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 JUNE 30, 2003

                                       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 ROAD, 100 SOUTH
                        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 Act).
[ ] Yes   [X] No

The number of outstanding  shares of the registrant's  Common Stock,  $0.001 par
value, was approximately 21,809,000 as of July 31, 2003.

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

<PAGE>



                                  VIRAGE, INC.

                                      INDEX

                                                                            PAGE

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

   Condensed Consolidated Balance Sheets - June 30, 2003
            and March 31, 2003.............................................    1

   Condensed Consolidated Statements of Operations -- Three Months Ended
            June 30, 2003 and 2002.........................................    2

   Condensed Consolidated Statements of Cash Flows -- Three Months Ended
            June 30, 2003 and 2002.........................................    3

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

Item 2. Management's Discussion and Analysis of Financial Condition
            and Results of Operations......................................   18

Item 3.  Quantitative and Qualitative Disclosures About Market Risk........   38

Item 4.  Controls and Procedures...........................................   38



PART II: OTHER INFORMATION

Item 1. Legal Proceedings..................................................   39

Item 2. Changes in Securities and Use of Proceeds..........................   40

Item 3. Defaults Upon Senior Securities....................................   40

Item 4. Submission of Matters to a Vote of Security Holders................   40

Item 5. Other Information..................................................   40

Item 6. Exhibits and Reports on Form 8-K...................................   41

Signature..................................................................   42


<PAGE>

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements


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

<TABLE>
<CAPTION>
                                                                  June 30,       March 31,
                                                                    2003           2003
                                                                 ----------      ---------
                           ASSETS
<S>                                                              <C>             <C>
Current assets:
  Cash and cash equivalents ...............................      $   6,459       $   2,934
  Short-term investments ..................................          7,464          13,383
  Accounts receivable, net ................................          1,350           2,441
  Prepaid expenses and other current assets ...............            698             920
                                                                 ---------       ---------
      Total current assets ................................         15,971          19,678

Property and equipment, net ...............................          1,044           1,347
Other assets ..............................................          1,247           1,293
                                                                 ---------       ---------
      Total assets ........................................      $  18,262       $  22,318
                                                                 =========       =========

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ........................................      $     491       $     614
  Accrued payroll and related expenses ....................          1,061           1,353
  Accrued expenses ........................................          2,009           1,923
  Accrued restructuring charges ...........................          1,421           1,515
  Deferred revenue ........................................          2,420           3,212
                                                                 ---------       ---------
      Total current liabilities ...........................          7,402           8,617

Commitments and contingencies

Stockholders' equity:
  Preferred stock .........................................             --              --
  Common stock ............................................             21              21
  Additional paid-in capital ..............................        121,661         121,513
  Deferred compensation ...................................           (519)           (789)
  Accumulated deficit .....................................       (110,303)       (107,044)
                                                                 ---------       ---------
      Total stockholders' equity ..........................         10,860          13,701
                                                                 ---------       ---------
      Total liabilities and stockholders' equity ..........      $  18,262       $  22,318
                                                                 =========       =========
</TABLE>

                             See accompanying notes.


                                       1
<PAGE>

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


                                                       Three Months Ended
                                                            June 30,
                                                     -----------------------
                                                       2003           2002
                                                     --------       --------

Revenues:
  License revenues ............................      $  1,276         $1,611
  Service revenues ............................         1,651          1,624
                                                     --------       --------
    Total revenues ............................         2,927          3,235
Cost of revenues:
  License revenues ............................           153            187
  Service revenues(1) .........................           948          1,159
                                                     --------       --------
    Total cost of revenues ....................         1,101          1,346
                                                     --------       --------
Gross profit ..................................         1,826          1,889
Operating expenses:
  Research and development(2) .................         1,654          2,382
  Sales and marketing(3) ......................         2,095          3,685
  General and administrative(4) ...............         1,120          1,142
  Stock-based compensation ....................           270            371
                                                     --------       --------
    Total operating expenses ..................         5,139          7,580
                                                     --------       --------
Loss from operations ..........................        (3,313)        (5,691)
Interest and other income .....................            54            190
                                                     --------       --------
Net loss ......................................      $ (3,259)      $ (5,501)
                                                     ========       ========

Basic and diluted net loss per share ..........      $  (0.15)      $  (0.27)
                                                     ========       ========
Shares used in computation of basic and diluted
  net loss per share ..........................        21,185         20,687
                                                     ========       ========

(1)  Excluding $5 in amortization of deferred employee stock-based  compensation
     for the three  months  ended June 30, 2003 ($5 for the three  months  ended
     June 30, 2002).

(2)  Excluding $17 in amortization of deferred employee stock-based compensation
     for the three  months  ended June 30, 2003 ($23 for the three  months ended
     June 30, 2002).

(3)  Excluding $17 in amortization of deferred employee stock-based compensation
     for the three  months  ended June 30, 2003 ($31 for the three  months ended
     June 30, 2002).

(4)  Excluding   $231  in   amortization   of  deferred   employee   stock-based
     compensation  for the three  months ended June 30, 2003 ($312 for the three
     months ended June 30, 2002).

                             See accompanying notes.


                                       2
<PAGE>

                                  VIRAGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                  June 30,
                                                                                           ---------------------
                                                                                           2003            2002
                                                                                           ----            ----
<S>                                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .........................................................................      $ (3,259)      $ (5,501)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization ..................................................           335            685
  Loss on disposal of assets .....................................................            --            106
  Amortization of deferred compensation related to
    stock options ................................................................           270            371
  Amortization of technology right and warrant fair values .......................            13             12
  Changes in operating assets and liabilities:
    Accounts receivable ..........................................................         1,091            481
    Prepaid expenses and other current assets ....................................           222           (898)
    Other assets .................................................................            37            (26)
    Accounts payable .............................................................          (123)          (236)
    Accrued payroll and related expenses .........................................          (292)            87
    Accrued expenses and accrued restructuring charges ...........................            (8)          (378)
    Deferred revenue .............................................................          (792)            58
    Deferred rent ................................................................            --             34
                                                                                        --------       --------
Net cash used in operating activities ............................................        (2,506)        (5,205)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...............................................           (32)          (118)
Purchase of short-term investments ...............................................        (5,431)       (22,600)
Sales and maturities of short-term investments ...................................        11,350         25,278
                                                                                        --------       --------
Net cash provided by investing activities ........................................         5,887          2,560

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of repurchases ......................           114             10
Proceeds from employee stock purchase plan .......................................            30            151
                                                                                        --------       --------
Net cash provided by financing activities ........................................           144            161
                                                                                        --------       --------
Net increase/(decrease) in cash and cash equivalents .............................         3,525         (2,484)
Cash and cash equivalents at beginning of period .................................         2,934          4,586
                                                                                        --------       --------
Cash and cash equivalents at end of period .......................................      $  6,459       $  2,102
                                                                                        ========       ========

SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Deferred compensation related to stock options ...................................      $     --             36
Reversal of deferred compensation upon employee termination ......................      $     --       $     34
</TABLE>

                             See accompanying notes.


                                       3
<PAGE>

                                  VIRAGE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2003
                                   (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 June 30,  2003 and for the three
month periods ended June 30, 2003 and 2002 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  months  ended  June 30,  2003 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 16, 2003, as amended by the Company's  Amendment
to its Annual  Report on Form  10-K/A,  dated July 29,  2003,  as filed with the
United States Securities and Exchange Commission. The accompanying balance sheet
at March 31, 2003 is derived from the Company's audited  consolidated  financial
statements at that date.

     Management  believes  that  its  restructuring  activities,  including  the
restructuring of its headquarters  facility,  have reduced its ongoing operating
expense such that the Company will have  sufficient  working  capital to support
planned  activities  through  fiscal 2004. As of June 30, 2003,  the Company had
cash, cash equivalents and short-term investments totaling $13,923,000,  working
capital of approximately  $8,569,000 and  stockholders'  equity of approximately
$10,860,000.  During the first quarter of fiscal 2004, the Company used cash and
cash equivalents in operating activities of approximately $2,506,000. During the
year  ended  March 31,  2003,  the  Company  used cash and cash  equivalents  in
operating  activities of approximately  $14,510,000.  Management is committed to
the successful  execution of the Company's  operating plan and will take further
action as necessary to align the  Company's  operations  and reduce  expenses to
ensure the Company continues as a going concern through at least March 31, 2004.

     In  July  2003,  the  Company  and  Autonomy  Corporation  entered  into  a
definitive  agreement under which Autonomy will acquire the Company (see Note 6)
for a  purchase  price of $1.10 per share in cash.  The  transaction  reflects a
fully-diluted cash purchase price of approximately $24,800,000.

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.   Service  revenues  include  revenues  from
maintenance   contracts,   application  services,   and  professional  services,
including  professional  services performed directly for and via subcontract for
the U.S. Government.


                                       4
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

     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  longer  than  normal  not  to be  fixed  and
determinable.  The Company's normal payment terms are generally considered to be
"net 30 days" to "net 60 days."  For  arrangements  involving  extended  payment
terms,  revenue  recognition  generally occurs when payments become due provided
all other  revenue  recognition  criteria  are met. No customer has the right of
return and arrangements  generally do not have acceptance criteria.  If right of
return or  customer  acceptance  does exist  within an  arrangement,  revenue is
deferred until the earlier of the end of the right of  return/acceptance  period
or until  written  notice  of  acceptance/cancellation  of right  of  return  is
received from the customer.

     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. Revenue is recognized
on a per  copy  basis  for  licensed  software  when  each  copy of the  license
requested  by the  customer is  delivered.  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  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  paragraphs  have been
met, (2) payment of the license fee is not dependent upon the performance of the
professional services,  (3) the services do not include significant  alterations
to the  features  and  functionality  of the  software  and (4) the services are
deemed  "perfunctory"  both in level of effort to perform  and in  magnitude  of
dollars  based  upon the  Company's  objective  evidence  of fair  value for the
services  relative to the fair value of other elements provided for in the total
arrangement fee.


                                       5
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

     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. For arrangements that include
customer  acceptance  clauses  that the  Company  does  not have an  established
history  of meeting  or which are not  considered  to be  routine,  the  Company
recognizes  revenue when the  arrangement has been completed and accepted by the
customer provided all other criteria for revenue recognition are met.

     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  that there are  indications
that the  customer is  satisfied  with and/or will pay for the  services and all
other revenue recognition criteria are met.

     Included as part of the Company's  service revenues are services  performed
for U.S.  Government  Defense and other  security  agencies,  either from direct
arrangements or subcontracts with other U.S. Government contractors. The Company
generally  performs  these  services in  conjunction  with existing or potential
software license sales.  Should software be included as part of the arrangement,
the Company  accounts  for any  software  license fee  according  to its revenue
recognition accounting policy for multiple-element arrangements described above.

     Virtually all of the Company's services with such U.S.  Government entities
are   performed   under   various   firm-fixed-price,   time-and-material,   and
cost-plus-fixed-fee   reimbursement  contracts.   Revenues  on  firm-fixed-price
contracts  are  generally  recognized  according  to SOP 81-1  based  upon costs
incurred in relation to total  estimated costs from input measures such as hours
or days. Revenues on time-and-material contracts are recognized to the extent of
billable  rates  multiplied  by hours worked plus  materials  expense  incurred.
Revenues for cost-plus-fixed-fee contracts are recognized as costs are incurred,
including a proportionate amount of the fee earned.

     Customer  billings  that have not been  recognized as revenue in accordance
with the above policies are shown on the balance sheet as deferred revenue.


                                       6
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

Allowance for Revenue Adjustments and Doubtful Accounts

     If the Company determines that payment from the customer is not probable at
the time all other revenue  recognition  criteria (as described above) have been
met, the Company  defers  revenues  until payment from the customer is received.
The  Company  also makes  judgments  as to its  ability  to collect  outstanding
receivables  (that have not been  deferred)  and provides an  allowance  for the
portion of  receivables  when  collection  becomes  doubtful.  The Company  also
provides an allowance for returns and revenue  adjustments in the same period as
the related  revenues are  recorded.  Allowances  are made based upon a specific
review of all significant  outstanding invoices.  Allowances recorded offset the
Company's gross accounts receivable balance.

Stock-Based Compensation

     The Company has elected to follow the intrinsic  value method of Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB Opinion No. 25"), in accounting for its employee stock options because, as
discussed below,  the alternative  fair value accounting  provided for under the
Financial   Accounting   Standards  Board's  ("FASB")   Statement  of  Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation" ("FAS
123"),  requires use of option  valuation models that were not developed for use
in valuing  employee  stock  options.  Under APB  Opinion  No. 25,  compensation
expense is based on the  difference,  if any, on the date of grant,  between the
estimated fair value of the Company's  common stock and the exercise price.  FAS
123 defines a "fair  value"  based method of  accounting  for an employee  stock
option or similar equity investment. The Company accounts for equity instruments
issued to  nonemployees  in  accordance  with the  provisions of FAS 123 and the
FASB's  Emerging  Issues  Task Force  Issue No.  96-18,  "Accounting  for Equity
Instruments  That Are  Issued  to  Other  Than  Employees  for  Acquiring  or in
Conjunction with Selling, Goods or Services ("EITF 96-18")."

Pro Forma Disclosures of the Effect of Stock-Based Compensation

     As  described  above,  the Company has elected to follow APB Opinion No. 25
and related interpretations in accounting for its employee stock plans. However,
FAS 123 requires pro forma information  regarding net loss as if the Company had
accounted for and calculated the related non-cash,  stock-based  expense for its
employee stock plans under the fair value method prescribed under FAS 123.

     In order to  determine  this pro  forma net  loss,  the fair  value for the
Company's  options was  estimated  at the date of grant using the  Black-Scholes
option valuation model with the following assumptions for the three months ended
June 30, 2003 and 2002: risk-free interest rates of 2.0% and 2.7%, respectively;
and  volatility  factors of 112%, no dividend  yield and an expected life of the
options  of four  years for both  periods  presented.  The fair  value of shares
issued and to be issued  pursuant to the Company's  employee stock purchase plan
in the  three  months  ended  June 30,  2003 and 2002 were  estimated  using the
following  weighted average  assumptions:  risk-free  interest rate of 1.3%, and
1.7%,  respectively,  and no dividend yield, a volatility factor of 112%, and an
expected life of the option of six months for both periods.  For purposes of pro
forma  disclosures,  the  estimated  fair value of the options is  amortized  to
expense over the options' vesting period.

     The  Black-Scholes  option valuation model used by the Company to determine
fair value for purposes of its pro forma  disclosure  was  developed  for use in
estimating  the fair value of traded  options that have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly subjective assumptions, including the expected price volatility.
Because the Company's employee stock options and stock purchase plan shares have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate,  in the  Company's  opinion,  the existing  models do not  necessarily
provide a  reliable  single  measure  of the fair  value of its  employee  stock
options.


                                       7
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

     Had  compensation  expense  for the  Company's  employee  stock  plans been
determined  using the fair value at the grant dates for awards under those plans
calculated using the  Black-Scholes  valuation model, the Company's net loss and
basic and diluted net loss per share would have been  increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                             Three Months Ended June 30,
                                                             ---------------------------
                                                                  2003         2002
                                                                -------       -------
<S>                                                             <C>           <C>
Net loss, as reported ....................................      $(3,259)      $(5,501)
Add:  stock-based compensation expense included in
  reported net loss, net of related tax effects ..........          270           371
Deduct:  total stock-based compensation expense determined
  under fair value method for all awards .................         (837)       (1,010)
                                                                -------       -------
Net loss, pro forma ......................................      $(3,826)      $(6,140)
                                                                =======       =======
Basic and diluted net loss per share, as reported ........      $ (0.15)      $ (0.27)
                                                                =======       =======
Basic and diluted net loss per share, pro forma ..........      $ (0.18)      $ (0.30)
                                                                =======       =======
</TABLE>
     These  pro  forma  amounts  may not be  representative  of the  effects  on
reported  net loss for future  periods as options  vest over  several  years and
additional awards are generally made each year.

     The  weighted-average  grant date fair value of options  granted during the
three months ended June 30, 2003 and 2002 was $0.61 and $0.97, respectively, and
the  weighted-average  grant date fair value of ESPP  shares was $0.68 and $0.57
during the three months ended June 30, 2003 and 2002, respectively.

Use of Estimates

     The  preparation  of  the  accompanying  unaudited  condensed  consolidated
financial  statements requires management to make estimates and assumptions that
effect 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 June 30, 2003, all of the Company's total
cash    equivalents    and   short-term    investments    were   classified   as
available-for-sale  and  consisted  of  obligations  issued  by U.S.  government
agencies and multinational corporations,  maturing within one year. Realized and
unrealized gains and losses were insignificant for all periods presented.

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.


                                       8
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

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.

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


                                        Three Months Ended
                                            June 30,
                                     -----------------------
                                       2003           2002
                                     --------       --------
Net loss ......................      $ (3,259)      $ (5,501)
                                     ========       ========
Weighted-average shares of
  common stock outstanding ....        21,185         20,706
Less weighted-average shares of
  common stock subject to
  repurchase ..................            --            (19)
                                     --------       --------
Weighted-average shares used
  in computation of basic and
  diluted net loss per share ..        21,185         20,687
                                     ========       ========
Basic and diluted net loss per
  share .......................      $  (0.15)      $  (0.27)
                                     ========       ========

Impact of Recently Issued Accounting Standards

    In November  2002,  the FASB's EITF reached a consensus on Issue No.  00-21,
"Revenue  Arrangements  with  Multiple  Deliverables  (EITF  00-21)." EITF 00-21
provides  guidance on how to account for arrangements  that involve the delivery
or performance of multiple  products,  services and/or rights to use assets. The
provisions  of Issue 00-21 will apply to revenue  arrangements  entered  into in
fiscal  periods  beginning  after  June 15,  2003.  We do not  believe  that the
adoption of EITF 00-21 will have a material effect on our consolidated financial
position, results of operations or cash flows.

    In January 2003, the FASB issued  Interpretation  No. 46,  "Consolidation of
Variable  Interest  Entities  ("FIN  46")." FIN 46 requires  an investor  with a
majority of the variable  interests  in a variable  interest  entity  ("VIE") to
consolidate  the entity and also  requires  majority  and  significant  variable
interest investors to provide certain  disclosures.  A VIE is an entity in which
the  equity  investors  do  not  have a  controlling  interest,  or  the  equity
investment at risk is  insufficient to finance the entity's  activities  without
receiving additional  subordinated financial support from the other parties. For
arrangements  entered  into with VIEs  created  prior to January 31,  2003,  the
provisions  of FIN 46 are  required to be adopted at the  beginning of the first
interim or annual period beginning after June 15, 2003. The provisions of FIN 46
are  effective  immediately  for all  arrangements  entered  into  with new VIEs
created  after  January 31, 2003.  To date,  the Company has not invested in any
VIE's  and  does  not  expect  the  adoption  of  FIN 46 to be  material  on its
operations, financial position or cash flows.


                                       9
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

    In April 2003, the FASB issued Statement of Financial  Accounting  Standards
No. 149,  "Amendment  of Statement  133 on  Derivative  Instruments  and Hedging
Activities  ("FAS  149")."  FAS 149 is  intended  to result  in more  consistent
reporting of contracts as either freestanding  derivative instruments subject to
FAS 133 in its entirety,  or as hybrid  instruments with debt host contracts and
embedded derivative features. In addition, FAS 149 clarifies the definition of a
derivative  by  providing  guidance on the  meaning of initial  net  investments
related to  derivatives.  FAS 149 is  effective  for  contracts  entered into or
modified  after June 30, 2003.  The Company does not believe the adoption of FAS
149 will have a material effect on our consolidated financial position,  results
of operations or cash flows.

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 may also be subject to termination fees
or expense  reimbursements  to  Autonomy  in certain  circumstances  where their
acquisition of the Company is not consummated.  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 Company  reviews its assessment of the likelihood
of loss on any  outstanding  contingencies  as  part of its  on-going  financial
processes.  However,  actual  results  may  differ  from these  estimates  under
different assumptions and conditions.

Commitments

     At June 30, 2003, 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,  2004,  the  Company's  total
commitments  amount to $2,610,000.  Future full fiscal year  commitments  are as
follows:  $1,972,000  in  2005,  $1,715,000  in  2006  and  $1,057,000  in  2007
($7,354,000  in total  commitments  as of June  30,  2003).  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 $1,000,000 for the year ending March 31, 2004,  pursuant
to the Lease Amendment described below.

Operating Lease Amendment

     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  abandoned 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
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.


                                       10
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

     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  forfeited  $1,250,000  of  $2,000,000  of
restricted  cash used to  collateralize  a letter of credit.  The  Company  also
forgave  approximately   $240,000  of  security  deposits.   The  $2,000,000  of
restricted  cash and  $240,000 of security  deposits  were  classified  as other
assets on the Company's consolidated balance sheet prior to forfeiture.

     The Company is  obligated to forfeit  $750,000 of  restricted  cash,  which
collateralizes its obligation and is classified as other assets on the Company's
consolidated balance sheet, to its landlord if the landlord is able to lease the
Company's excess space. The Company  estimates it will also incur  approximately
$359,000 of other  collateral  forfeitures  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.

     The Company is amortizing the payments and other collateral described above
as rent  expense  over  the  life of the  lease  and the  amortization  of these
payments and other  collateral  totaled  $71,000 for the three months ended June
30,  2003.  In March  2003,  the  Company  abandoned  approximately  half of its
headquarters  facility to facilitate  the leasing of the excess space to a third
party. As a result,  the Company incurred  charges of  approximately  $2,239,000
(including  $89,000 of  equipment  write-downs)  during the year ended March 31,
2003.  The charges are related to the  write-off  of  approximately  half of the
unamortized portion of payments and other collateral  forfeiture described above
and an accrual of approximately  $1,026,000  relating to the expected leasing of
the  excess  space to a third  party at a rate  that is below the  Minimum  Rate
guarantee.  The Company paid out  $129,000  relating to its excess space for the
three  months  ended June 30, 2003 and reduced its accrual for such excess space
accordingly.

     The  Company  has made a number  of  assumptions,  such as  length  of time
required to engage a  sublessee,  and  estimates,  such as the assumed  sublease
rate, in deriving the  accounting  for its lease  amendment and excess  facility
space.  The  Company's  assumptions  and  estimates  are  based  upon  the  best
information  the Company has at the time any  charges are  derived.  There are a
number  of  external  factors  outside  of  the  Company's  control  that  could
materially  change the  Company's  assumptions  and  estimates  and  require the
Company to record additional charges in future periods. The Company monitors all
of these  external  factors and the impact on its  assumptions  and estimates as
part of its on-going financial reporting processes.

Restructuring

     During the three  months  ended June 30,  2003,  appropriate  levels of the
Company's  management  approved  and  committed  the  Company  to  restructuring
programs to better align  operating  expenses  with  anticipated  revenues.  The
Company recorded $35,000 of employee severance costs as limited  individuals who
performed  general and  administrative  duties were notified  about the specific
actions of the  restructuring  programs as of June 30, 2003. The Company expects
to notify the  remaining  individuals  to be  affected by the  recently  adopted
restructuring programs and expects to pay the majority of all employee severance
related to these programs during the three months ending  September 30, 2003. In
addition,  the Company had $1,386,000 of accrued  restructuring costs related to
monthly rent for excess  facility  capacity  that the Company has ceased to use,
and potential cash payments and potential forfeiture of cash-based collateral in
conjunction with the Lease Amendment described above. The Company expects to pay
out its excess facility charges accrued as of June 30, 2003 over the life of the
operating  lease,  which runs through  September  2006.  The Company  expects to
sublease its excess space and forfeit its cash-based collateral and pay out cash
payments  related  to its Lease  Amendment  over the  course of the next  twelve
months.


                                       11
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

     The following table depicts the Company's restructuring activity during the
three months ended June 30, 2003 (in thousands):
<TABLE>
<CAPTION>
                                                                    Expenditures
                            Balance at                              ------------                                  Balance at
    Category              March 31, 2003    Additions          Cash            Non-cash        Adjustments      June 30, 2003
    --------              --------------    ---------          ----            --------        -----------      -------------
<S>                           <C>             <C>              <C>             <C>               <C>                <C>
Excess facilities             $1,515          $  --            $129            $ --              $  --              $1,386
Employee severance                --             35              --              --                 --                  35
                              ------          -----            ----            ------            -------            ------
    Total ........            $1,515          $  35            $129            $ --              $  --              $1,421
                              ======          =====            ====            ======            =======            ======
</TABLE>

     The Company has experienced  excess  operating lease capacity and should it
continue to be unable to find a sub lessee at a rate equivalent to its operating
lease  rate,  the  Company  may be  required  to record a charge  for the rental
payments that it owes to its landlord  relating to any excess facility  capacity
that  it  ceased  to  use.  The  Company's   management   reviews  its  facility
requirements  and  assesses  whether any excess  capacity  exists as part of its
on-going financial processes.

     During  the three  months  ended June 30,  2002,  the  Company  implemented
additional  restructuring  programs  to better  align  operating  expenses  with
anticipated  revenues.  The Company  recorded a $731,000  restructuring  charge,
which  consisted  of  $625,000  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 three months ended June 30, 2002.
The  restructuring  programs resulted in a reduction in force across all company
functions of  approximately  30  employees.  At March 31, 2002,  the Company had
$763,000  of accrued  restructuring  costs  related  to monthly  rent for excess
facility capacity,  employee severance payments and other exit costs. As of June
30, 2003, the Company has paid out all restructuring  amounts accrued as of June
30, 2002.

     The following table depicts the Company's restructuring activity during the
three months ended June 30, 2002 (in thousands):
<TABLE>
<CAPTION>
                                                                   Expenditures
                              Balance at                           ------------              Balance at
    Category                March 31, 2002   Additions          Cash         Non-cash      June 30, 2002
    --------                --------------   ---------          ----         --------      -------------
<S>                            <C>             <C>             <C>             <C>             <C>
Excess facilities ...          $  460          $   --          $  163          $  --           $  297
Employee severance ..             259             625             235             --              649
Equipment write-downs              --             106              --            106               --
Other exit costs ....              44              --              --              6               38
                               ------          ------          ------          ------          ------
   Total ............          $  763          $  731          $  398          $ 112          $   984
                               ======          ======          ======          ======          ======
</TABLE>


                                       12
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

Litigation

     Securities  class action lawsuits were filed,  starting on August 22, 2001,
in the United States District Court for the Southern  District of New York . The
cases have been consolidated under the caption In re Virage, Inc. Initial Public
Offering Securities Litigation,  No. 01-CV-7866 (SAS) (S.D.N.Y.),  related to In
re Initial  Public  Offerings  Securities  Litigation,  No. 21 MC 92 (SAS).  The
lawsuit is brought purportedly on behalf of all persons who purchased the common
stock of the Company from June 28, 2000 through December 6, 2000. The defendants
are the Company, one of its current officers and one of its former officers (the
"Virage  Defendants");  and investment banking firms that served as underwriters
for the Company's  initial  public  offering.  The operative  amended  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 IPO did not  disclose  that:  (1) the
underwriters  agreed to allow certain customers to purchase shares in the IPO in
exchange  for  excess  commissions  paid  to  the  underwriters;   and  (2)  the
underwriters arranged for certain customers to purchase additional shares in the
aftermarket at predetermined  prices.  The complaint also appears to allege that
false or misleading  analyst  reports were issued.  The complaint does not claim
any specific amount of damages.  Similar allegations were made in other lawsuits
challenging  over 300 other initial  public  offerings  and follow-on  offerings
conducted in 1999 and 2000. The cases were  consolidated for pretrial  purposes.
On February 19, 2003, the Court ruled on all defendants' motions to dismiss. The
Court denied the motions to dismiss the claims under the Securities Act of 1933.
The Court  granted  the  motions to  dismiss  the  claims  under the  Securities
Exchange Act of 1934.

     The Company has decided to accept a  settlement  proposal  presented to all
issuer defendants.  In this settlement,  plaintiffs will dismiss and release all
claims against the Virage  Defendants,  in exchange for a contingent  payment by
the insurance companies collectively responsible for insuring the issuers in all
of the IPO cases,  and for the  assignment  or surrender of control over certain
claims the Company may have against the underwriters. The Virage Defendants will
not be required to make any cash payments in the settlement, unless the pro rata
amount  paid  by the  insurers  in the  settlement  exceeds  the  amount  of the
insurance  coverage,  a  circumstance  which the Company  does not believe  will
occur.  The  settlement  will  require  approval of the Court,  which  cannot be
assured,  after  class  members  are  given  the  opportunity  to  object to the
settlement or opt out of the settlement.

     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.

NASDAQ Listing Requirements

    Through June 30, 2003, the Company's stock was traded on The NASDAQ National
Market and the bid price for its common stock had been under $1.00 per share for
over 30 consecutive trading days. 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.


                                       13
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

    The Company  received a NASDAQ letter on May 1, 2003 that stated the Company
was not in compliance  with NASDAQ's  minimum bid price listing  requirement and
that the Company had seven calendar days to do one of the following:

     o    Submit an  application  for transfer of the Company's  securities  for
          trading to The NASDAQ SmallCap Market;

     o    Request a hearing to appeal the delisting notice; or

     o    Have  the  Company's  securities  delisted  from The  NASDAQ  National
          Market.

    The Company  initiated an appeal process with NASDAQ whereby it requested an
in-person  hearing  with NASDAQ  regulators  to present  relevant  measures  the
Company has taken in order to improve its  operating  results  and, as a result,
bolster its stock price to levels required by NASDAQ.  The hearing took place in
June 2003.  The  Company  received a verdict  letter  from  NASDAQ's  compliance
department in July 2003 (see Note 6).

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."  From time to time, the Company may enter into
contracts  that  extend the  warranty  period  for its  products  and  services.
However,  such extensions have not  historically  impacted the level of warranty
workmanship  or expense  levels.  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 June 30, 2003 and March 31, 2003
was not  significant  and, to date, the Company's  product and service  warranty
expenses have not been significant.

     The Company has two letters of credit that collateralize  certain operating
lease  obligations of the Company and total  approximately  $768,000 at June 30,
2003 and March 31, 2003, respectively.  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 June 30, 2003 and March 31, 2003.  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.


                                       14
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

3.  Stockholders' Equity

Warrant issued to Landlord

     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 months ended June 30, 2003, the Company recorded $3,000 as rent
expense related to this warrant.

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.

4.  Segment Reporting

The  Company  has two  reportable  segments:  the sale of  software  and related
software  support  services  including  revenues from U.S.  government  agencies
("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).  Discreet 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.


                                       15
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

    Information on the Company's  reportable segments for the three months ended
June 30, 2003 and 2002 are as follows (in thousands):

                                                     Three Months Ended
                                                          June 30,
                                                  ------------------------
                                                   2003              2002
                                                  ------            ------
Software:

Total revenues .......................            $2,021            $2,250

Total cost of revenues ...............               334               386
                                                  ------            ------

Gross profit .........................            $1,687            $1,864
                                                  ======            ======

Application and Professional Services:

Total revenues .......................            $  906            $  985

Total cost of revenues ...............               767               960
                                                  ------            ------

Gross profit .........................            $  139            $   25
                                                  ======            ======


5.   Income Taxes

     The Company has not  recorded a provision  for federal and state or foreign
income  taxes for the three  months  ended  June 30,  2003 or 2002  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.

6.  Subsequent Events (Unaudited)

Definitive Agreement with Autonomy Corporation plc and Related Restructuring

     In July 2003,  the  Company and  Autonomy  Corporation  plc entered  into a
definitive  agreement  under which Autonomy will acquire the Company.  Under the
terms of the definitive agreement, upon completion of the acquisition,  Autonomy
will pay to the Company's stockholders $1.10 per share in cash for each share of
the Company's common stock  outstanding and will assume any outstanding  options
to purchase the Company's common stock.

     The merger is  subject to a number of  conditions  including,  among  other
things,  approval of the Company's  stockholders  and  regulatory  approvals and
clearance.  The transaction is currently expected to be completed in the quarter
ending  September 30, 2003.  There can be no assurance that the transaction will
be consummated. In the event that the proposed transaction fails to close, under
certain circumstances, the Company may be required to pay Autonomy a termination
fee of $1,250,000 and reimbursement of expenses of up to $350,000.

     As  described  in  Note  2  above,  appropriate  levels  of  the  Company's
management approved and committed the Company to certain restructuring programs.
However,   the  Company  had  not  notified  the  significant  majority  of  the
individuals  affected by these programs as of June 30, 2003. In conjunction with
the signing of the definitive  agreement with Autonomy in July 2003, the Company
expects that it will notify the  remaining  individuals  to be affected by these
restructuring  programs and expects to incur and pay employee severance costs of
approximately  $1,000,000 during the three months ended September 30, 2003 . The
impact of the expected  severance  costs to the Company's  software  segment and
application  services  and  professional  services  segment  is  expected  to be
approximately $28,000 and $18,000, respectively.


                                       16
<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                  June 30, 2003
                                   (unaudited)

NASDAQ SmallCap Market Transfer

    In July 2003,  the  Company  received a response  from  NASDAQ's  compliance
department  stating that its appeal was  dismissed  and that the Company had the
option of  transferring to The NASDAQ SmallCap Market or being delisted from the
exchange.  The  Company  submitted  an  application  for  transfer to The NASDAQ
SmallCap  Market,  which was accepted and the Company  transferred  to and began
trading on The NASDAQ  SmallCap Market in July 2003. The Company expects that it
will  have at  least  180  days  to  regain  compliance  with  NASDAQ's  listing
requirements  while trading on The NASDAQ  SmallCap  Market.  The Company 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.


                                       17
<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", "will acquire", 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 video and rich media  communication  software
products, professional services and application services. We sell these products
and services to  corporations,  media and  entertainment  companies,  government
agencies, and universities worldwide.

Recent Events

Definitive Agreement with Autonomy Corporation plc and Related Restructuring

     In  July  2003,  we  entered  into a  definitive  agreement  with  Autonomy
Corporation  plc under which  Autonomy  will  acquire us. Under the terms of the
definitive agreement,  upon completion of the acquisition,  Autonomy will pay to
our  stockholders  $1.10 per share in cash for each  share of our  common  stock
outstanding  and will  assume any  outstanding  options to  purchase  our common
stock.

     The merger is  subject to a number of  conditions  including,  among  other
things,  approval of our stockholders and regulatory approvals and clearance. We
currently expect the transaction to be completed in the quarter ending September
30, 2003. There can be no assurance that the transaction will be consummated. In
the  event  that  the  proposed   transaction  fails  to  close,  under  certain
circumstances,  we  may  be  required  to  pay  Autonomy  a  termination  fee of
$1,250,000 and reimbursement of expenses of up to $350,000.

     During the three  months  ended June 30,  2003,  appropriate  levels of our
management  approved and committed us to restructuring  programs to better align
our operating  expenses with anticipated  revenues.  As of June 30, 2003, we had
accrued  employee  severance  costs of $35,000 as only limited  individuals  who
performed  general and  administrative  duties were notified  about the specific
actions of these restructuring  programs. We expect we will notify the remaining
individuals  to be affected  by these  restructuring  programs  during the three
months ending September 30, 2003. We expect to incur employee severance costs of
approximately  $1,000,000  during the three months ending September 30, 2003 and
expect to pay the majority of all employee  severance  related to these programs
during the same period.

     In  addition,  at June 30,  2003 we had an accrual  balance  of  $1,386,000
related to restructuring costs for excess facility capacity,  and potential cash
payments and potential  forfeiture of cash-based  collateral in conjunction with
an  operating  lease   amendment   described  in  the  notes  to  our  condensed
consolidated  financial statements contained elsewhere in this quarterly report.
We expect to pay out the excess  facility  charges  accrued as of June 30,  2003
over the life of the  operating  lease,  which runs through  September  2006. We
expect to sublease our excess space and forfeit  certain  cash-based  collateral
and pay out cash payments  related to our Lease Amendment over the course of the
next six months.

                                       18
<PAGE>

     The following  table depicts our  restructuring  activity  during the three
months ended June 30, 2003 (in thousands):
<TABLE>
<CAPTION>
                                            Balance at              Expenditures                                      Balance at
        Category          March 31, 2003    Additions           Cash             Non-cash        Adjustments         June 30, 2003
        --------          --------------    ---------           ----             --------        -----------         -------------
<S>                           <C>             <C>              <C>               <C>                 <C>                 <C>
Excess facilities             $1,515          $  --            $  129            $     --            $     --            $1,386
Employee severance                --             35                --                  --                  --                35
                              ------          -----            ------            --------            --------            ------
    Total ........            $1,515          $  35            $  129            $     --            $     --            $1,421
                              ======          =====            ======            ========            ========            ======
</TABLE>
     Excess  Facilities:  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 and the restructuring of our San Mateo
office lease (refer to the discussion regarding our lease amendment in the notes
to our condensed  consolidated  financial statements contained elsewhere in this
quarterly report).  Cash expenditures for excess facilities and other exit costs
during the three months ended June 30, 2003  represent the  contractual  ongoing
lease  payments.  It is  management's  best estimate that we will not be able to
recoup the losses from our lease rental payments recorded as excess  facilities,
which  continues  through  September  2006. The current  commercial  real estate
market in Northern  California is poor for sublessors  looking for tenants,  and
while we will make every  attempt to secure a sublease,  we believe that we will
be unable to sublease this  additional  space at a rate that is consistent  with
the minimum rate provided for in our lease  amendment.  We have made a number of
estimates,  such as length of time required to engage a sublessee and an assumed
sublease  rate, in deriving the  accounting  for our lease  amendment and excess
facility  space.   Our  assumptions  and  estimates  are  based  upon  the  best
information that we have at the time any charges are derived. There are a number
of external  factors outside of our control that could prove our assumptions and
estimates  materially  inaccurate and require us to record additional charges in
future periods.  We monitor all of these external  factors and the impact on its
assumptions and estimates as part of our on-going financial processes.

     Employee Severance:  Accrued employee  severance,  which includes severance
payments,  related taxes, outplacement and other benefits, totaled approximately
$35,000 as of June 30, 2003. As of June 30, 2003,  only limited  individuals who
performed  general and  administrative  duties were notified  about the specific
actions of our  restructuring  programs.  We expect we will notify the remaining
individuals  to be affected  by these  restructuring  programs  during the three
months  ending  September  30, 2003.  As a result,  we expect to incur  employee
severance  costs of  approximately  $1,000,000  during the three  months  ending
September  30,  2003 and expect to pay the  majority of all  employee  severance
related to these programs during the same period.

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,  provisions  for  revenue  adjustments  and  doubtful
accounts,  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.   Service   revenues  include  revenues  from  maintenance
contracts,   application   services,   and  professional   services,   including
professional  services  performed  directly for and via subcontract for the U.S.
Government.


                                       19
<PAGE>

     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
longer than normal not to be fixed and  determinable.  Our normal  payment terms
are generally  considered to be "net 30 days" to "net 60 days." For arrangements
involving  extended  payment terms,  revenue  recognition  generally occurs when
payments become due provided all other revenue recognition  criteria are met. No
customer  has the  right  of  return  and  arrangements  generally  do not  have
acceptance criteria. If right of return or customer acceptance does exist within
an arrangement, revenue is deferred until the earlier of the end of the right of
return/acceptance period or until written notice of  acceptance/cancellation  of
right of return is received from the customer.

     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. Revenue is recognized
on a per  copy  basis  for  licensed  software  when  each  copy of the  license
requested  by the  customer is  delivered.  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  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  paragraphs  have been
met, (2) payment of the license fee is not dependent upon the performance of the
professional services,  (3) the services do not include significant  alterations
to the  features  and  functionality  of the  software  and (4) the services are
deemed  "perfunctory"  both in level of effort to perform  and in  magnitude  of
dollars  based  upon the  Company's  objective  evidence  of fair  value for the
services  relative to the fair value of other elements provided for in the total
arrangement fee.

     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, 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.   For  arrangements  that  include  customer
acceptance  clauses  that we do not have an  established  history  of meeting or
which  are  not  considered  to  be  routine,  we  recognize  revenue  when  the
arrangement  has been completed and accepted by the customer  provided all other
criteria for revenue recognition have been met.


                                       20
<PAGE>

     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. 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
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.  We recognize revenues on transaction fees that are subject to
monthly  minimums  based upon the monthly  minimum rate 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 that we have  indications the
customer  is  satisfied  with  and/or  will pay for the  services  and all other
revenue recognition criteria are met.

     Included as part of our service  revenues are services  performed  for U.S.
Government Defense and other security agencies,  either from direct arrangements
or subcontracts  with other U.S.  Government  contractors.  We generally perform
these services in conjunction with existing or potential software license sales.
Should  software  be  included  as part of the  arrangement,  we account for any
software license fee according to our revenue recognition  accounting policy for
multiple-element arrangements described above.

     Virtually  all of our  services  with such  U.S.  Government  entities  are
performed    under    various    firm-fixed-price,     time-and-material,    and
cost-plus-fixed-fee   reimbursement  contracts.   Revenues  on  firm-fixed-price
contracts  are  generally  recognized  according  to SOP 81-1  based  upon costs
incurred in relation to total  estimated costs from input measures such as hours
or days. Revenues on time-and-material contracts are recognized to the extent of
billable  rates  multiplied  by hours worked plus  materials  expense  incurred.
Revenues for cost-plus-fixed-fee contracts are recognized as costs are incurred,
including a proportionate amount of the fee earned.

     Customer  billings  that have not been  recognized as revenue in accordance
with the above policies are shown on the balance sheet as deferred revenue.

Allowance for Revenue Adjustments and Doubtful Accounts

     If we determine  that payment from the customer is not probable at the time
all other revenue  recognition  criteria (as described  above) have been met, we
defer  revenues  until  payment  from the  customer  is  received.  We also make
judgments as to our ability to collect  outstanding  receivables  (that have not
been  deferred)  and provide an allowance  for the portion of  receivables  when
collection  becomes  doubtful.  We also  provide an  allowance  for  returns and
revenue  adjustments  in the same period as the related  revenues are  recorded.
Allowances are made based upon a specific review of all significant  outstanding
invoices. Allowances recorded offset our gross accounts receivable balance.

Restructuring Costs

     During the three months ended June 30, 2003 and 2002, we undertook plans to
restructure  our  operations  in  order  to  reduce  operating   expenses.   Our
restructuring  expenses have included  excess  facilities,  employee  severance,
asset write-downs and other exit costs. Given the significance of, and timing of
the execution of such activities,  this process is complex and involves periodic
reassessments  of estimates  made at the time the original  decisions were made.
Our  restructuring  expenses involved  significant  estimates made by management
using the best  information  available at the time that the estimates were made,
some of  which  were  based  upon  information  provided  by third  parties.  We
continually  evaluate  the  adequacy  of the  remaining  liabilities  under  our
restructuring  initiatives.  Although we believe that these estimates accurately
reflect the costs of our restructuring plans, actual results may differ, thereby
requiring  us to record  additional  provisions  or  reverse  a portion  of such
provisions.


                                       21
<PAGE>

     As discussed in Note 2 of the notes to our condensed consolidated financial
statements  included  elsewhere  in this  quarterly  report,  we  have  recorded
significant restructuring expenses in connection with our abandonment of certain
leased  facilities.  These  excess  facility  costs  were  estimated  to include
remaining lease liabilities,  forfeiture of certain  collateral  pursuant to our
lease  amendment  and  brokerage  fees  offset  by  estimated  sublease  income.
Estimates  related  to  sublease  costs  and  income  are  based on  assumptions
regarding the period required to sublease the facilities and the likely sublease
rates.  These estimates are based on market trend information  analyses provided
by  commercial  real estate  brokerage  firms  retained  by us. We review  these
estimates each reporting period and, to the extent that our assumptions  change,
adjustments to the restructuring accrual are recorded. If the real estate market
continues to worsen and we are not able to sublease the  properties as early as,
or at the rates estimated, the accrual will be increased,  which would result in
additional  restructuring  costs in the  period in which such  determination  is
made.  If the real estate  market  strengthens  and we are able to sublease  the
properties earlier or at more favorable rates than projected, the accrual may be
decreased,  which  would  increase  net  income  in the  period  in  which  such
determination is made.

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.  We also may be  subject  to
termination fees or expense  reimbursements to Autonomy in certain  circumstance
where their  acquisition of us is not  consummated.  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.

     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 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.

Results of Operations

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


                                                Three Months Ended
                                                     June 30,
                                             -------------------------
                                               2003              2002
                                             -------           -------
Revenues:
  License revenues ...............              44%               50%
  Service revenues ...............              56                50
                                              ----              ----
          Total revenues .........             100               100
                                              ----              ----
Cost of revenues:
  License revenues ...............               5                 6
  Service revenues ...............              33                36
                                              ----              ----
          Total cost of revenues .              38                42
                                              ----              ----
Gross profit .....................              62                58
Operating expenses:
  Research and development .......              57                74
  Sales and marketing ............              71               114
  General and administrative .....              38                35
  Stock-based compensation .......               9                11
                                              ----              ----
          Total operating expenses             175               234
                                              ----              ----
Loss from operations .............            (113)             (176)
Interest and other income ........               2                 6
                                              ----              ----
Net loss .........................            (111)%            (170)%
                                              ====              ====


                                       22
<PAGE>

     We incurred a net loss of $3,259,000 during the three months ended June 30,
2003. As of June 30, 2003, we had an  accumulated  deficit of  $110,303,000.  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 are not
necessarily sustainable or indicative of our future growth.

Revenues

     The  following  table sets forth a breakdown  of our revenues for the three
months ended June 30, 2003,  with changes  expressed in whole dollar amounts and
percentages  versus  results  from the same period in the prior fiscal year (all
amounts presented are in thousands, except percentages):
<TABLE>
<CAPTION>
                                       Three Months Ended June 30,             Increase/(Decrease)
                                       --------------------------              -------------------
                                          2003              2002             Amount          Percent
                                         ------            ------            ------          -------
<S>                                      <C>               <C>               <C>               <C>
License revenues ............            $1,276            $1,611            $(335)            (21)%

Customer support revenues ...               745               639              106              17%
Professional service revenues               511               522              (11)             (2)%
Application service revenues                395               463              (68)            (15)%
                                         ------            ------            -----
  Total service revenues ....             1,651             1,624               27               2%
                                         ------            ------            -----

    Total revenues ..........            $2,927            $3,235            $(308)            (10)%
                                         ======            ======            =====           =====
</TABLE>
     Total revenues  decreased to $2,927,000 for the three months ended June 30,
2003 from  $3,235,000  for the three  months  ended June 30, 2002, a decrease of
$308,000  or  10%.   This  decrease  was  a  result  of  decreases  in  license,
professional service, and application service revenues,  and was slightly offset
by increases in customer support revenues.  International  revenues decreased to
$463,000, or 16% of total revenues, during the three months ended June 30, 2003,
from $714,000, or 22% of total revenues,  during the three months ended June 30,
2002.  There were no customers who accounted for more than 10% of total revenues
during the three months ended June 30, 2003 or 2002.

      License  revenues  decreased to $1,276,000 for the three months ended June
30, 2003 from  $1,611,000 for the three months ended June 30, 2002, a decline of
$335,000  or 21%.  This  decrease  was a result of lower  sales of our  platform
products and was offset,  in part, by increased  revenues  from our  application
products.  We believe  the lower sales  performance  for our  platform  business
during  the three  months  ended June 30,  2003  continued  to result  from weak
technology  spending  by our target  markets in the  United  States and  abroad,
causing  delays in the closure of deals for our platform  license  products or a
reduction in the size of those deals.  The decline in platform  license revenues
was offset,  in part,  by  increased  revenues  from our  application  products,
particularly  VS  Webcasting.  Our VS  Webcasting  product  continues  to be our
strongest performing  application  product,  although we do, to a lesser extent,
continue to  experience  some  demand for our VS  Publishing  and VS  Production
applications.


                                       23
<PAGE>

     Service revenues increased to $1,651,000 during the three months ended June
30,  2003 from  $1,624,000  during  the three  months  ended June 30,  2002,  an
increase of $27,000.  Customer support  increased by 17% during the three months
ended June 30, 2003 in comparison  to the three months ended June 30, 2002.  Our
customer support  revenues  increased in comparison to the prior year's quarter,
despite a decline in our license revenues during the current quarter. This was a
result of existing  customers  renewing their support  agreements with us during
the current and prior quarters.  These  renewals,  combined with the significant
majority of our new customers also purchasing support contracts, resulted in our
customer support revenues increasing during the current quarter in comparison to
the same period in the prior year. Professional and application service revenues
declined two percent and 15%,  respectively,  in the three months ended June 30,
2003 in comparison to the three months ended June 30, 2002. Professional service
revenues  typically  correlate  with  fluctuations  in our  license  business as
consulting  contracts are  frequently  signed upon the purchase of our software.
Consistent  with the  decrease in our license  revenues  during the three months
ended June 30, 2003, we generated lower  professional  service revenues from our
commercial  customers.  These decreases were partially  offset by an increase in
revenues  earned from defense  related  entities of the U.S.  Government,  which
comprised 10% of our total revenues  during the three months ended June 30, 2003
(none during the three  months ended June 30,  2002).  Our  application  service
revenues  declined  modestly  during the three  months  ended June 30, 2003 as a
result of lower  revenues  generated  from our  application  and  video  hosting
services.  We focused our efforts and resources on our  enterprise  software and
related  services  businesses  during the past 12 months  and,  as a result,  we
significantly  downsized our application  services business  infrastructure  and
sales  efforts.  As a  result,  we had fewer  customers  engaging  such  hosting
services  during the three months ended June 30, 2003 in  comparison to June 30,
2002.

Cost of Revenues

     The  following  table  sets  forth a  breakdown  of our  different  cost of
revenues  for the  three  months  ended  June 30,  2003 and 2002,  with  changes
expressed in whole dollar amounts and  percentages  versus results from the same
period in the prior fiscal year (all amounts presented are in thousands,  except
percentages):
<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,               Increase/(Decrease)
                                                    ---------------------------               -------------------
                                                     2003                2002               Amount           Percent
                                                    ------             -------              ------           -------
<S>                                                 <C>                <C>                  <C>               <C>
Cost of license revenues ...............            $  153             $   187              $ (34)            (18)%

Cost of customer support revenues ......               181                 199                (18)             (9)%
Cost of professional service revenues ..               417                 539               (122)            (23)%
Cost of application service revenues ...               350                 421                (71)            (17)%
                                                    ------             -------              -----
  Total cost of service revenues .......               948               1,159               (211)            (18)%
                                                    ------             -------              -----
    Total cost of revenues .............            $1,101             $ 1,346              $(245)            (18)%
                                                    ======             =======              =====            =======


License gross profit ...................                88%                 88%

Customer support gross profit ..........                76%                 69%
Professional service gross profit (loss)                18%                 (3)%
Application service gross profit .......                11%                  9%
  Total service gross profit ...........                43%                 29%
    Total gross profit .................                62%                 58%
                                                    ======             =======
</TABLE>
     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,  related  overhead,  communication  expenses  and
capital equipment  depreciation costs for maintenance and support activities and
application  and  professional  services.  Total cost of revenues  decreased  to
$1,101,000,  or 38% of total  revenues,  in the three months ended June 30, 2003
from  $1,346,000,  or 42% of total revenues,  in the three months ended June 30,
2002.  The  decrease in total cost of revenues was due to a reduction in license
royalties  payable as a result of a smaller amount of revenues  during the three
months ended June 30, 2003, as well as our restructuring efforts during the past
twelve  months.  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.


                                       24
<PAGE>

     Cost of license revenues decreased to $153,000, or 12% of license revenues,
in the three  months  ended  June 30,  2003  from  $187,000,  or 12% of  license
revenues,  in the three months ended June 30, 2002.  The decrease was  primarily
due to fewer  shipments of products upon which we incur a unit-based  royalty to
certain technology providers.

     Cost of service revenues decreased to $948,000, or 57% of service revenues,
in the three  months  ended  June 30,  2003 from  $1,159,000,  or 71% of service
revenues, in the three months ended June 30, 2002. Decreases in cost of customer
support services, professional services and application services all contributed
to lower cost of service expenses and were a result of our restructuring efforts
undertaken  during  the past  twelve  months,  including  headcount  reductions,
facility consolidations and equipment write-downs.

Operating Expenses

     The  following  table sets forth a  breakdown  of our  different  operating
expenses  for the  three  months  ended  June 30,  2003 and 2002,  with  changes
expressed in whole dollar amounts and  percentages  versus results from the same
period in the prior fiscal year (all amounts presented are in thousands,  except
percentages):
<TABLE>
<CAPTION>
                                                                             Increase/(Decrease)
                                    Three Months Ended June 30,                 vs. Prior Year
                                    ---------------------------              -------------------
                                       2003              2002              Amount             Percent
                                       ----              ----              ------             -------
<S>                                   <C>               <C>               <C>                   <C>
Research and development .            $1,654            $2,382            $  (728)              (31)%
Sales and marketing ......             2,095             3,685             (1,590)              (43)%
General and administrative             1,120             1,142                (22)               (2)%
Stock-based compensation .               270               371               (101)              (27)%
                                      ------            -------           -------
  Total operating expenses            $5,139            $7,580            $(2,441)              (32)%
                                      ======            ======            =======              ====
</TABLE>
     Research  and  Development  Expenses.  Research  and  development  expenses
consist  primarily of personnel and related costs for our  development  efforts.
Our  research  and  development  expenses  decreased  to  $1,654,000,  or 57% of
revenues,  in the three  months ended June 30, 2003 from  $2,382,000,  or 74% of
revenues,  in the three months ended June 30, 2002.  The decrease was  primarily
due to our restructuring efforts during fiscal 2003 whereby headcount reductions
and facility  consolidations  resulted in  decreases  of $467,000 and  $248,000,
respectively,  during the three months ended June 30, 2003 in  comparison to the
three months ended June 30, 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  discretionary  marketing  programs  including trade shows,
telemarketing campaigns and seminars.  Sales and marketing expenses decreased to
$2,095,000,  or 71% of total  revenues,  in the three months ended June 30, 2003
from $3,685,000,  or 114% of total revenues,  in the three months ended June 30,
2002. The decrease was primarily due to our restructuring  efforts during fiscal
2003,  resulting in reductions in headcount and facility  related  expenses that
saved $1,162,000 and $245,000, respectively,  during the three months ended June
30, 2003 in comparison to the three months ended June 30, 2002.

     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,  facilities,
costs of our external audit firm and costs of our outside legal counsel. General
and   administrative   expenses   decreased  modestly  in  absolute  dollars  to
$1,120,000,  or 38% of total  revenues,  in the three months ended June 30, 2003
from  $1,142,000,or  35% of total  revenues,  in the three months ended June 30,
2002.  The decrease in absolute  dollars was primarily due to our  restructuring
efforts during fiscal 2003,  resulting in payroll and related expense savings of
$212,000 and facility-related  cost savings of $51,000 in the three months ended
June 30, 2003 in  comparison  to the three  months  ended June 30,  2002.  These
decreases were almost  entirely  offset by an increase in  professional  service
expenses,  particularly legal and accounting fees payable in connection with the
pending acquisition of us by Autonomy, of $264,000 during the three months ended
June 30, 2003 in comparison to June 30, 2002.


                                       25
<PAGE>

     Stock-Based  Compensation  Expense. We follow the intrinsic value method of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB Opinion No. 25"), in accounting for our employee stock options
because the  alternative  fair value  accounting  provided  for under the FASB's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing  employee stock options.  Under APB Opinion No. 25,
compensation  expense is based on the difference,  if any, on the date of grant,
between the estimated fair value of the Company's  common stock and the exercise
price.  Stock based  compensation  expense  represents the  amortization of this
deferred compensation for stock options granted to our employees.  We recognized
stock-based  compensation  expense of $270,000  and $371,000 in the three months
ended June 30, 2003 and 2002,  respectively,  in connection with the granting of
stock options to our employees.  Our stock-based  compensation expense decreased
in the three months ended June 30, 2003 in  comparison to the three months ended
June 30, 2002 as the options for which  deferred  compensation  originated  have
become fully vested or employees have departed from the Company.

     Interest and Other  Income.  Interest and other  income  includes  interest
income from cash,  cash  equivalents  and short-term  investments.  Interest and
other income,  net, decreased to $54,000 in the three months ended June 30, 2003
from  $190,000 in the three  months ended June 30, 2002.  The  decreases  were a
result of lower interest rates and lower average cash balances  during the three
months ended June 30, 2003.

     Provision  for Income  Taxes.  We have not recorded a provision for federal
and state or foreign income taxes during the three months ended June 30, 2003 or
2002 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  June  30,  2003,  we  had  cash,  cash  equivalents  and  short-term
investments of $13,923,000, a decrease of $2,394,000 from March 31, 2003 and our
working  capital,  defined as  current  assets  less  current  liabilities,  was
$8,569,000, a decrease of $2,492,000 in working capital from March 31, 2003. The
decrease in our cash,  cash  equivalents,  and  short-term  investments  and our
working capital is primarily attributable to cash used in operating activities.

     Our operating  activities  resulted in net cash outflows of $2,506,000  and
$5,205,000 for the three months ended June 30, 2003 and 2002, respectively.  The
cash  used  in  these  periods  was  primarily  attributable  to net  losses  of
$3,259,000  and  $5,501,000  in the three  months  ended June 30, 2003 and 2002,
respectively, offset by depreciation and non-cash, stock-based charges.

     Investing  activities resulted in cash inflows of $5,887,000 and $2,560,000
for the three months ended June 30, 2003 and 2002,  respectively.  Our investing
inflows were primarily from the maturity of our short-term  investments  and our
outflows were primarily for the purchase of short-term  investments  and capital
equipment.  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 $144,000 and $161,000
during  the three  months  ended  June 30,  2003 and 2002,  respectively.  These
inflows were from the proceeds of our employee stock plans during each period.

     At June 30,  2003,  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,  2004,  our  total  commitments  amount  to
$2,610,000.  Future full fiscal year  commitments are as follows:  $1,972,000 in
2005, $1,715,000 in 2006 and $1,057,000 in 2007 ($7,354,000 in total commitments
as of June 30, 2003). 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 $1,000,000  for
the year ending March 31, 2004, pursuant to the Lease Amendment described in the
notes to our condensed  consolidated  financial statements included elsewhere in
this quarterly report.


                                       26
<PAGE>

     Our  management  believes we have  adequate  cash to sustain  operations at
least  through  fiscal 2004 and is managing  our business in the  short-term  to
control  the  amount  of  cash  used  and in the  long-term  to  manage  towards
profitability  utilizing  existing  assets.  During fiscal 2003, we continued to
reduce  operating  expenses by  renegotiating  our lease  commitments,  reducing
purchases of other services and making workforce reductions. During fiscal 2004,
we executed additional  workforce  reduction  measures.  We are committed to the
successful  execution of our operating plan and will take further  restructuring
actions as necessary to align our revenue and reduce expenses.

     Although we believe our existing cash,  cash  equivalents  and  investments
will be sufficient to meet our  anticipated  cash needs for working  capital and
capital  expenditures for the next 12 months,  higher than anticipated  expenses
and lower than  anticipated  receipts may result in lower cash, cash equivalents
and investments balances than presently anticipated and we may find it necessary
to  obtain  additional  equity or debt  financing.  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
stockholders would be reduced.  Furthermore,  these equity securities might have
rights, preferences or privileges senior to our common stock.


                                       27
<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

If the proposed  merger with  Autonomy  Corporation  plc is not  completed,  our
business and stock price may be adversely affected.

      On July 10,  2003,  we  announced a  definitive  acquisition  agreement by
Autonomy   Corporation   plc.  The   acquisition  is  subject  to  a  number  of
contingencies,  including  approval  by a  majority  vote  of our  stockholders,
receipt  of  regulatory   approvals  and  other  customary  closing  conditions.
Therefore, there is a risk that the merger will not be completed or that it will
not be completed in the expected time period. If the merger is not completed, we
could be subject to a number of risks that may adversely affect our business and
stock price, including:

     o    the  trading  price of our  common  stock  likely  will  decline as we
          believe the current  trading price reflects a market  assumption  that
          the acquisition will be completed;

     o    we have and will continue to incur significant expenses related to the
          acquisition prior to its closing, including fees paid to an investment
          bank for a fairness  opinion for the merger,  and legal and accounting
          fees, that must be paid even if the merger is not completed; and

     o    if the merger agreement is terminated under certain circumstances,  we
          may be obligated to pay Autonomy a $1,250,000  termination  fee and up
          to $350,000 for reimbursable expenses.

     If completion of the merger is substantially  delayed,  we could be subject
to a number of risks that may  adversely  affect our  business  and stock price,
including:

     o    the trading  price of our common  stock might not exceed  $1.10 to the
          extent that the trading price  reflects a market  assumption  that the
          merger will be completed; and

     o    we could suffer  repercussions  from the limitations on our ability to
          conduct  our  business  that we are  bound by  (until  the  merger  is
          completed  or the  merger  agreement  is  terminated)  in  the  merger
          agreement.

     In  connection  with the proposed  acquisition,  we have mailed and/or will
mail to our  stockholders  and filed with the SEC a definitive  proxy  statement
which will contain important  information about Virage,  the proposed merger and
related  matters.  We urge  all  interested  and  affected  parties  to read the
definitive proxy statement.

The uncertainty created by the proposed acquisition of us by Autonomy could have
an adverse effect on our revenue and results of operations.

     Due to our  agreement to be acquired by Autonomy,  we are and will continue
to be  operating in a state of  uncertainty  about our future until the proposed
transaction is either completed or the acquisition agreement is terminated. As a
result of this  uncertainty,  customers  may decide to delay,  defer,  or cancel
purchases of our products  pending  resolution of the proposed  transaction.  If
these decisions represent a significant portion of our anticipated  revenue, our
results of operations and quarterly revenues could be adversely impacted.


                                       28
<PAGE>

The  announcement  of the sale of our Company to Autonomy could impair  existing
relationships with our suppliers,  customers,  strategic partners and employees,
which could have an adverse effect on our business and financial results.

     The recent  public  announcement  that we have  entered  into a  definitive
agreement  to be acquired  by  Autonomy  could  substantially  impair  important
business  relationships  because of uncertainty  regarding our future  strategic
direction  and  the  distraction  completing  these  transactions  will  create.
Impairment of these  business  relationships  could reduce  revenues or increase
expenses, either of which could harm our financial results. Specific examples of
situations in which we could experience problems include the following:

     o    suppliers,  distributors  or  customers  could  decide  to  cancel  or
          terminate existing arrangements,  or fail to renew those arrangements,
          as a result of the pending acquisition by Autonomy;

     o    our employees may be distracted by concerns  about the pending  merger
          with Autonomy and  therefore may not meet critical  deadlines in their
          assigned tasks or otherwise perform effectively;

     o    our management personnel may be distracted from day-to-day  operations
          by the  time  demands  associated  with  these  significant  corporate
          transactions  and  therefore  may be  unable to  timely  identify  and
          address business issues as they arise; and

     o    other  current or  prospective  employees may  experience  uncertainty
          about their  future roles with us,  which could  adversely  affect our
          ability to attract and retain key  management,  sales,  marketing  and
          technical personnel.

If the proposed  acquisition  by Autonomy is completed,  shares of Virage common
stock will no longer represent equity interests in Virage's business.

      If the proposed  merger with Autonomy is  completed,  each share of Virage
common stock will be converted  into the right to receive $1.10 in cash and will
no longer  represent an equity interest in Virage.  Because of this  conversion,
stockholders  will  not be able to  share  in any  potential  future  growth  of
Virage's business.

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 June 30, 2003, we had an accumulated  deficit of  $110,303,000.  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,
particularly  in  connection  with the proposed  acquisition  by  Autonomy.  Our
revenues have been  relatively  flat to slightly down for the past five 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 $13,923,000 as of June 30,
2003 and we used $2,506,000 in our operating  activities during the three months
ended June 30, 2003. 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 June 30,
2003 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 Small Cap and/or  National  Market and severely  limit
the ability to sell any of our common stock.

    Our stock is currently traded on The NASDAQ SmallCap Market.  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.  For at least the prior 12 months
until the  announcement of our agreement to be acquired by Autonomy,  our common
stock  price  predominantly  traded  below  $1.00  per  share.  There  can be no
assurance  that our  stock  will  continue  to trade  above  the $1.00 per share
listing  requirement,  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  SmallCap  Market or The NASDAQ  National  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.

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 and annual 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 the pending  acquisition  of us by  Autonomy,  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   domestically  and   internationally,   the  strength  of
information  technology  spending,  and other  factors  that may be  beyond  our
control.  In addition,  our application  products are relatively  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
and/or our potential  platform 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  the pending  acquisition  of us by  Autonomy,
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 and/or annual operating results.


                                       30
<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  the  pending  acquisition  of  us  by  Autonomy,
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 recognize from sales to those
customers'  when amounts become due or are collected,  rather than upon delivery
of our software to the customer.  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 impair our 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. Customers may
opt to defer the implementation of significant services,  which will cause us to
recognize  revenues  from the  license as we perform  the  services or we may be
required  to defer  revenues  from  the  license  until  the  completion  of the
services.  Either of these  scenarios  may impair  our  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 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.


                                       31
<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 and
year to year.

     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  relatively  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 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 the
announcement  of our  definitive  agreement to be acquired by Autonomy and other
announcements  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  SmallCap  Market or The NASDAQ  National  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 SmallCap Market or 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.


                                       32
<PAGE>

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 favorable
to  companies  involved in  information  technology  infrastructure  for several
quarters.  In addition,  potential conflicts with rogue countries and the threat
of terrorist  actions 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 quarter in
comparison to other quarters over the past couple of years.  If global  economic
conditions  continue to weaken or if potential 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,  as well as during our  quarter  ending
September 30, 2003,  we have taken 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.  We monitor our expenses
closely  and  benchmark  our  expenses  against  expected  revenues.  Should our
revenues not meet internal or external expectations or other circumstances arise
that require us to better align resources required to operate efficiently in the
prevailing  market  such as our  pending  acquisition  by  Autonomy,  additional
restructuring  efforts  will  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.

     As we have better aligned our resources over the past several quarters,  we
have  consolidated  our  operations  into  facility  space that is less than our
current facility  commitment,  resulting in excess operating lease capacity.  We
consolidated  our space in March 2003 and recorded charges related to our excess
space  as of the  date we  cease  to use the  space.  This  charge  was our best
estimate  based upon a number of  assumptions  and  estimates  that could  prove
inaccurate  including  length of period that it will take to sublease our excess
space,  assumed  sublease rate and other  collateral we expect to forfeit to our
landlord upon  commencement  of a sublease.  In addition,  should we continue to
have excess  operating lease capacity and we are unable to find a sublessee 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.

We have experienced  rapid growth followed by substantial  downsizing and we may
encounter  difficulties  in managing these size changes,  which could  adversely
impact our results of operations

     We have  experienced  a period of rapid  growth in our business and related
expenses,  followed  by a period  of rapid  and  substantial  downsizing  of our
workforce and related  expenses.  These periods have placed a serious  strain on
our  managerial,   administrative  and  financial  personnel  and  our  internal
infrastructure. To manage the changes these periods of expansion and contraction
of our business and personnel have brought to our  operations and personnel,  we
will be required to continue to improve  existing and implement new operational,
financial and management controls,  reporting systems and procedures. We may not
be able to install  adequate  management  information  and control systems in an
efficient  and timely  manner and our  current  or  planned  personnel  systems,
procedures and controls may not be adequate to support our future operations. If
we are unable to manage further growth or reductions effectively,  we may not be
able to capitalize on attractive business opportunities.


                                       33
<PAGE>

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.  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;
     o    the general worldwide economic  conditions and demand for our products
          there from, 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 months ended June 30, 2003
and 2002, sales and marketing  expenses were 71% and 114% of our total revenues,
respectively.

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 56% and 50% of our total revenues for the three months ended
June 30, 2003 and 2002,  respectively.  Our service revenues have  substantially
lower  gross  profit  margins  than our  license  revenues.  Our cost of service
revenues  for the three  months ended June 30, 2003 and 2002 were 57% and 71% of
service revenues,  respectively. 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 a number of factors  including our swings in headcount
and related costs and restructuring  charges.  Recently,  we have experienced an
increase  in  the  percentage  of  license  customers  requesting   professional
services.  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.

     The relative amount of service revenues as compared to license revenues has
also  varied  based  on  customer  demand  for  our  application  services.  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.
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.


                                       34
<PAGE>

     Service revenues from contracts with federal government  agencies comprised
10% of total  revenues  during the three months ended June 30, 2003 (none during
the three months ended June 30, 2002).  Contract  costs for service  revenues to
federal government agencies,  including indirect expenses,  are subject to audit
and subsequent adjustment by negotiation between U.S. Government representatives
and us.  Service  revenues are recorded in amounts  expected to be realized upon
final settlement and in accordance with our revenue recognition policies.  While
historically  we have had no adverse impact related to our revenues from such an
audit and  believes  that the results of any future  audit will have no material
effect on our  financial  position  or  results of  operations,  there can be no
assurance  that no adjustment  will be made and that, if made,  such  adjustment
will  not have a  material  effect  on our  financial  position  or  results  of
operations (including our gross profit margin).

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. 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 pending
transaction  with  Autonomy,  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.

If requirements  relating to accounting treatment for employee stock options are
changed, we may be forced to change our business practices.

    We  currently  account  for the  issuance  of  stock  options  under  follow
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees." If proposals  currently under  consideration by  administrative  and
governmental  authorities are adopted,  we may be required to treat the value of
the stock options  granted to employees as compensation  expense.  Such a change
could have a negative  effect on our earnings.  In response to a requirement  to
expense the value of stock  options,  we could  decide to decrease the number of
employee stock options  granted to our employees.  Such a reduction could affect
our ability to retain existing employees and attract qualified  candidates,  and
increase the cash compensation we would have to pay to them.


                                       35
<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  SmallCap  Market  and The  NASDAQ  National  Market  have  proposed
revisions to their  requirements  for  companies  like Virage.  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.  For
example, our proposed transaction with Autonomy has caused one of our vendors to
claim we are in  default  with our  technology  licensing  agreement  with them.
Although we do not believe that we are  substantially  dependent on any licensed
technology,  some of the  software  we  license  from  third  parties  could  be
difficult for us to replace.  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.  The use of  additional  third-party
software would require us to negotiate  license  agreements  with other parties,
which  could  result  in  higher   royalty   payments  and  a  loss  of  product
differentiation.  In  addition,  the  effective  implementation  of our products
depends  upon the  successful  operation  of  third-party  licensed  products in
conjunction  with our products,  and therefore  any  undetected  errors in these
licensed  products could prevent the  implementation or impair the functionality
of our products, delay new product introductions and/or damage our reputation.


                                       36
<PAGE>

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  conflicts  with rogue  countries or threatened
acts of  terrorism  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  or  adverse  biological  event  (such as the recent  outbreak  of SARS
globally,  and in  particular,  in Asia and Canada)  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.

     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
third party facilities in Santa Clara, California and Palo Alto, California.  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 and/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.


                                       37
<PAGE>

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.


Item 3.     Quantitative and Qualitative Disclosures About Market Risk

    At June  30,  2003,  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

    Our management  evaluated,  with the  participation  of our Chief  Executive
Officer  and our  Acting  Chief  Financial  Officer,  the  effectiveness  of our
disclosure  controls and  procedures as of the end of the period covered by this
Quarterly  Report on Form 10-Q.  Based on this  evaluation,  our Chief Executive
Officer  and  our  Acting  Chief  Financial  Officer  have  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 control over financial reporting

    There was no change in our internal  control over  financial  reporting that
occurred  during the period covered by this  Quarterly  Report on Form 10-Q that
has  materially  affected,  or is reasonably  likely to materially  affect,  our
internal control over financial reporting.


                                       38
<PAGE>

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

            Securities class action lawsuits were filed,  starting on August 22,
            2001, in the United States District Court for the Southern  District
            of New York . The cases have been consolidated  under the caption In
            re Virage, Inc. Initial Public Offering Securities  Litigation,  No.
            01-CV-7866  (SAS)  (S.D.N.Y.),  related  to  In  re  Initial  Public
            Offerings Securities Litigation,  No. 21 MC 92 (SAS). The lawsuit is
            brought  purportedly  on behalf of all  persons  who  purchased  our
            common  stock from June 28,  2000  through  December  6,  2000.  The
            defendants are the Company,  one of our current  officers and one of
            our  former  officers  (the  "Virage  Defendants");  and  investment
            banking  firms that served as  underwriters  for our initial  public
            offering.  The operative  amended  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 IPO did not disclose that:
            (1) the underwriters  agreed to allow certain  customers to purchase
            shares in the IPO in  exchange  for excess  commissions  paid to the
            underwriters;   and  (2)  the  underwriters   arranged  for  certain
            customers  to  purchase  additional  shares  in the  aftermarket  at
            predetermined  prices.  The  complaint  also  appears to allege that
            false or misleading  analyst reports were issued. The complaint does
            not claim any specific amount of damages.  Similar  allegations were
            made in other  lawsuits  challenging  over 300 other initial  public
            offerings and follow-on  offerings  conducted in 1999 and 2000.  The
            cases were consolidated for pretrial purposes. On February 19, 2003,
            the Court ruled on all  defendants'  motions to  dismiss.  The Court
            denied the motions to dismiss the claims under the Securities Act of
            1933.  The Court granted the motions to dismiss the claims under the
            Securities Exchange Act of 1934.

            We have  decided to accept a  settlement  proposal  presented to all
            issuer defendants.  In this settlement,  plaintiffs will dismiss and
            release all claims against the Virage Defendants,  in exchange for a
            contingent   payment  by  the   insurance   companies   collectively
            responsible  for insuring  the issuers in all of the IPO cases,  and
            for the  assignment  or surrender of control over certain  claims we
            may have against the underwriters. The Virage Defendants will not be
            required to make any cash payments in the settlement, unless the pro
            rata  amount  paid by the  insurers  in the  settlement  exceeds the
            amount of the insurance  coverage,  a  circumstance  which we do not
            believe will occur.  The  settlement  will  require  approval of the
            Court,  which cannot be assured,  after class  members are given the
            opportunity   to  object  to  the  settlement  or  opt  out  of  the
            settlement.

            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  it, the
            ultimate  disposition of which would have a material  adverse effect
            on our  consolidated  financial  position,  results of operations or
            cash flows.


                                       39
<PAGE>

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.


Item 3. Defaults Upon Senior Securities

     None.


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

     None.

Item 5. Other Information

    Through  June 30, 2003,  our common stock was traded on The NASDAQ  National
    Market and the bid price for our common stock had 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.

    We  received  a NASDAQ  letter  on May 1,  2003  that  stated we were not in
    compliance with the NASDAQ's minimum bid price listing  requirement and that
    we had seven calendar days to do one of the following:

     o    Submit an  application  for transfer of our  securities for trading to
          The NASDAQ SmallCap Market;

     o    Request a hearing to appeal the delisting notice; or

     o    Have our securities delisted from The NASDAQ National Market.

     We  initiated  an appeal  process  with  NASDAQ  whereby  it  requested  an
     in-person  hearing with NASDAQ  regulators to present relevant  measures we
     have taken in order to improve  our  operating  results  and,  as a result,
     bolster our stock  price to levels  required  by NASDAQ.  The hearing  took
     place in June 2003. We received a verdict  letter from NASDAQ's  compliance
     department in July 2003.


                                       40
<PAGE>

    In July 2003,  we received a response from  NASDAQ's  compliance  department
    stating  that  our  appeal  was  dismissed  and  that we had the  option  of
    transferring  to The  NASDAQ  SmallCap  Market  or being  delisted  from the
    exchange.  We submitted an application  for transfer to The NASDAQ  SmallCap
    Market,  which was accepted and we  transferred  to and began trading on The
    NASDAQ  SmallCap  Market in July 2003.  We expect that we will have at least
    180 days to regain  compliance  with  NASDAQ's  listing  requirements  while
    trading on the NASDAQ SmallCap  Market.  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.


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

(a)       Exhibits

          Exhibit 2.1+  Agreement  and Plan of Merger with Autonomy  Corporation
                        plc

          Exhibit 31.1  Certification by Paul G. Lego Pusuant to Rule 13a-14(a)

          Exhibit 31.2  Certification by Scott Gawel Pursuant to Rule 13a-14(a)

          Exhibit 32.1  Certifications Pursuant to 18 U.S.C. Section 1350

          + Incorporated by reference to the Registrant's Current Report on Form
          8-K filed on July 11, 2003


       (b) Report on Form 8-K

          1.   We filed a current report on Form 8-K dated April 24, 2003, which
               announced  our  results of  operations  for the three  months and
               fiscal year ended March 31, 2003.


                                       41
<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:  August 7, 2003             By:   /s/ Scott Gawel
                                        ----------------------------------------
                                        Scott Gawel
                                        Vice President, Finance &
                                        Acting Chief Financial Officer
                                        (Duly Authorized Officer and
                                        Principal Financial Officer)


                                       42