be excluded
from the Lease  Amendment as of the date an agreement  for the third party lease
is executed,  subject to our  guaranteeing our landlord the Minimum Rate for the
leased space.  This guarantee will continue for a minimum of 24 months after the
date of execution for the leased space.

         Furthermore,  if we are acquired by an unrelated  entity,  the acquirer
may terminate  the lease  obligation  for a termination  fee equal to 67% of the
total  minimum  monthly  rent  payable  for  the  remaining  term  of the  lease
subsequent to such acquisition.

         In  consideration  for the above,  we issued our  landlord a warrant to
purchase 200,000 shares of our common stock at $0.57 per share. In addition,  we
will pay our landlord  $1,250,000  on January 2, 2003.  On March 30,  2003,  our
landlord will release back to us  $1,250,000  of  $2,000,000 of restricted  cash
used to  collateralize  a letter of credit.  We will also  forego  approximately
$240,000 of security  deposits by March 31, 2003.  The  $2,000,000 of restricted
cash and  $240,000 of security  deposits are  classified  as other assets on our
consolidated balance sheets as of December 31, 2002 and March 31, 2002.

         We will  also be  obligated  to remit  an  additional  $750,000  to our
landlord if our  landlord is able to lease this excess  space for the benefit of
the Company. Should this occur, our landlord will cancel our letter of credit in
its entirety and release the final  $750,000 of  restricted  cash back to us. We
estimate we will also incur  approximately  $325,000 of other  various  expenses
relating to certain provisions set forth within the Lease Amendment.

         In  addition,  our  landlord,  under  certain  limited  conditions  and
exceptions  specified in the Lease Amendment,  may have the option to extend the
term of the Lease Amendment for an additional five (5) years, with the base rent
for the renewal term based on fair market value.

         We began  amortizing  the  $2,565,000  of payments  and other  expenses
described  above as rent expense over the life of the lease in December 2002. As
noted above, in March 2003, we anticipate  abandoning  approximately half of our
headquarters  facility to facilitate  the leasing of the space to a third party.
As a result of this and the  Company's  early  adoption of FAS 146, we expect to
incur charges of  approximately  $1,858,000  during the three months ended March
31, 2003. The charges are related to the write-off of approximately  half of the
unamortized  portion of the $2,565,000 of anticipated  payments  described above
and the accrual of  approximately  $750,000  relating to the expected leasing of
the  excess  space to a third  party at a rate  that is below the  Minimum  Rate
guarantee.

                                       18
<PAGE>

Business Restructuring Charges

         During the nine months ended  December 31, 2002,  we  re-evaluated  our
cost structure and executed additional restructuring measures designed to reduce
and  consolidate   operations  worldwide.   We  further  reduced  headcount  and
infrastructure  across all  functional  areas of the  company  in our  continued
efforts to limit our expenses and more closely match our expense and short-term,
anticipated revenue levels. These headcount and infrastructure  changes resulted
in a  reduction  in  force  of  approximately  50  employees  worldwide  and the
recording of $940,000 in business  restructuring  charges during the nine months
ended  December 31, 2002.  A breakdown  of our  business  restructuring  charges
during  the  nine  months  ended   December  31,  2002  and  of  the   remaining
restructuring accrual is as follows:

<TABLE>
<CAPTION>
                                            Balance at                           Expenditures                         Balance at
                                             March 31,                      ----------------------                    December 31,
        Category                               2002        Additions         Cash         Non-cash     Adjustments        2002
        --------                              ------       ---------        ------        --------     -----------       ------
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Excess facilities and other ..............    $  504         $   --         $  370         $   --         $   66         $   68
Employee severance .......................       259            834          1,093             --             --             --
Equipment write-downs ....................        --            106             --            106             --             --
                                              ------         ------         ------         ------         ------         ------
  Total ..................................    $  763         $  940         $1,463         $  106         $   66         $   68
                                              ======         ======         ======         ======         ======         ======
</TABLE>


         Excess  Facilities  and Other Exit Costs:  Excess  facilities and other
exit costs relate to lease obligations and closure costs associated with offices
we have vacated as a result of our cost reduction initiatives. Cash expenditures
for excess facilities and other exit costs during the nine months ended December
31, 2002 primarily represent contractual ongoing lease payments.  Our management
reviews our  facility  requirements  and  assesses  whether any excess  capacity
exists as part of our on-going financial processes.

         During the three months ended  December 31, 2002, we made an adjustment
of $66,000 to our accrued excess facilities costs, which affected our results of
operations  for the three and nine months ended  December  31, 2002.  The excess
facility accrual was originally  recorded pursuant to the FASB's Emerging Issues
Task Force Issue 94-3,  "Liability  Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity ("EITF 94-3")." The adjustment is a
result of our expectation  that, in March 2003, we will re-occupy  certain space
we had previously written-off and had not intended to use until April 2003.

         Employee  Severance:   Employee  severance,  which  includes  severance
payments,  related taxes, outplacement and other benefits, totaled approximately
$834,000   during  the  nine  months  ended  December  31,  2002   (representing
approximately 50 terminated  employees),  and $1,093,000 was paid in cash during
the  nine  months  ended  December  31,  2002.  Personnel  affected  by the cost
reduction  initiatives  during the nine months  ended  December 31, 2002 include
employees in positions  throughout  the company in sales,  marketing,  services,
engineering, and general and administrative functions in all geographies.

         Equipment  Write-Downs:  As part of our cost restructuring  efforts, we
decided  to  substantially  downsize  our  subsidiary  in  the  United  Kingdom,
primarily  in response to weak market  conditions  in Europe.  Pursuant to these
efforts,  we reduced  our  European  asset  infrastructure  by  reducing  assets
previously  used by  terminated  employees.  This  resulted  in a  write-off  of
approximately  $106,000 of assets at net book value. Our management  reviews its
equipment  requirements and assesses whether any excess equipment exists as part
of our on-going financial processes.

                                       19
<PAGE>

Voluntary Stock Option Cancellation and Re-grant Program

         In  February  2002,  we  canceled  2,678,250  stock  options of certain
employees who elected to participate in our voluntary stock option  cancellation
and re-grant  program.  Many of our  employees  canceled  stock options that had
significantly  higher  exercise  prices in  comparison to where our common stock
price currently  trades. On August 7, 2002, we issued 2,538,250 stock options to
current  employees  who  participated  in the program with a new exercise  price
equal to $0.59 per share.

         We believe that this program has helped,  and will continue to help, to
retain our employees and to improve our workforce morale.  However, this program
may cause dilution to our existing  stockholder  base, which may cause our stock
price to fall.

Critical Accounting Policies & Estimates

         The  discussion  and analysis of our financial  position and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  generally  accepted  accounting  principles in the
United  States.  The  preparation  of these  consolidated  financial  statements
requires us to make estimates and judgments that affect the reported  amounts of
assets,   liabilities,   revenues,  and  expenses,  and  related  disclosure  of
contingent  assets  and  liabilities.   We  base  our  estimates  on  historical
experience and on various other  assumptions  that are believed to be reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent from other sources.  Estimates and assumptions are reviewed as
part of our management's on-going financial processes. Actual results may differ
from these estimates under different assumptions and conditions.

         We believe our  critical  accounting  policies  and  estimates  include
accounting for revenue  recognition and the accounting and related estimates for
our commitments and contingencies.

Revenue Recognition

         We  enter  into  arrangements  for the  sale of  licenses  of  software
products   and  related   maintenance   contracts,   application   services  and
professional services offerings; and also receive revenues under U.S. government
agency research  grants.  Service  revenues  include  revenues from  maintenance
contracts,  application services, and professional services.  Other revenues are
primarily U.S. government agency research grants.

         Our  revenue  recognition  policy is in  accordance  with the  American
Institute of Certified Public  Accountants'  ("AICPA") Statement of Position No.
97-2 ("SOP 97-2"),  "Software Revenue  Recognition",  as amended by Statement of
Position  No.  98-4,  "Deferral  of the  Effective  Date of SOP 97-2,  "Software
Revenue  Recognition""  ("SOP  98-4"),  and  Statement  of  Position  No.  98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP 98-9")
and is also  consistent  with the  Securities  and Exchange  Commission's  Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial  Statements." For
each  arrangement,  we  determine  whether  evidence of an  arrangement  exists,
delivery has  occurred,  the fee is fixed or  determinable,  and  collection  is
probable.  If any of these criteria are not met, revenue recognition is deferred
until such time as all  criteria  are met. We  consider  all  arrangements  with
payment terms extending beyond twelve months and other arrangements with payment
terms longer than normal not to be fixed or determinable.  If  collectibility is
not  considered  probable,  revenue  is  recognized  when the fee is  collected.
Generally, no customer has the right of return.

         Arrangements consisting of license and maintenance. For those contracts
that consist solely of license and  maintenance,  we recognize  license revenues
based upon the residual  method after all elements other than  maintenance  have
been delivered as prescribed by SOP 98-9. We recognize maintenance revenues over
the term of the maintenance  contract as vendor specific  objective  evidence of
fair value for maintenance exists. In accordance with paragraph ten of SOP 97-2,
vendor specific objective evidence of fair value of maintenance is determined by
reference  to the price the  customer  will be  required  to pay when it is sold
separately  (that is, the renewal rate).  Customers that enter into  maintenance
contracts  have the  ability  to  renew  such  contracts  at the  renewal  rate.
Maintenance contracts are typically one year in duration.  Revenue is recognized
on a per  copy  basis  for  licensed  software  when  each  copy of the  license
requested by the customer is delivered.

                                       20
<PAGE>

         Revenue is recognized on licensed  software on a per user or per server
basis for a fixed fee when the  product  master is  delivered  to the  customer.
There is no right of  return  or price  protection  for  sales to  domestic  and
international  distributors,   system  integrators,  or  value  added  resellers
(collectively,  "resellers").  In  situations  where the reseller has a purchase
order or other  contractual  agreement  from  the end user  that is  immediately
deliverable upon, we recognize revenue on the shipment to the reseller, if other
criteria  in SOP 97-2 are met,  since we have no risk of  concessions.  We defer
revenue on shipments to resellers if the reseller does not have a purchase order
or other contractual agreement from an end user that is immediately  deliverable
upon or other  criteria in SOP 97-2 are not met. We recognize  royalty  revenues
upon receipt of the quarterly reports from the vendors.

         When  licenses and  maintenance  are sold  together  with  professional
services such as consulting and implementation, license fees are recognized upon
shipment,  provided  that (1) the criteria in the previous  paragraph  have been
met, (2) payment of the license fee is not dependent upon the performance of the
professional   services,  and  (3)  the  services  do  not  include  significant
alterations to the features and functionality of the software.

         Should  professional  services be essential to the functionality of the
licenses in a license arrangement which contains professional services or should
an arrangement not meet the criteria  mentioned above, both the license revenues
and  professional  service  revenues  are  recognized  in  accordance  with  the
provisions  of the AICPA's  Statement  of Position  No.  81-1,  "Accounting  for
Performance of Construction  Type and Certain  Production Type Contracts"  ("SOP
81-1").  When  reliable  estimates  are  available  for the  costs  and  efforts
necessary  to  complete  the  implementation  services  and  the  implementation
services do not include contractual  milestones or other acceptance criteria, we
account for the arrangements under the percentage of completion  contract method
pursuant to SOP 81-1 based upon input measures such as hours or days.  When such
estimates are not available,  the completed contract method is utilized. When an
arrangement  includes  contractual  milestones,  we  recognize  revenues as such
milestones  are  achieved  provided  the  milestones  are  not  subject  to  any
additional acceptance criteria.

         Application  services.  Application services revenues consist primarily
of account set-up,  web design and integration  fees,  video processing fees and
application  hosting fees.  Account set-up,  web design and integration fees are
recognized  ratably over the  contract  term,  which is generally  six to twelve
months. We generate video processing fees for each hour of video that a customer
deploys.  Processing  fees are  recognized  as encoding,  indexing and editorial
services  are  performed  and are  based  upon  hourly  rates  per hour of video
content.  Application  hosting fees are  generated  based on the number of video
queries  processed,  subject to  monthly  minimums.  We  recognize  revenues  on
transaction  fees that are subject to monthly  minimums on a monthly basis since
we have no further obligations, the payment terms are normal and each month is a
separate measurement period.

         Professional   services.  We  provide  professional  services  such  as
consulting, implementation and training services to our customers. Revenues from
such services, when not sold in conjunction with product licenses, are generally
recognized as the services are performed provided all other revenue  recognition
criteria are met.

         Other revenues.  Other revenues  consist  primarily of U.S.  government
agency    research   grants   that   are   best   effort    arrangements.    The
software-development   arrangements  are  within  the  scope  of  the  Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 68,
"Research and Development  Arrangements." As the financial risks associated with
the  software-development  arrangement  rest  solely  with the  U.S.  government
agency, we recognize  revenues as the services are performed.  The cost of these
services  is  included  in cost of other  revenues.  The  Company's  contractual
obligation  is to  provide  the  required  level of  effort  (hours),  technical
reports, and funds and man-hour expenditure reports.

                                       21
<PAGE>

         We follow very specific and detailed  guidelines,  discussed  above, in
determining revenues; however, certain judgments and estimates are made and used
to determine revenue recognized in any accounting period.  Material  differences
may result in the amount  and  timing of  revenue  recognized  for any period if
different  conditions  were to prevail.  For  example,  in  determining  whether
collection is probable, we assess each customer's ability and intent to pay. Our
actual  experience  with  respect to  collections  could differ from our initial
assessment if, for instance,  unforeseen  declines in the overall  economy occur
and negatively impact our customers'  financial  condition.  To date, we believe
that our revenue  recognition has been proper and our related reserves have been
sufficient.

Commitments and Contingencies

         In the normal  course of business,  we are subject to  commitments  and
contingencies,  including operating leases, restructuring liabilities, and legal
proceedings   and  claims  that  cover  a  wide  range  of  matters,   including
securities-related  litigation  and  other  claims  in the  ordinary  course  of
business. We record accruals for such contingencies based upon our assessment of
the  probability  of  occurrence  and,  where  determinable,  an estimate of the
liability.  We consider many factors in making these assessments  including past
history and the specifics of each matter. We believe that there are no claims or
actions  pending or  threatened  against  us that would have a material  adverse
effect on our  operating  results.  Further,  we review  our  assessment  of the
likelihood of loss on any outstanding  contingencies as part of our management's
on-going  financial  processes.  However,  actual  results may differ from these
estimates under different assumptions and conditions.

         In July  2002,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 146,  "Accounting  for Costs  Associated  with Exit and  Disposal
Activities  ("FAS 146")." This  statement  revises the  accounting  for exit and
disposal  activities  under EITF 94-3 by spreading out the reporting of expenses
related to restructuring activities. Commitment to a plan to exit an activity or
dispose of  long-lived  assets will no longer be sufficient to record a one-time
charge for most  anticipated  costs.  Instead,  companies  will  record  exit or
disposal costs when they are  "incurred" and can be measured at fair value,  and
they will  subsequently  adjust the recorded  liability for changes in estimated
cash flows. Companies may not restate previously issued financial statements for
the  effect  of the  provisions  of  FAS  146  and  liabilities  that a  company
previously recorded under EITF 94-3 are grandfathered.  Based upon the facts and
circumstances  around charges that we historically have been required to record,
we currently  believe that the adoption of FAS 146 may affect the timing of, but
ultimately  will not have a  materially  different  impact on,  our  operations,
financial  position  or  cash  flows  as  the  accounting  treatment  under  the
provisions of FAS 146 are not dissimilar to those prescribed under EITF 94-3.

         During the three months ended  December 31, 2002,  we early adopted FAS
146  and we  also  adopted  a plan  that  calls  for us to  consolidate  certain
headquarters facilities in March 2003. As a result of this early adoption of FAS
146,  approximately  $1,858,000 of charges  related to the our planned  facility
consolidation  will be  recorded  as of the  date we cease  use of the  space we
intend to abandon (March 2003) instead of the plan adoption date (December 2002)
as prescribed under EITF 94-3.

         At December 31, 2002, we have  contractual  and commercial  commitments
not  included  on our  balance  sheet  primarily  for our San Mateo,  California
facility that we have an obligation to lease  through  September  2006.  For the
remainder of the fiscal year ended March 31, 2003, our total commitments  amount
to $2,290,000. Future full fiscal year commitments are as follows: $3,166,000 in
2004, $1,972,000 in 2005, $1,715,000 in 2006 and $1,057,000 in 2007 ($10,200,000
in total  commitments  as of December  31,  2002).  The  aforementioned  amounts
include our best  estimate of expected  fair market rental rates in fiscal years
ending  March 31,  2004 to March 31,  2007 and if we  underestimate  these  fair
market rental rates,  the amount of our contractual  commitments  will increase.
The aforementioned amounts also include payments of cash and forfeiture of other
collateral of $1,489,000  and $1,076,000 for the years ending March 31, 2003 and
2004, respectively, pursuant to the Lease Amendment described above.

         From time to time, we may become involved in litigation  claims arising
from our ordinary  course of business.  We provide  further  detail about one of
these claims in the notes to our  condensed  consolidated  financial  statements
included elsewhere in this quarterly report. We believe that there are no claims
or actions pending or threatened  against us, the ultimate  disposition of which
would have a material adverse effect on the our consolidated financial position,
results of operations or cash flows.

                                       22
<PAGE>

Results of Operations

         The  following  table sets forth  consolidated  financial  data for the
periods indicated, expressed as a percentage of total revenues:


<TABLE>
<CAPTION>
                                                  Three Months Ended                  Nine Months Ended
                                                      December 31,                        December 31,
                                            -------------------------------     ------------------------------
                                                 2002              2001              2002             2001
                                            ------------      -------------     -------------    -------------
<S>                                                   <C>              <C>               <C>              <C>
  Revenues:
    License revenues....................              40 %               31 %              47 %             46 %
    Service revenues....................              60                 69                53               52
    Other revenues......................              --                 --                --                2
                                            ------------      -------------     -------------    -------------
      Total revenues....................             100                100               100              100
  Cost of revenues:
    License revenues....................               6                  4                 5                4
    Service revenues....................              33                 45                34               52
    Other revenues......................              --                 --                --                1
                                            ------------      -------------     -------------    -------------
      Total cost of revenues............              39                 49                39               57
                                            ------------      -------------     -------------    -------------
  Gross profit..........................              61                 51                61               43
  Operating expenses:
    Research and development............              54                 44                67               51
    Sales and marketing.................              71                 80                93               94
    General and administrative..........              29                 27                32               29
    Stock-based compensation............               8                 15                11               17
                                            ------------      -------------     -------------    -------------
      Total operating expenses..........             162                166               203              191
                                            ------------      -------------     -------------    -------------
  Loss from operations..................            (101)              (115)             (142)            (148)
  Interest and other income, net........               3                  6                 5                9
                                            ------------      -------------     -------------    -------------
  Net loss..............................             (98)%             (109)%            (137)%           (139)%
                                            =============     =============     =============    =============
</TABLE>

         We incurred net losses of $3,262,000 and  $13,506,000  during the three
and nine months ended December 31, 2002, respectively.  As of December 31, 2002,
we had an accumulated  deficit of  $102,430,000.  We expect to continue to incur
operating  losses for the foreseeable  future.  In view of the rapidly  changing
nature  of our  market  and our  limited  operating  history,  we  believe  that
period-to-period comparisons of our revenues and other operating results are not
necessarily  meaningful  and should not be relied upon as  indications of future
performance. Our historic revenue growth rates have not been sustainable and are
not necessarily indicative of future growth.

         Revenues.  Total revenues  decreased to $3,314,000 for the three months
ended December 31, 2002 from  $4,788,000 for the three months ended December 31,
2001, a decrease of $1,474,000 or 31%. Total revenues decreased by $3,698,000 or
27% to $9,826,000 for the nine months ended  December 31, 2002 from  $13,524,000
for the nine  months  ended  December  31,  2001.  These  decreases  were due to
decreases  in  license,  service,  and other  revenues.  International  revenues
increased to $1,025,000,  or 31% of total  revenues,  for the three months ended
December 31, 2002 from $799,000, or 17% of total revenues,  for the three months
ended December 31, 2001. International revenues decreased in absolute dollars to
$2,569,000,  or 26% of total  revenues,  for the nine months ended  December 31,
2002  from  $3,413,000,  or 25% of total  revenues,  for the nine  months  ended
December 31, 2001. No customer  constituted  more than 10% of total revenues for
the  three or nine  months  ended  December  31,  2002.  Sales  to one  customer
accounted for 30% of total revenues for the three months ended December 31, 2001
and  sales  to two  customers  (one  of whom  was a  reseller  of our  products)
accounted for 15% and 11%,  respectively,  of total revenues for the nine months
ended December 31, 2001.

                                       23
<PAGE>

         License revenues  decreased to $1,339,000 during the three months ended
December 31, 2002 from  $1,478,000  during the three  months ended  December 31,
2001, a decrease of $139,000 or 9%. License revenues  decreased by $1,669,000 or
27% to $4,623,000 during the nine months ended December 31, 2002 from $6,292,000
during the nine months ended  December 31, 2001.  These  decreases are primarily
due to lower  unit sales of our  platform  products,  particularly  sales of our
SmartEncode product suite to the media and entertainment marketplace.  The media
and  entertainment  marketplace  was our weakest  market for  software  licenses
during the three months ended  December  31, 2002.  Historically,  the media and
entertainment  marketplace has been our strongest market for software  licenses.
We believe the reduction in revenues for our platform  products during the three
and nine months ended  December 31, 2002 is primarily a function of  unfavorable
global macroeconomic conditions affecting a number of our potential customers in
markets  such as media  and  entertainment  and  resulting  in weak  demand  for
information technology products.

         Service  revenues  decreased to  $1,975,000  for the three months ended
December 31, 2002 from  $3,290,000 for the three months ended December 31, 2001,
a decrease of $1,315,000. Service revenues decreased by $1,797,000 to $5,203,000
for the nine months ended December 31, 2002 from  $7,000,000 for the nine months
ended  December 31, 2001.  These  decreases  are  primarily  the result of lower
revenues in our application services business,  primarily due to the non-renewal
of our application  services  contract with Major League Baseball Advanced Media
("MLBAM").  Service revenues during the three and nine months ended December 31,
2001  include  $216,000  and  $648,000,  respectively,  of warrant  amortization
recorded as contra-service revenues resulting from a warrant issued to MLBAM.

         Other  revenues  were  $20,000 and  $232,000  during the three and nine
months  ended  December  31, 2001 (none  during the three and nine months  ended
December 31, 2002). These decreases were primarily  attributable to the level of
engineering  research  services  performed  pursuant  to  a  federal  government
research grant.

         Cost of  Revenues.  Cost of  license  revenues  consists  primarily  of
royalty fees for third-party software products integrated into our products. Our
cost of service  revenues  includes  personnel  expenses and other direct costs,
related  overhead,  communication  expenses and capital  depreciation  costs for
maintenance and support  activities and application and  professional  services.
Our cost of other revenues primarily includes engineering personnel expenses and
related overhead for engineering research for government projects. Total cost of
revenues decreased to $1,285,000, or 39% of total revenues, for the three months
ended December 31, 2002 from $2,329,000, or 49% of total revenues, for the three
months ended December 31, 2001. Total cost of revenues  decreased to $3,850,000,
or 39% of total  revenues,  for the nine  months  ended  December  31, 2002 from
$7,746,000,  or 57% of total  revenues,  for the nine months ended  December 31,
2001.  These decreases in total cost of revenues were due primarily to decreases
in our cost of  service  revenues  during  the three and the nine  months  ended
December 31, 2002.  We expect our total cost of revenues to increase  during our
fourth fiscal  quarter in comparison to our third fiscal  quarter ended December
31,  2002  due to the  allocation  of the  one-time  charge  to be  recorded  in
connection  with our  restructured  San Mateo office lease (as  discussed  under
"Facility  Lease  Amendment"  above).  Excluding  the  one-time  effects of this
facility  charge,  we generally expect that increases or decreases in the dollar
amount of our total cost of revenues will  correlate with increases or decreases
in the dollar amount of our total revenues.  However, our total cost of revenues
is  highly  variable  and  has,  in  the  past,  been   inconsistent   with  our
expectations.

         Cost of  license  revenues  decreased  to  $195,000,  or 15% of license
revenues,  during the three months ended December 31, 2002 from $202,000, or 14%
of license  revenues,  during the three  months ended  December  31, 2001.  This
decrease (in absolute  dollars) was due to lower unit sales of our products that
are subject to unit-based  (rather than fixed-fee)  license royalty payments for
the three months ended December 31, 2002 in comparison to the three months ended
December 31, 2001. For the nine months ended December 31, 2002,  cost of license
revenues increased to $542,000, or 12% of license revenues, from $534,000, or 8%
of license  revenues,  during the same period in the prior year.  This  increase
during  the  nine  months  ended  December  31,  2002 was  primarily  due to the
introduction  of our new  application  products  and other  recently  introduced
products during our fiscal year 2003 for which we incur a unit-based  royalty to
certain  technology  providers.  These additional  unit-based  royalties paid in
fiscal  2003  were  incremental  to  fixed  royalties  paid  to  our  historical
technology providers in fiscal 2002 and fiscal 2003.

                                       24
<PAGE>

         Cost of service  revenues  decreased to  $1,090,000,  or 55% of service
revenues,  for the three months ended December 31, 2002 from $2,122,000,  or 65%
of service  revenues for the three months ended  December 31, 2001. For the nine
months  ended  December  31,  2002,  cost  of  service  revenues   decreased  to
$3,308,000,  or 64% of service  revenues,  from  $7,059,000,  or 101% of service
revenues for the nine months ended December 31, 2001.  These  decreases were due
to lower expenditures for our application  services  business,  primarily due to
the  non-renewal  of our  contract  with MLBAM,  which  allowed us to reduce our
headcount and  infrastructure  costs and better  aligned our cost structure with
our current revenue levels.

         Cost of other revenues was $5,000 and $153,000, or 25% and 66% of other
revenues, during the three and nine months ended December 31, 2001, respectively
(none for the three and nine months ended  December 31, 2002).  These  decreases
were  attributable  to the  level of  engineering  research  services  performed
pursuant to federal government research contracts.

         Research and Development  Expenses.  Research and development  expenses
consist  primarily of personnel  and related  costs for our product  development
efforts.  Research and development  expenses decreased to $1,781,000,  or 54% of
total revenues, for the three months ended December 31, 2002 from $2,117,000, or
44% of total  revenues,  for the three months ended  December 31, 2001.  For the
nine months ended December 31, 2002, research and development expenses decreased
to  $6,607,000,  or 67% of  total  revenues,  from  $6,934,000,  or 51% of total
revenues, for the nine months ended December 31, 2001. The decreases in absolute
dollars were  primarily due to reduced  payroll and related  expenses  resulting
from lower  headcount due primarily to our  restructuring  initiatives in fiscal
2003. We expect research and development  expenses to increase during our fourth
fiscal  quarter due to the  allocation of the one-time  charge to be recorded in
connection  with the  restructured  San Mateo office lease (as  discussed  under
"Facility  Lease  Amendment"  above).  Excluding  the  one-time  effects of this
facility charge, we expect that our quarterly research and development  expenses
will remain  relatively  consistent with our third fiscal quarter ended December
31, 2002. To date, we have not  capitalized  any software  development  costs as
they have been insignificant after establishing technological feasibility.

         Sales and Marketing  Expenses.  Sales and marketing expenses consist of
personnel  and related costs for our direct sales force,  pre-sales  support and
marketing  staff,  and marketing  programs  including  trade shows and seminars.
Sales and marketing expenses decreased to $2,357,000,  or 71% of total revenues,
during the three months ended December 31, 2002 from $3,858,000, or 80% of total
revenues,  during the three months ended December 31, 2001.  Sales and marketing
expenses  decreased to  $9,104,000,  or 93% of total  revenues,  during the nine
months  ended  December  31, 2002 from  $12,720,000,  or 94% of total  revenues,
during the nine months ended December 31, 2001.  These  decreases were primarily
due to lower  headcount  costs due to prior  period  restructuring  efforts  and
reduced discretionary  marketing program spending. We expect our quarterly sales
and  marketing  expenses  to  increase  during  our  fourth  fiscal  quarter  in
comparison  to our third fiscal  quarter due to the  allocation  of the one-time
charge to be recorded in connection with the restructured San Mateo office lease
(as discussed under "Facility Lease  Amendment"  above).  Excluding the one-time
effects of this facility  charge,  we expect our  quarterly  sales and marketing
expenses  to  remain  in a range  of  relatively  flat to a modest  increase  in
comparison to our third fiscal quarter ended  December 31, 2002,  primarily as a
result of variability in our sales personnel's  variable  compensation  programs
and timing of marketing initiatives.

         General  and  Administrative   Expenses.   General  and  administrative
expenses consist  primarily of personnel and related costs for general corporate
functions,  including finance, accounting,  legal, human resources, costs of our
external  audit  firm and  costs  of our  outside  legal  counsel.  General  and
administrative expenses decreased to $963,000, or 29% of total revenues, for the
three months ended December 31, 2002 from  $1,284,000 or 27% of total  revenues,
for the three months ended December 31, 2001. For the nine months ended December
31, 2002, general and administrative expenses decreased to $3,174,000, or 32% of
total revenues,  from  $3,946,000 or 29% of total revenues,  for the nine months
ended December 31, 2001.  These decreases in absolute dollars were primarily due
to lower headcount costs as a result of prior period  restructuring  efforts. We
expect general and administrative  expenses to increase during our fourth fiscal
quarter  due  to the  allocation  of  the  one-time  charge  to be  recorded  in
connection  with the  restructured  San Mateo office lease (as  discussed  under
"Facility  Lease  Amendment"  above).  Excluding  the  one-time  effects of this
facility charge, we expect our quarterly general and administrative  expenses to
increase  for the  foreseeable  future  as we  incur  higher  audit,  legal  and
insurance costs due to a number of external  factors  including  recently passed
legislation such as the Sarbanes-Oxley Act.

                                       25
<PAGE>

         Stock-Based  Compensation  Expense.  Stock based  compensation  expense
represents the amortization of deferred  compensation  (calculated primarily for
stock options  granted to our employees  prior to the time of our initial public
offering as the  difference  between  the  exercise  price of the stock  options
granted  and the then  deemed  fair value of our common  stock).  We  recognized
stock-based  compensation  expense of $291,000 and $719,000 for the three months
ended  December 31, 2002 and 2001,  respectively,  and $1,026,000 and $2,257,000
for the  nine  months  ended  December  31,  2002  and  2001,  respectively,  in
connection with the granting of stock options to our employees.  Our stock-based
compensation  expense  decreased during the three and nine months ended December
31, 2002 due to the cancellation of stock options  resulting from  participation
in our  voluntary  stock  option  cancellation  and  re-grant  program  for  our
employees  during the year ended  March 31,  2002.  The  implementation  of this
cancellation  and re-grant  program  resulted in the immediate  expensing of the
majority of our  employee-related  deferred  compensation  in our fourth  fiscal
quarter  of  2002.  As  a  result,   our  fiscal  2003  and  future  stock-based
compensation expenses are, and are expected to continue to be, lower than fiscal
2002 levels.  We will continue to amortize the remaining  deferred  compensation
balance as expense for employees who did not  participate in our voluntary stock
option cancellation and re-grant program.

         Interest and Other Income.  Interest and other income include  interest
income from cash,  cash  equivalents  and short-term  investments.  Interest and
other  income  decreased  to $101,000 and $429,000 for the three and nine months
ended  December 31, 2002,  respectively,  from $315,000 and  $1,295,000  for the
three and nine months ended December 31, 2001.  These decreases were a result of
lower interest  rates and lower average cash balances  during the three and nine
months ended December 31, 2002.

         Provision  for Income  Taxes.  We have not recorded a provision for any
significant  federal  and state or foreign  income  taxes in either the three or
nine months  ended  December 31, 2002 or 2001  because we have  experienced  net
losses since  inception,  which have  resulted in deferred  tax assets.  We have
recorded a valuation  allowance for the entire deferred tax asset as a result of
uncertainties  regarding the  realization  of the asset balance  through  future
taxable profits.

Liquidity and Capital Resources

         As of December 31, 2002, we had cash,  cash  equivalents and short-term
investments of  $18,872,000,  a decrease of $11,822,000  from March 31, 2002 and
our working  capital,  defined as current assets less current  liabilities,  was
$13,628,000,  a decrease of $10,449,000 in working  capital from March 31, 2002.
The decrease in our cash, cash equivalents,  and short-term  investments and our
working  capital  is  primarily  attributable  to  cash  used  in our  operating
activities.

         Our operating  activities resulted in net cash outflows of $11,887,000,
and  $13,429,000  for  the  nine  months  ended  December  31,  2002  and  2001,
respectively.  The cash used in these periods was primarily  attributable to net
losses of $13,506,000 and $18,784,000 in the nine months ended December 31, 2002
and 2001,  respectively,  offset by depreciation expense, losses on disposals of
assets, and non-cash, stock-based charges. Investing activities resulted in cash
inflows of  $9,953,000  and cash  outflows of $32,000 for the nine months  ended
December 31, 2002 and 2001,  respectively.  Our investing  activity cash inflows
were due to the sale and  maturity  of  short-term  investments.  Our  investing
activity cash outflows were primarily for the purchase of short-term investments
and capital  equipment  during both periods.  We expect that we will continue to
invest in short-term  investments and purchase  capital  equipment as we replace
older  equipment  with newer  models.  Financing  activities  provided  net cash
inflows of $271,000 and $769,000  during the nine months ended December 31, 2002
and 2001, respectively.  These net cash inflows were primarily from the proceeds
of our employee stock plans.

         We anticipate  that our current cash,  cash  equivalents and short-term
investments  will be sufficient to meet our  anticipated  cash needs for working
capital and capital expenditures for the next 12 months. However, we may need to
raise additional  funds in future periods through public or private  financings,
or other sources,  to fund our operations  and potential  acquisitions,  if any,
until we achieve  profitability,  if ever. We may not be able to obtain adequate
or favorable  financing  when  necessary to fund our business.  Failure to raise
capital  when  needed  could harm our  business.  If we raise  additional  funds
through the issuance of equity  securities,  the  percentage of ownership of our
existing  stockholders  would be reduced.  Furthermore,  these equity securities
might have rights, preferences or privileges senior to our common stock.

                                       26
<PAGE>

Risk Factors

         The  occurrence  of any of the  following  risks could  materially  and
adversely affect our business,  financial  condition and operating  results.  In
this case,  the trading  price of our common  stock could  decline and you might
lose all or part of your investment.


                          Risks Related to Our Business

Our revenues,  cost of revenues,  expense and cash balance/cash  usage forecasts
are based upon the best information we have available, but our operating results
have  historically  been  volatile  and there are a number of risks that make it
difficult for us to foresee or accurately  evaluate  factors that may impact our
forecasts.

         Our quarterly  operating results have varied  significantly in the past
and  are  likely  to  vary   significantly  in  the  future.   We  believe  that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as  indicators  of future  performance.  Our operating
results have in past quarters fallen below securities  analyst  expectations and
will likely fall below their expectations in some future quarter or quarters.

         We  have  limited  visibility  into  future  demand,  and  our  limited
operating  history makes it difficult  for us to foresee or accurately  evaluate
factors that may impact such future demand.  Our  visibility  over our potential
sales is typically  limited to the current  quarter and our  visibility for even
the current  quarter is rather limited.  In order to provide a revenue  forecast
for the current  quarter,  we must make  assumptions  about  conversion of sales
prospects into current  quarter  revenues.  Such  assumptions  may be materially
incorrect due to competition for the customer order,  pricing  pressures,  sales
execution  issues,  customer  selection  criteria  or  length  of  the  customer
selection cycle, the failure of sales contracts to meet our revenue  recognition
criteria,  our inability to timely perform professional  services, our inability
to hire and retain qualified personnel,  our inability to develop new markets in
Europe or Asia,  the  strength of  information  technology  spending,  and other
factors that may be beyond our control.  In addition,  our application  products
are early in their product life cycles and we cannot  predict how the market for
these  products  will develop.  Our  assumptions  about  conversion of potential
application  product  sales into current  quarter  revenues  could be materially
incorrect.  We are reliant on third party resellers for a significant portion of
our license  revenues and we have limited  visibility  into the status of orders
from these third parties.

         For  quarters  beyond  the  current  quarter,   we  have  very  limited
visibility  into  potential  sales  opportunities,  and  thus  we  have a  lower
confidence  level  in any  revenue  forecast  or  forward-looking  guidance.  In
developing  a  revenue  forecast  for such  quarters,  we  assess  any  customer
indications  about  future  demand,  general  industry  trends,  marketing  lead
development  activities,  productivity  goals for the sales  force and  expected
growth in sales personnel, and any demand for products that we may have. Because
visibility into outlying  quarters is so limited,  we have not provided guidance
beyond the current quarter for the past several quarters.

         Our cost of sales and expense  forecasts are based upon our budgets and
spending  forecasts  for  each  area of the  Company.  Circumstances  we may not
foresee  could  increase cost and expense  levels beyond the levels  forecasted.
Such circumstances may include  competitive  threats in our markets which we may
need to address with  additional  sales and  marketing  expenses,  severance for
involuntary  reductions in headcount  should we determine cost cutting  measures
are  necessary,  write-downs  of  equipment  and/or  facilities  in the event of
unforeseen excess capacity, legal claims, employee turnover,  additional royalty
expenses should we lose a source of current technology, losses of key management
personnel, unknown defects in our products, and other factors we cannot foresee.
In  addition,   many  expenditures  are  planned  or  committed  in  advance  in
anticipation of future revenues, and if our revenues in a particular quarter are
lower than we anticipate,  we may be unable to reduce  spending in that quarter.
As a result,  any  shortfall  in revenues or a failure to improve  gross  profit
margin would likely hurt our quarterly operating results.

                                       27
<PAGE>

         Our cash balance and cash usage forecasts are typically  limited to the
current quarter and are based upon a number of factors including our revenue and
expense forecasts,  which are also subject to a number of risks described above.
In addition,  in deriving our cash  forecasts,  we make a number of  assumptions
that are subject to other uncertainties  including our expected cash payments to
employees,  vendors and other parties, expected cash receipts from customers and
interest  earned on our cash and investment  balances.  Such  assumptions may be
materially  incorrect due to unexpected payments that are required to be made to
employees  or  vendors,   delayed  payments  from  our  customers,   unfavorable
fluctuations in interest rates and other factors that may be beyond our control.

The failure of any  significant  contracts to meet our policies for  recognizing
revenue may prevent us from achieving our revenue  objectives for a quarter or a
fiscal year, which would hurt our operating results.

         Our sales contracts are typically  based upon standard  agreements that
meet our revenue  recognition  policies.  However,  our future sales may include
site licenses,  professional  services or other  transactions with customers who
may  negotiate  special terms and  conditions  that are not part of our standard
sales  contracts.  In  addition,  customers  may insist on an  extended  payment
schedule or may delay  payments to us, which may require us to account for those
customers'  revenues on a cash basis,  rather than accrual basis, of accounting.
If these special terms and conditions  cause sales under these  contracts to not
qualify  under our revenue  recognition  policies,  we would  defer  revenues to
future periods when all revenue recognition criteria are met, which may hurt our
reported revenues and operating results.

         In   addition,   customers   that  license  our  products  may  require
consulting,  implementation,  maintenance and training  services and obtain them
from  our  internal  professional   services,   customer  support  and  training
organizations.  When  we  provide  significant  services  in  connection  with a
software license  arrangement,  our revenue recognition policy may require us to
recognize the software license fee as the implementation  services are performed
or we may be required  to defer the fee until the  completion  of the  services,
which may hurt our current quarter's revenues and operating results.

We have allocated significant product development, sales and marketing resources
toward the  deployment of our  application  products,  we face a number of risks
that  may  impede  market  acceptance  of these  products  and  such  risks  may
ultimately  prove our business  model  invalid,  thereby  hurting our  financial
results.

         We have invested  significant  resources into  developing and marketing
our application products and do not know whether our business model and strategy
will be successful. The market for these products is in a relatively early stage
and one of our key  assumptions  about the  market is that  digital  video  will
continue to develop as a more relevant  communication  medium. We cannot predict
how the market for our  applications  will  develop,  and part of our  strategic
challenge will be to convince enterprise customers of the productivity, improved
communications, cost savings and other benefits of our application products. Our
future  revenues  and  revenue  growth  rates  will  depend in large part on our
success  in  delivering  these new  products  effectively  and  creating  market
acceptance  for these  products.  If we fail to do so, our products and services
will  not  achieve  widespread  market  acceptance,  and  we  may  not  generate
significant  revenues to offset our development  and sales and marketing  costs,
which will hurt our business.  Additionally, our future success will continue to
depend  upon our ability to develop new  products or product  enhancements  that
address  future  needs of our target  markets  and to respond to these  changing
standards and practices.

         In  addition,  resources  may be  required to fund  development  of our
application   products'   feature-sets  beyond  what  we  have  planned  due  to
unanticipated  marketplace  demands. We may determine that we are unable to fund
these  additional  feature-sets  due to financial  constraints  and may halt the
development of a product at a stage that the marketplace  perceives as immature.
We may also encounter that the marketplace for an application  product is not as
robust as we had expected and we may react to this by leaving the development of
a product at an early  stage or  combining  key  features  of one or more of our
application products into a single product.  Either of these product development
scenarios may impede market  acceptance of any of our  application  products and
therefore hurt our financial results.

                                       28
<PAGE>

The length of our sales and deployment  cycle is uncertain,  which may cause our
revenues and operating results to vary significantly from quarter to quarter.

         During  our  sales  cycle,  we  spend  considerable  time  and  expense
providing information to prospective customers about the use and benefits of our
products and services without  generating  corresponding  revenues.  Our expense
levels  are  relatively  fixed  in the  short-term  and  based  in  part  on our
expectations of future revenues.  Therefore,  any delay in our sales cycle could
cause significant  variations in our operating results,  particularly  because a
relatively  small  number of customer  orders  represent a large  portion of our
revenues.

         Some of our largest  sources of revenues  are  government  entities and
large corporations that often require long testing and approval processes before
making a decision to license our products.  In general,  the process of entering
into a licensing  arrangement  with a  potential  customer  may involve  lengthy
negotiations.  As a result,  our sales  cycle  has been and may  continue  to be
unpredictable.  In the past,  our sales  cycle has ranged from one to 12 months.
Our sales  cycle is also  subject  to  delays  as a result of  customer-specific
factors over which we have little or no control, including budgetary constraints
and internal approval procedures. In addition, because our technology must often
be integrated  with the products and services of other  vendors,  there may be a
significant delay between the use of our software and services in a pilot system
and our customers' volume deployment of our products and services.

         Our  application  products are aimed toward a broadened  business  user
base within our key  markets.  These  products  are early in their  product life
cycles and we are  relatively  inexperienced  with their sales cycle.  We cannot
predict how the market for our application products will develop and part of our
strategic  challenge  will be to convince  targeted  users of the  productivity,
improved  communications,  cost savings and other benefits.  Accordingly,  it is
likely that  delays in our sales  cycles with these  application  products  will
occur and this could cause significant variations in our operating results.

We have not been profitable and if we do not achieve profitability, our business
may  fail.  If we need  additional  financing  we may not  obtain  the  required
financing on favorable terms and conditions.

         We have  experienced  operating  losses in each  quarterly  and  annual
period  since we were  formed and we expect to incur  significant  losses in the
future. As of December 31, 2002, we had an accumulated  deficit of $102,430,000.
We have made efforts to reduce our expenses over the past several quarters,  but
it is possible that we could incur increasing  research and  development,  sales
and  marketing  and  general  and  administrative  expenses at some point in the
future.  Our revenues have been  relatively  flat for the past four quarters and
any inability to increase our revenues  significantly  in the future will result
in continuing  losses and a  deteriorating  cash  position,  which will harm our
business.  In addition,  our cash,  cash  equivalent and  short-term  investment
resources  (collectively,  "cash resources")  totaled $18,872,000 as of December
31, 2002 and we used  $11,887,000  in our operating  activities  during the nine
months ended December 31, 2002. We anticipate that our operating activities will
use a  substantial  portion of our  remaining  cash  resources  over the next 12
months.  Absent a significant  interim improvement in our operating results or a
successful  effort  to  raise  additional  capital,  this  will  leave us with a
deteriorated cash position in comparison to our cash position as of December 31,
2002 and this may affect our ability to transact future strategic  operating and
investing  activities,  which may harm our business and cause our stock price to
fall.  In addition,  we may  experience  reluctance  on the part of prospects to
purchase  from us if they believe our  financial  viability is in question.  The
current business  environment is not conducive to raising additional  financing.
If we require  additional  financing,  the terms of such  financing  may heavily
dilute the ownership  interests of current investors,  and cause our stock price
to fall  significantly or we may not be able to secure financing upon acceptable
terms at all.  Accordingly,  our stock price and business'  viability is heavily
dependent upon our ability to grow our revenues and manage our costs in order to
preserve cash resources.

                                       29
<PAGE>

Failure to comply with NASDAQ's listing  standards could result in our delisting
by NASDAQ from the NASDAQ National Market and severely limit the ability to sell
any of our common stock.

         Our stock is currently traded on the NASDAQ National Market and the bid
price for our common stock has, in the past, been under $1.00 per share for over
30 consecutive  trading days. Under NASDAQ's listing maintenance  standards,  if
the  closing  bid  price of our  common  stock is under  $1.00  per share for 30
consecutive  trading days, NASDAQ may choose to notify us that it may delist our
common stock from the NASDAQ National Market.

         On January 30, 2003, NASDAQ submitted a proposal to the U.S. Securities
and Exchange  Commission ("SEC") to extend its pilot program governing bid price
rules for all companies  listed on the NASDAQ  National Market and also proposed
additional  bid price  rules for all  companies  listed on the  NASDAQ  SmallCap
Market.  Under the National  Market  proposal,  NASDAQ will extend the bid price
grace  period of its pilot  program  for all  National  Market  issuers  from 90
calendar days to 180 calendar days. In addition, the NASDAQ Small Cap Market has
proposed to increase its pilot program by an additional  180 day grace period to
gain  compliance with the minimum bid price listing  requirement  (provided that
certain other non-bid price related criteria are met by the registrant). The SEC
must  approve all of the  NASDAQ's  proposals  prior to the  proposals  becoming
effective.

         We  received a NASDAQ  letter on October  31,  2002 that we were not in
compliance with the NASDAQ's minimum bid price listing  requirement.  Based upon
NASDAQ's proposed changes,  which still require SEC approval, we believe that we
may have  until  approximately  April  29,  2003 to regain  compliance  with the
minimum bid price listing requirement. If we are unable to meet this minimum bid
price  listing  requirement  by April 29,  2003,  we expect that we may have the
option of  transferring  to the NASDAQ  SmallCap  Market.  Based upon a separate
NASDAQ  proposal  that also requires SEC approval,  the NASDAQ  SmallCap  market
would make  available up to two  additional  180  calendar  day  extended  grace
periods (ie. until  approximately  April 23, 2004) to meet the minimum $1.00 bid
price  requirement  provided we are able to meet certain  non-bid  price related
criteria. If we transfer to the NASDAQ SmallCap Market, we expect that we may be
eligible  to  transfer  back to the  NASDAQ  National  Market  if our bid  price
maintains the $1.00 per share requirement for 30 consecutive trading days and we
have maintained compliance with all other continued listing requirements for the
NASDAQ National Market.

         Should the SEC not  approve the  NASDAQ's  proposals  and/or  should we
receive  a letter  from  NASDAQ  informing  us that we will be  delisted  due to
noncompliance  with the  National  Market's  minimum bid price  requirement,  we
believe we will have the opportunity to transfer to the NASDAQ Small Cap Market.
From the date of receipt of such a NASDAQ delisting  letter, we believe we would
have 90 days to  attempt  to  regain  compliance  while  trading  on the  NASDAQ
SmallCap  Market.  In  addition,  we expect that we may also be eligible  for an
additional 180 calendar day grace period on the NASDAQ  SmallCap Market provided
that we meet the other non-bid price related listing criteria.

         There can be no assurance that the SEC will approve NASDAQ's proposals,
that we will comply with other non-bid price  related  listing  criteria or that
our common stock will remain  eligible for trading on the NASDAQ National Market
or the NASDAQ SmallCap  Market.  If our stock were delisted,  the ability of our
stockholders  to sell any of our common stock at all would be  severely,  if not
completely, limited.

                                       30
<PAGE>

We expect the market price of our common stock to be volatile.

         The market price of our common stock has experienced significant swings
in  price  over  short  periods  of  time.  We  believe  that  factors  such  as
announcements  of  developments  related to our  business,  fluctuations  in our
operating  results,  failure  to meet  securities  analysts'  expectations,  our
ability  to remain an active  listing on the  NASDAQ  National  Market or NASDAQ
Small  Cap  Market,  general  conditions  in the  software  and high  technology
industries   and  the  worldwide   economy,   announcements   of   technological
innovations,  new  systems or  product  enhancements  by us or our  competitors,
acquisitions,  changes in governmental  regulations,  developments in patents or
other  intellectual  property  rights  and  changes  in our  relationships  with
customers and suppliers could cause the price of our common stock to continue to
fluctuate substantially.  Historically, there has been a relatively small number
of buyers and sellers of our common stock and trading volume of our common stock
is relatively low in comparison to many companies  listed on the NASDAQ National
Market and other well-known stock exchanges. This low trading volume contributes
to the volatility of our stock. In addition, in recent years the stock market in
general,  and the market for small  capitalization and high technology stocks in
particular,  has experienced  extreme price  fluctuations.  Any of these factors
could adversely affect the market price of our common stock.

Our revenues may be harmed if general economic conditions do not improve.

         Our revenues are dependent on the health of the economy (in particular,
the  robustness  of  information  technology  spending)  and the  growth  of our
customers and potential future customers.  The economic environment has not been
conducive to companies  involved in information  technology  infrastructure  for
several quarters. In addition, looming conflicts with countries such as Iraq and
North  Korea  create  a great  deal  of  uncertainty  for  businesses  and  this
uncertainty  generally results in businesses delaying  investments in such areas
as information  technology.  If the economic trend continues,  our customers and
potential  customers  may  continue  to delay or reduce  their  spending  on our
software  and  service  solutions.  When  economic  conditions  for  information
technology  products  weaken,  sales  cycles for sales of software  products and
related  services tend to lengthen and  companies'  information  technology  and
business  unit  budgets  tend to be reduced.  We believe  that  global  economic
conditions have become  progressively weaker over the past 24 months and believe
that this has  contributed  to our  decline in  revenues  for our  current  year
periods in comparison to our prior year periods.  If global economic  conditions
continue  to weaken or if looming  conflicts  continue or worsen,  our  revenues
could continue to suffer and our stock price could decline further.

Our  restructuring  efforts may not result in the intended  benefits.  We may be
required  to record  additional  restructuring  charges  and this may  adversely
affect the morale and  performance  of our  personnel  we wish to retain and may
also adversely affect our ability to hire new personnel.

         During the past several quarters,  including the quarter ended December
31,  2002,  we took  steps to better  align the  resources  required  to operate
efficiently  in the  prevailing  market.  Through  these  steps,  we reduced our
headcount and incurred charges for employee severance,  excess facility capacity
and excess equipment.  While we believe that these steps help us achieve greater
operating efficiency, we have limited history with such measures and the results
of these measures are less than  predictable.  The Company monitors its expenses
closely and  benchmarks  its  expenses  against  expected  revenues.  Should the
Company's  revenues  not  meet  internal  or  external   expectations  or  other
circumstances  arise that require the Company to better align resources required
to  operate  efficiently  in the  prevailing  market,  additional  restructuring
efforts may be required. We believe workforce reductions, management changes and
facility  consolidation  create anxiety and uncertainty and may adversely affect
employee  morale.  These measures could  adversely  affect our employees that we
wish to retain and may also adversely  affect our ability to hire new personnel.
They may also affect customers  and/or vendors,  which could harm our ability to
operate as intended and which would harm our business.

                                       31
<PAGE>

         As we have better aligned our resources over the past several quarters,
we have  consolidated our company's  operations into facility space that is less
than our  current  facility  commitment,  resulting  in excess  operating  lease
capacity.  During the quarter ended  December 31, 2002, we adopted the Financial
Accounting Standards Board's Statement No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities" ("FAS 146"). We expect to further consolidate
our space in March 2003 and to record a charge of  approximately  $1,882,000  as
FAS 146  requires us to record a charge for excess space as of the date we cease
to use the space. Subsequent to this expected consolidation,  should we continue
to have excess  operating  lease capacity and we are unable to find a sub lessee
at a rate equivalent to our operating lease rate, we would be required to record
additional  charges for the rental payments that we owe to our landlord relating
to any excess facility  capacity,  which would harm our operating  results.  Our
management  reviews our facility  requirements  and assesses  whether any excess
capacity exists as part of our on-going financial processes.

The prices we charge for our  products  and services may decrease or our pricing
assumptions may be incorrect,  either of which may impact our ability to develop
a sustainable business.

         The prices we charge for our  products  and  services may decrease as a
result of competitive pricing pressures,  promotional programs and customers who
negotiate price  reductions.  For example,  we recently reduce the list price of
our VideoLogger  product,  one of our key platform products,  in order to better
compete in the marketplace.  In addition,  some of our competitors have provided
their services without charge in order to gain market share or new customers and
key accounts.  The prices at which we sell and license our products and services
to our customers depend on many factors, including:

         o        purchase volumes;

         o        competitive pricing;

         o        the specific requirements of the order;

         o        the duration of the licensing arrangement; and

         o        the level of sales and service support.

         Our  applications  products are intended to increase  both our revenues
and the average  size of our  customers'  orders.  These  products  have pricing
models based upon a number of assumptions about the market for our products.  If
our assumptions  are incorrect or our pricing does not work as intended,  we may
not be able to increase the average  size of our  customer  orders or reduce the
costs of selling and marketing for our products  and,  therefore,  we may not be
able to develop a profitable and sustainable business.

         Our sales and  marketing  costs are a high  percentage  of the revenues
from our orders,  due partly to the expense of developing  leads and  relatively
long sales  cycles  involved  in selling  products  that are not yet  considered
"mainstream"  technology  investments.  For the  three  and  nine  months  ended
December 31, 2002, our sales and marketing  expenses  totaled 71% and 93% of our
total revenues, respectively.

                                       32
<PAGE>

Our service  revenues  have  substantially  lower gross profit  margins than our
license  revenues,  and an  increase  in service  revenues  relative  to license
revenues could harm our gross margins.

         Our service revenues,  which include fees for our application  services
as well as professional services such as consulting, implementation, maintenance
and  training,  were 60% and 53% of our  total  revenues  for the three and nine
months ended December 31, 2002, respectively,  and were 69% and 52% of our total
revenues  for the three and nine months ended  December 31, 2001,  respectively.
Our service  revenues  have  substantially  lower gross profit  margins than our
license  revenues.  Our cost of service  revenues  for the three and nine months
ended December 31, 2002 were 55% and 64%, respectively,  of service revenues and
for the  three  and nine  months  ended  December  31,  2001  were 64% and 100%,
respectively,  of service  revenues.  An  increase  in the  percentage  of total
revenues  represented  by service  revenues could  adversely  affect our overall
gross profit margins.

         Service  revenues as a percentage of total revenues and cost of service
revenues  as a  percentage  of total  revenues  have varied  significantly  from
quarter  to  quarter  due  to  our  relatively   early  stage  of   development.
Historically,  the  relative  amount of service  revenues as compared to license
revenues  has  varied  based on  customer  demand for our  application  services
revenues.   Our  application  services  require  a  relatively  fixed  level  of
investment in staff, facilities and equipment. In the past, we have operated our
application  service  business at a loss due to fixed  investments that exceeded
actual  levels of revenues  realized.  We have reduced the  application  service
fixed  investments over the past year.  However,  there is no assurance that the
current  level of  application  service  revenues  will  continue to allow us to
recover our fixed costs and make a positive gross profit margin.

         More  recently,  we have  experienced  an increase in the percentage of
license customers requesting  professional services,  which will also impact the
relative amount of service revenues as compared to license  revenues.  We expect
that the amount and  profitability of our  professional  services will depend in
large part on:

         o        the software solution that has been licensed;

         o        the  complexity  of  the  customers'   information  technology
                  environments;

         o        the  resources  directed by customers to their  implementation
                  projects;

         o        the size and complexity of customer implementations; and

         o        the extent to which outside consulting  organizations  provide
                  services directly to customers.

Because  competition for qualified  personnel is intense,  we may not be able to
recruit or retain  personnel,  which could impact the development and acceptance
of our products and services.

         Our future  success  depends to a  significant  extent on the continued
services  of our  senior  management  and  other  key  personnel  such as senior
development staff, product marketing staff and sales personnel.  The loss of key
employees  would likely have an adverse  effect on our business.  We do not have
employment agreements with most of our senior management team. If one or more of
our  senior  management  team were to resign,  the loss could  result in loss of
sales, delays in new product development and diversion of management resources.

         We may also be required to create additional  performance and retention
incentives in order to retain our employees including the granting of additional
stock options to employees at or below current prices or issuing  incentive cash
bonuses.  Such  incentives  may either dilute our existing  stockholder  base or
result in  unforeseen  operating  expenses,  which may cause our stock  price to
fall.  For example,  in February  2002, we  introduced a Voluntary  Stock Option
Cancellation and Re-grant  Program in which a number of our employees  cancelled
stock options that had  significantly  higher  exercise  prices in comparison to
where  our  common  stock  price  currently  trades.  These  employees  received
2,538,250  shares at $0.59 per share in August 2002.  This may cause dilution to
our existing stockholder base, which may cause our stock price to fall.

         We may need to hire sales,  development,  marketing and  administrative
personnel in the foreseeable  future.  We may be unable to attract or assimilate
other highly qualified  employees in the future particularly given our continued
operating losses and weakening cash position.  We have in the past  experienced,
and we expect to continue to  experience,  difficulty in hiring  highly  skilled
employees with  appropriate  qualifications.  In addition,  new hires frequently
require  extensive  training before they achieve desired levels of productivity.
We may fail to  attract  and  retain  qualified  personnel,  which  could have a
negative impact on our business.

                                       33
<PAGE>

Recently  enacted and proposed  changes in securities laws and regulations  will
increase our costs.

         The Sarbanes-Oxley Act ("the Act") of 2002 that became law in July 2002
requires changes in some of our corporate  governance and securities  disclosure
and/or  compliance  practices.  The Act also requires the SEC to promulgate  new
rules on a variety of subjects,  in addition to rule proposals already made, and
the NASDAQ  National  Market has  proposed  revisions  to its  requirements  for
companies like Virage that are listed on NASDAQ.  We believe these  developments
will increase our legal and accounting  compliance  costs.  We also expect these
developments  to make it more  difficult  and more  expensive  for us to  obtain
director  and  officer  liability  insurance,  and we may be  required to accept
reduced coverage or incur substantially  higher costs to obtain coverage.  These
developments could make it more difficult for us to attract and retain qualified
members of our board of  directors,  or  qualified  executive  officers.  We are
presently evaluating and monitoring regulatory  developments and cannot reliably
estimate the timing or magnitude of  additional  costs we will incur as a result
of the Act or other, related legislation.

If the  protection  of our  intellectual  property is  inadequate or third party
intellectual  property is unavailable or if others bring  infringement  or other
claims against us, we may incur significant costs or lose customers.

         We depend on our  ability  to  develop  and  maintain  the  proprietary
aspects  of  our  technology.  Policing  unauthorized  use of  our  products  is
difficult and software  piracy may become a problem.  We license our proprietary
rights to third  parties,  who may not abide by our  compliance  guidelines.  To
date, we have not sought  patent  protection  of our  proprietary  rights in any
foreign jurisdiction,  and the laws of some foreign countries do not protect our
proprietary  rights to as great an extent as do the laws of the  United  States.
Our efforts to protect our intellectual  property rights may not be effective to
prevent misappropriation of our technology or may not prevent the development by
others of products competitive with those developed by us.

         In addition,  other  companies may obtain patents or other  proprietary
rights that would limit our ability to conduct  our  business  and could  assert
that  our  technologies  infringe  their  proprietary  rights.  We  could  incur
substantial costs to defend any litigation, and intellectual property litigation
could force us to cease using key technology,  obtain a license, or redesign our
products.  From  time to  time,  we have  received  notices  claiming  that  our
technology  infringes  patents held by third  parties and in addition may become
involved in litigation  claims arising from our ordinary course of business.  We
believe that there are no claims or actions  pending or  threatened  against us,
the ultimate  disposition  of which would have a material  adverse effect on us.
However, in the event any claim against us is successful,  our operating results
would be significantly harmed.

         Furthermore,  we license  technology from third parties,  which may not
continue to be available on commercially  reasonable  terms, if at all. The loss
of any of these licenses could result in delays in the licensing of our products
until  equivalent  technology,  if  available,  is  developed  or  licensed  for
potentially  higher fees and  integrated.  In the event of any such loss,  costs
could be increased and delays could be incurred, thereby harming our business.

Interruptions  to our  business  or  internal  infrastructure  from  unforeseen,
adverse  events or  circumstances  will disrupt our  business and our  operating
results will suffer.

         The  worldwide  socio-political  environment  has changed  dramatically
since September 11, 2001 and potential  looming conflicts with countries such as
Iraq and North Korea create a great deal of global  uncertainty.  Our customers,
potential customers and vendors are located worldwide and generally within major
international  metropolitan areas. In addition,  the significant majority of our
operations  are  conducted  at  offices  within a  60-mile  radius  of the major
metropolitan  cities of San  Francisco,  New York City,  Boston and London.  Our
business also requires that certain personnel, including our officers, travel in
order to perform  their  jobs  appropriately.  A  terrorist  attack or  military
conflict  could reduce our ability to travel or could limit our ability to enter
foreign  countries,  either of which would diminish our effectiveness in closing
international  customer  opportunities.  Should a major catastrophe occur within
the  vicinity  of  any  of  our  operations,  our  customers'  and/or  potential
customers'  operations  and/or  vendors'  operations,   our  operations  may  be
adversely impacted and our business may be harmed.

                                       34
<PAGE>

         Our  communications  and network  infrastructure are a critical part of
our business  operations.  Our application  services  business is dependent upon
providing our customers with fast, efficient and reliable services.  To meet our
customers' requirements, we must protect our network against damage from any and
all sources, including among other things:

         o        human error;

         o        physical or electronic security breaches;

         o        computer viruses;

         o        fire, earthquake, flood and other natural disasters;

         o        power loss;

         o        telecommunications failure; and

         o        sabotage and vandalism.

         We  have  communications  hardware  and  computer  hardware  operations
located at Exodus  Communications'  facility in Santa Clara,  California  and at
Palo Alto Internet  Exchange in Palo Alto,  CA. We do not have  complete  backup
systems for these operations.  A problem with, or failure of, our communications
hardware or operations  could result in  interruptions  or increases in response
times on the Internet sites of our customers.  Furthermore, if these third party
partners fail to adequately  maintain or operate our communications  hardware or
do not perform our computer hardware operations adequately,  our services to our
customers may not be available. We have experienced system failures in the past.
Any disruptions  could damage our  reputation,  reduce our revenues or otherwise
harm our business.  Our insurance policies may not adequately  compensate us for
any losses that may occur due to any failures or interruptions in our systems.

Defects in our  software  products or  services  could  diminish  demand for our
products or could subject us to liability  claims and negative  publicity if our
customers'  systems,  information or video content is damaged through the use of
our products or our application services.

         Our software  products and related services are complex and may contain
errors  that may be detected at any point in the life of the product or service.
Our software  products must operate within our  customers'  hardware and network
environment in order to function as intended. We cannot assure you that, despite
testing by us and our current and potential customers,  errors will not be found
in new products or releases  after  shipment or in the related  services that we
perform for our  customers.  If our  customers'  systems,  information  or video
content is damaged by software  errors or services that we perform for them, our
business  may  be  harmed.   In  addition,   these  errors  or  defects  or  the
incompatibility of our products to work within a customers' hardware and network
environment may cause severe  customer  service and public  relations  problems.
Errors,  bugs, viruses,  incompatibility or misimplementation of our products or
services may cause liability claims and negative publicity  ultimately resulting
in the loss of market  acceptance of our products and services.  Our  agreements
with customers that attempt to limit our exposure to liability claims may not be
enforceable in jurisdictions where we operate.

                                       35
<PAGE>

We may need to make acquisitions or form strategic  alliances or partnerships in
order to remain  competitive in our market,  and potential future  acquisitions,
strategic alliances or partnerships could be difficult to integrate, disrupt our
business and dilute stockholder value.

         We may acquire or form strategic  alliances or partnerships  with other
businesses  in the  future  in order to remain  competitive  or to  acquire  new
technologies.  As  a  result  of  these  acquisitions,  strategic  alliances  or
partnerships, we may need to integrate products, technologies,  widely dispersed
operations  and  distinct  corporate   cultures.   The  products,   services  or
technologies  of the acquired  companies may need to be altered or redesigned in
order to be made  compatible  with our software  products and  services,  or the
software  architecture  of our  customers.  These  integration  efforts  may not
succeed or may distract our management from operating our existing business. Our
failure to  successfully  manage  future  acquisitions,  strategic  alliances or
partnerships  could  seriously  harm our  operating  results.  In addition,  our
stockholders  would  be  diluted  if  we  finance  the  acquisitions,  strategic
alliances  or  partnerships  by  incurring  convertible  debt or issuing  equity
securities.

         In addition to the above-stated  risks, under the Financial  Accounting
Standards Board's Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142"), any future goodwill resulting from any
future  acquisitions we may undertake will not be amortized but instead reviewed
at least  annually  for  impairment.  We will be required to test  goodwill  for
impairment using the two-step process prescribed in FAS 142. The first step is a
screen for  potential  impairment,  while the second step measures the amount of
impairment, if any. Should we enter into any future acquisition transactions and
general  macroeconomic  conditions  deteriorate  subsequent to the  acquisition,
which  affects our business and  operating  results over the  long-term,  and/or
should  the  future   acquisition  target  not  provide  the  results  that  are
anticipated  when the  merger is  consummated,  we could be  required  to record
accelerated impairment charges related to goodwill, which could adversely affect
our financial results.

As we operate  internationally,  we face significant  risks in doing business in
foreign countries.

         We are  subject  to a number  of risks  associated  with  international
business activities, including:

         o        costs of  customizing  our  products  and services for foreign
                  countries, including localization,  translation and conversion
                  to international and other foreign technology standards;

         o        compliance    with   multiple,    conflicting   and   changing
                  governmental  laws  and  regulations,   including  changes  in
                  regulatory requirements that may limit our ability to enter or
                  sell our products and services in particular countries;

         o        import and export restrictions, tariffs and greater difficulty
                  in collecting accounts receivable; and

         o        foreign currency-related risks if a significant portion of our
                  revenues become denominated in foreign currencies.

                                       36
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

         At December 31, 2002, the Company's cash and cash equivalents consisted
primarily of bank  deposits and money market  funds.  The  Company's  short-term
investments  consisted of commercial paper,  municipal bonds, and federal agency
and  related  securities.  The  Company  did not hold any  derivative  financial
instruments.  The  Company's  interest  income is  sensitive  to  changes in the
general level of interest rates.  In this regard,  changes in interest rates can
affect  the  interest  earned  on  cash  and  cash  equivalents  and  short-term
investments.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

         Within 90 days prior to the  filing  date of this  Quarterly  Report on
Form 10-Q (the "Evaluation  Date"),  we evaluated,  under the supervision of our
chief   executive   officer  and  our  acting  chief  financial   officer,   the
effectiveness  of  our  disclosure  controls  and  procedures.   Based  on  this
evaluation,  our chief  executive  officer and acting  chief  financial  officer
concluded  that our  disclosure  controls and procedures are effective to ensure
that  information  we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.

Changes in Internal Controls

         Our review of our internal  controls was made within the context of the
relevant   professional   auditing  standards   defining  "internal   controls,"
"significant  deficiencies," and "material  weaknesses." "Internal controls" are
processes  designed to provide  reasonable  assurance that our  transactions are
properly authorized, our assets are safeguarded against unauthorized or improper
use, and our transactions are properly recorded and reported,  all to permit the
preparation of our financial  statements in conformity  with generally  accepted
accounting principles. "Significant deficiencies" are referred to as "reportable
conditions,"  or control issues that could have a significant  adverse effect on
the  ability to record,  process,  summarize  and report  financial  data in the
financial statements. A "material weakness" is a particularly serious reportable
condition  where the internal  control does not reduce to a relatively low level
the risk that  misstatements  caused by error or fraud may occur in amounts that
would be material in relation to the  financial  statements  and not be detected
within a timely  period by employees in the normal  course of  performing  their
assigned functions. As part of our internal controls procedures, we also address
other, less significant control matters that we or our auditors identify, and we
determine what revision or  improvement to make, if any, in accordance  with our
on-going procedures.

         Subsequent to the Evaluation Date, there were no significant changes in
our internal  controls or in other factors that could  significantly  affect our
internal  controls,  including any corrective actions with regard to significant
deficiencies and material weaknesses.

                                       37
<PAGE>

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

         Beginning on August 22, 2001,  purported  securities fraud class action
         complaints  were  filed in the  United  States  District  Court for the
         Southern  District  of New York.  The cases were  consolidated  and the
         litigation  is now  captioned  as In re  Virage,  Inc.  Initial  Public
         Offering  Securities  Litigation,  Civ. No.  01-7866 (SAS)  (S.D.N.Y.),
         related to In re Initial Public Offering Securities  Litigation,  21 MC
         92 (SAS)  (S.D.N.Y.).  On or  about  April  19,  2002,  the  plaintiffs
         electronically  served an amended  complaint.  The amended complaint is
         brought  purportedly  on  behalf  of  all  persons  who  purchased  the
         Company's  common stock from June 28, 2000 through December 6, 2000. It
         names as defendants the Company,  one current and one former officer of
         the  Company,  and  several  investment  banking  firms that  served as
         underwriters  of our initial  public  offering.  The complaint  alleges
         liability  under  Sections 11 and 15 of the  Securities Act of 1933 and
         Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the
         grounds  that  the  registration  statement  for the  offering  did not
         disclose  that:  (1) the  underwriters  had  agreed  to  allow  certain
         customers  to purchase  shares in the  offerings in exchange for excess
         commissions  paid to the  underwriters;  and (2) the  underwriters  had
         arranged  for certain  customers to purchase  additional  shares in the
         aftermarket at predetermined prices. The amended complaint also alleges
         that false  analyst  reports  were  issued.  No  specific  damages  are
         claimed.

         We are aware that similar  allegations have been made in other lawsuits
         filed in the Southern  District of New York  challenging over 300 other
         initial public offerings and secondary  offerings conducted in 1999 and
         2000. Those cases have been  consolidated for pretrial  purposes before
         the Honorable Judge Shira A. Scheindlin.  On July 15, 2002, we (and the
         other  issuer  defendants)  filed a motion to dismiss.  This motion was
         heard on November 1, 2002. We believe that the allegations  against our
         officers  and us are  without  merit,  and we  intend to  contest  them
         vigorously.

         From time to time, we may become involved in litigation  claims arising
         from its  ordinary  course of  business.  We believe  that there are no
         claims or  actions  pending or  threatened  against  us,  the  ultimate
         disposition of which would have a material adverse effect on us.

Item 2. Changes in Securities and Use of Proceeds

(d)      Use of Proceeds.

         On July 5, 2000, we completed a firm  commitment  underwritten  initial
         public offering of 3,500,000  shares of our common stock, at a price of
         $11.00 per share.  Concurrently  with our initial public  offering,  we
         also sold 1,696,391 shares of common stock in a private  placement at a
         price of $11.00 per share. On July 17, 2000, our underwriters exercised
         their over-allotment option for 525,000 shares of our common stock at a
         price of $11.00 per share.  The shares of the common  stock sold in the
         offering and exercised via our underwriters' over-allotment option were
         registered  under  the  Securities  Act  of  1933,  as  amended,  on  a
         Registration Statement on Form S-1 (File No. 333-96315). The Securities
         and Exchange Commission  declared the Registration  Statement effective
         on June 28, 2000. The public  offering was  underwritten by a syndicate
         of  underwriters  led  by  Credit  Suisse  First  Boston,   FleetBoston
         Robertson  Stephens  Inc.  and  Wit  SoundView  Corporation,  as  their
         representatives.

         The  initial  public  offering  and private  placement  resulted in net
         proceeds of  $57,476,000,  after  deducting  $3,099,000 in underwriting
         discounts and commissions and $1,800,000 in costs and expenses  related
         to the offering. None of the costs and expenses related to the offering
         or the  private  placement  were paid  directly  or  indirectly  to any
         director,  officer,  general  partner  of Virage  or their  associates,
         persons owning 10 percent or more of any class of equity  securities of
         Virage or an  affiliate  of  Virage.  Proceeds  from the  offering  and
         private  placement  have  been  used for  general  corporate  purposes,
         including working capital and capital  expenditures.  The remaining net
         proceeds have been invested in cash,  cash  equivalents  and short-term
         investments.  The use of the  proceeds  from the  offering  and private
         placement  does not represent a material  change in the use of proceeds
         described in our prospectus.

                                       38
<PAGE>

Item 3. Defaults Upon Senior Securities

         None.


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

         None.


Item 5. Other Information

         NASDAQ National Market Trading Requirements

         Our stock is currently traded on the NASDAQ National Market and the bid
         price for our common stock has, in the past, been under $1.00 per share
         for  over  30  consecutive   trading  days.   Under  NASDAQ's   listing
         maintenance standards,  if the closing bid price of our common stock is
         under  $1.00 per share for 30  consecutive  trading  days,  NASDAQ  may
         choose to notify us that it may delist our common stock from the NASDAQ
         National Market.

         On January 30, 2003, NASDAQ submitted a proposal to the U.S. Securities
         and Exchange  Commission  ("SEC") to extend its pilot program governing
         bid price rules for all companies  listed on the NASDAQ National Market
         and also proposed  additional bid price rules for all companies  listed
         on the NASDAQ  SmallCap  Market.  Under the National  Market  proposal,
         NASDAQ will extend the bid price grace period of its pilot  program for
         all National Market issuers from 90 calendar days to 180 calendar days.
         In  addition,  the NASDAQ Small Cap Market has proposed to increase its
         pilot program by an additional 180 day grace period to gain  compliance
         with the minimum bid price listing  requirement  (provided that certain
         other non-bid price related  criteria are met by the  registrant).  The
         SEC must approve all of the NASDAQ's  proposals  prior to the proposals
         becoming effective.

         We  received a NASDAQ  letter on October  31,  2002 that we were not in
         compliance  with the NASDAQ's  minimum bid price  listing  requirement.
         Based upon NASDAQ's proposed changes, which still require SEC approval,
         we  believe  that we may have  until  approximately  April 29,  2003 to
         regain compliance with the minimum bid price listing requirement. If we
         are unable to meet this minimum bid price listing  requirement by April
         29, 2003, we expect that we may have the option of  transferring to the
         NASDAQ SmallCap Market. Based upon a separate NASDAQ proposal that also
         requires SEC approval,  the NASDAQ SmallCap market would make available
         up to two additional 180 calendar day extended grace periods (ie. until
         approximately  April  23,  2004) to meet the  minimum  $1.00  bid price
         requirement  provided we are able to meet certain non-bid price related
         criteria.  If we transfer to the NASDAQ SmallCap Market, we expect that
         we may be eligible to transfer  back to the NASDAQ  National  Market if
         our  bid  price  maintains  the  $1.00  per  share  requirement  for 30
         consecutive  trading days and we have  maintained  compliance  with all
         other continued listing requirements for the NASDAQ National Market.

         Should the SEC not  approve the  NASDAQ's  proposals  and/or  should we
         receive a letter from NASDAQ  informing us that we will be delisted due
         to  noncompliance   with  the  National   Market's  minimum  bid  price
         requirement, we believe we will have the opportunity to transfer to the
         NASDAQ  Small Cap  Market.  From the date of  receipt  of such a NASDAQ
         delisting letter, we believe we would have 90 days to attempt to regain
         compliance while trading on the NASDAQ SmallCap Market. In addition, we
         expect that we may also be eligible for an additional  180 calendar day
         grace period on the NASDAQ  SmallCap  Market  provided that we meet the
         other non-bid price related listing criteria.

         There can be no assurance that the SEC will approve NASDAQ's proposals,
         that we will comply with other non-bid price related  listing  criteria
         or that our common stock will remain eligible for trading on the NASDAQ
         National  Market or the  NASDAQ  SmallCap  Market.  If our  stock  were
         delisted,  the  ability of our  stockholders  to sell any of our common
         stock at all would be severely, if not completely, limited.

                                       39
<PAGE>

Item 6. Exhibits and Report on Form 8-K.

         (a)      Exhibits

         Exhibit 4.6       Warrant to Purchase  Common Stock Between  Registrant
                           and JRT  Investment  Company,  a limited  partnership
                           wholly owned by the Jim Joseph Revocable Trust, dated
                           December 23, 2002.

         Exhibit 10.14     Amendment to Office Lease,  Dated  December 23, 2002,
                           between 411 Borel LLC and Registrant.

         Exhibit 99.1      Certification Pursuant to 18 U.S.C. Section 1350

         (b)      Reports on Form 8-K

                  None.

                                       40
<PAGE>

                                    SIGNATURE

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.


                                          VIRAGE, INC.

Date: February 14, 2003                   By: /s/ Scott Gawel
                                              ----------------------------------
                                              Scott Gawel
                                              Vice President, Finance &
                                              Acting Chief Financial Officer
                                              (Duly Authorized Officer and
                                              Principal Financial Officer)

                                       41
<PAGE>

I, Paul G. Lego, certify that:

1.       I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  Virage,
         Incorporated;

2.       Based on my  knowledge,  this  quarterly  report  does not  contain any
         untrue  statement of a material  fact or omit to state a material  fact
         necessary to make the  statements  made, in light of the  circumstances
         under which such  statements  were made, not misleading with respect to
         the period covered by this quarterly report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included in this quarterly  report,  fairly present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this quarterly report;

4.       The  registrant's  other  certifying  officer and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

         c)       presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying  officer and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         Audit  Committee  of  registrant's   Board  of  Directors  (or  persons
         performing the equivalent functions):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's  other certifying officer and I have indicated in this
         quarterly  report  whether  or not there  were  significant  changes in
         internal controls or in other factors that could  significantly  affect
         internal controls subsequent to the date of our most recent evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


Date: February 14, 2003
                                           /s/ Paul G. Lego
                                           -----------------------------------
                                           Paul G. Lego
                                           President & Chief Executive Officer

                                       42
<PAGE>

I, Scott Gawel, certify that:

1.       I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  Virage,
         Incorporated;

2.       Based on my  knowledge,  this  quarterly  report  does not  contain any
         untrue  statement of a material  fact or omit to state a material  fact
         necessary to make the  statements  made, in light of the  circumstances
         under which such  statements  were made, not misleading with respect to
         the period covered by this quarterly report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included in this quarterly  report,  fairly present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this quarterly report;

4.       The  registrant's  other  certifying  officer and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

         c)       presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying  officer and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         Audit  Committee  of  registrant's   Board  of  Directors  (or  persons
         performing the equivalent functions):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's  other certifying officer and I have indicated in this
         quarterly  report  whether  or not there  were  significant  changes in
         internal controls or in other factors that could  significantly  affect
         internal controls subsequent to the date of our most recent evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


Date: February 14, 2003
                                               /s/ Scott Gawel
                                               -------------------------------
                                               Scott Gawel
                                               Vice President, Finance &
                                               Acting Chief Financial Officer

                                       43