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 SEPTEMBER 30, 2002

                                       OR

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


                         COMMISSION FILE NUMBER: 0-30903

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

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


                             411 BOREL AVENUE, 100S
                        SAN MATEO, CALIFORNIA 94402-3116
                                 (650) 573-3210

(Address,  including zip code, and telephone number, including area code, of the
                   registrant's principal executive offices)

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

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


     The number of outstanding shares of the registrant's  Common Stock,  $0.001
par value, was 20,915,346 as of November 3, 2002.


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<PAGE>

<TABLE>
<CAPTION>
                                  VIRAGE, INC.

                                      INDEX

                                                                                                         PAGE
<S>  <C>                                                                                                 <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)


   Condensed Consolidated Balance Sheets - September 30, 2002 and
              March 31, 2002..............................................................................1

   Condensed Consolidated Statements of Operations -- Three and Six Months Ended
              September 30, 2002 and 2001.................................................................2

   Condensed Consolidated Statements of Cash Flows -- Six Months Ended
              September 30, 2002 and 2001.................................................................3

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

Item 2. Management's Discussion and Analysis of Financial Condition
              and Results of Operations..................................................................14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk......................................32

Item 4.  Controls and Procedures.........................................................................32




PART II: OTHER INFORMATION


Item 1. Legal Proceedings................................................................................33

Item 2. Changes in Securities and Use of Proceeds........................................................33

Item 3. Defaults Upon Senior Securities..................................................................34

Item 4. Submission of Matters to a Vote of Security
              Holders....................................................................................34

Item 5. Other Information................................................................................34

Item 6. Exhibits and Reports on Form 8-K.................................................................35

Signature................................................................................................36

Certifications...........................................................................................37

</TABLE>



<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements


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

<TABLE>
<CAPTION>
                                                                               September 30,             March 31,
                                                                                   2002                    2002
                                                                                ---------                ---------
                           ASSETS
<S>                                                                             <C>                      <C>
Current assets:
  Cash and cash equivalents .................................................   $   3,610                $   4,586
  Short-term investments ....................................................      18,031                   26,108
  Accounts receivable, net ..................................................       2,013                    2,366
  Prepaid expenses and other current assets .................................         795                      220
                                                                                ---------                ---------
      Total current assets ..................................................      24,449                   33,280

Property and equipment, net .................................................       2,493                    3,701
Other assets ................................................................       2,400                    2,571
                                                                                ---------                ---------
      Total assets ..........................................................   $  29,342                $  39,552
                                                                                =========                =========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ..........................................................   $     636                $     831
  Accrued payroll and related expenses ......................................       2,023                    2,376
  Accrued expenses ..........................................................       2,360                    2,946
  Deferred revenue ..........................................................       3,112                    3,050
                                                                                ---------                ---------
      Total current liabilities .............................................       8,131                    9,203

Deferred rent ...............................................................         358                      290


Commitments and contingencies

Stockholders' equity:
  Preferred stock ...........................................................          --                       --
  Common stock ..............................................................          21                       21
  Additional paid-in capital ................................................     121,332                  121,387
  Deferred compensation .....................................................      (1,332)                  (2,425)
  Accumulated deficit .......................................................     (99,168)                 (88,924)
                                                                                ---------                ---------
      Total stockholders' equity ............................................      20,853                   30,059
                                                                                ---------                ---------
      Total liabilities and stockholders' equity ............................   $  29,342                $  39,552
                                                                                =========                =========
</TABLE>

                             See accompanying notes.


                                       1

<PAGE>

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

                                                                 Three Months Ended              Six Months Ended
                                                                    September 30,                  September 30,
                                                               ------------------------        ------------------------
                                                                 2002            2001            2002            2001
                                                               --------        --------        --------        --------

<S>                                                            <C>             <C>             <C>             <C>
Revenues:
  License revenues ......................................      $  1,673        $  2,932        $  3,284        $  4,814
  Service revenues ......................................         1,604           1,663           3,228           3,710
  Other revenues ........................................            --             151              --             212
                                                               --------        --------        --------        --------
    Total revenues ......................................         3,277           4,746           6,512           8,736
Cost of revenues:
  License revenues ......................................           160             178             347             332
  Service revenues(1) ...................................         1,059           2,405           2,218           4,937
  Other revenues ........................................            --              91              --             148
                                                               --------        --------        --------        --------
    Total cost of revenues ..............................         1,219           2,674           2,565           5,417
                                                               --------        --------        --------        --------
Gross profit ............................................         2,058           2,072           3,947           3,319
Operating expenses:
  Research and development(2) ...........................         2,444           2,344           4,826           4,817
  Sales and marketing(3) ................................         3,062           4,423           6,747           8,862
  General and administrative(4) .........................         1,069           1,330           2,211           2,662
  Stock-based compensation ..............................           364             756             735           1,538
                                                               --------        --------        --------        --------
    Total operating expenses ............................         6,939           8,853          14,519          17,879
                                                               --------        --------        --------        --------
Loss from operations ....................................        (4,881)         (6,781)        (10,572)        (14,560)
Interest and other income, net ..........................           138             412             328             980
                                                               --------        --------        --------        --------
Net loss ................................................      $ (4,743)       $ (6,369)       $(10,244)       $(13,580)
                                                               ========        ========        ========        ========

Basic and diluted net loss per share ....................      $  (0.23)       $  (0.31)       $  (0.49)       $  (0.67)
                                                               ========        ========        ========        ========

Shares used in computation of basic and
  diluted net loss per share ............................        20,773          20,247          20,730          20,190
                                                               ========        ========        ========        ========
</TABLE>

(1)  Excluding $5 and $10 in amortization of deferred  stock-based  compensation
     for the three and six months ended  September 30, 2002,  respectively  ($69
     and  $143  for  the  three  and  six  months  ended   September  30,  2001,
     respectively).

(2)  Excluding $23 and $46 in amortization of deferred stock-based  compensation
     for the three and six months ended September 30, 2002,  respectively  ($102
     and  $219  for  the  three  and  six  months  ended   September  30,  2001,
     respectively).

(3)  Excluding $24 and $55 in amortization of deferred stock-based  compensation
     for the three and six months ended September 30, 2002,  respectively  ($227
     and  $459  for  the  three  and  six  months  ended   September  30,  2001,
     respectively).

(4)  Excluding   $312  and  $624  in   amortization   of  deferred   stock-based
     compensation  for the  three  and six  months  ended  September  30,  2002,
     respectively  ($358 and $717 for the three and six months  ended  September
     30, 2001, respectively).


                             See accompanying notes.


                                       2

<PAGE>

<TABLE>
<CAPTION>
                                  VIRAGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)


                                                                          Six Months Ended
                                                                           September 30,
                                                                        -------------------
                                                                          2002       2001
                                                                        --------   --------
<S>                                                                     <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................   $(10,244)  $(13,580)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization .....................................      1,296      1,481
  Loss on disposal of assets ........................................        106         --
  Amortization of deferred compensation related to
    stock options and issuance of stock options to consultants ......        822      1,928
  Amortization of technology right ..................................         18         17
  Amortization of warrant fair values ...............................          6        438
  Changes in operating assets and liabilities:
    Accounts receivable .............................................        353       (526)
    Prepaid expenses and other current assets .......................       (575)      (127)
    Other assets ....................................................        153         --
    Accounts payable ................................................       (195)      (221)
    Accrued payroll and related expenses ............................       (353)       (15)
    Accrued expenses ................................................       (586)      (201)
    Deferred revenue ................................................         62       (500)
    Deferred rent ...................................................         68        111
                                                                        --------   --------
Net cash used in operating activities ...............................     (9,069)   (11,195)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................................       (194)      (309)
Purchase of short-term investments ..................................    (33,250)   (43,163)
Sales and maturities of short-term investments ......................     41,327     39,205
                                                                        --------   --------
Net cash provided by (used in) investing activities .................      7,883     (4,267)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of repurchases .........         59         (7)
Proceeds from employee stock purchase plan ..........................        151        489
                                                                        --------   --------
Net cash provided by financing activities ...........................        210        482
                                                                        --------   --------
Net decrease in cash and cash equivalents ...........................       (976)   (14,980)
Cash and cash equivalents at beginning of period ....................      4,586     19,680
                                                                        --------   --------
Cash and cash equivalents at end of period ..........................   $  3,610   $  4,700
                                                                        ========   ========

SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
Book value of equipment write-downs .................................   $    432   $     --
Accumulated depreciation of equipment write-downs ...................   $    326   $     --
Deferred compensation related to stock options ......................   $     36   $    123
Reversal of deferred compensation upon employee termination .........   $    394   $    567
</TABLE>

                  See accompanying notes.


                                       3

<PAGE>

                                  VIRAGE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2002
                                   (unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim  financial  information and in accordance with the  instructions to Form
10-Q and Article 10 of Regulation S-X.  Accordingly,  they do not include all of
the  information  and  footnotes  required  by  generally  accepted   accounting
principles for complete financial statements. In the opinion of management,  all
adjustments  (consisting  of normal  recurring  accruals)  necessary  for a fair
presentation of the financial statements at September 30, 2002 and for the three
and six month periods ended September 30, 2002 and 2001 have been included.

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

     Results  for the three and six  months  ended  September  30,  2002 are not
necessarily  indicative of results for the entire fiscal year or future periods.
These financial  statements  should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's Annual
Report  on Form  10-K,  dated  June 14,  2002 as filed  with the  United  States
Securities and Exchange Commission.  The accompanying balance sheet at March 31,
2002 is derived from the Company's audited consolidated  financial statements at
that date.

Revenue Recognition

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

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

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


                                       4

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

     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  upn or other criteria in SOP 97-2 are
not met. The Company  recognizes  royalty revenues upon receipt of the quarterly
reports from the vendors.

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

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

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

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

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


                                       5

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

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 September 30, 2002, 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.

Comprehensive Net Loss

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

Net Loss per Share

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


                                       6

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

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

                                      Three Months Ended      Six Months Ended
                                         September 30,          September 30,
                                      -------------------   -------------------
                                         2002       2001      2002       2001
                                      --------   --------   --------   --------
Net loss ...........................  $ (4,743)  $ (6,369)  $(10,244)  $(13,580)
                                      ========   ========   ========   ========
Weighted-average shares of common
  stock outstanding ................    20,783     20,383     20,745     20,363
Less weighted-average shares of
  common stock subject to
  repurchase .......................       (10)      (136)       (15)      (173)
                                      --------   --------   --------   --------
Weighted-average shares used in
  computation of basic and
  diluted net loss per share .......    20,773     20,247     20,730     20,190
                                      ========   ========   ========   ========

Basic and diluted net loss per
  share ............................  $  (0.23)  $  (0.31)  $  (0.49)  $  (0.67)
                                      ========   ========   ========   ========

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

Impact of Recently Issued Accounting Standards

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

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

                                       7

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

    In July 2002, the FASB issued  Statement of Financial  Accounting  Standards
No. 146,  "Accounting  for Costs  Associated  with Exit and Disposal  Activities
("FAS  146")."  This  statement  revises the  accounting  for exit and  disposal
activities  under the FASB's Emerging  Issues Task Force Issue 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF  94-3")," by spreading out the reporting of expenses  related to
restructuring activities. Commitment to a plan to exit an activity or dispose of
long-lived  assets will no longer be sufficient to record a one-time  charge for
most anticipated  costs.  Instead,  companies will record exit or disposal costs
when  they are  "incurred"  and can be  measured  at fair  value,  and they will
subsequently  adjust the recorded liability for changes in estimated cash flows.
The  provisions  of FAS 146 are  effective  prospectively  for exit or  disposal
activities  initiated  after  December  31,  2002.  Companies  may  not  restate
previously  issued financial  statements for the effect of the provisions of FAS
146 and  liabilities  that a company  previously  recorded  under  EITF 94-3 are
grandfathered.  The Company has  recorded  charges  related to exit and disposal
activities  in the past  pursuant  to EITF  94-3 and may be  required  to record
additional  charges in the future according to FAS 146. However,  based upon the
facts and  circumstances  around charges that the Company  historically has been
required to record,  the Company currently does not believe that the adoption of
FAS 146 will have a materially  different  impact on its  operations,  financial
position or cash flows as the accounting  treatment  under the provisions of FAS
146 are not dissimilar to those prescribed under EITF 94-3.

2. Commitments and Contingencies

    In the normal course of business,  the Company is subject to commitments and
contingencies,   including  operating  leases,   restructuring  liabilities  and
litigation  including  securities-related  litigation  and  other  claims in the
ordinary course of business. The Company records accruals for such contingencies
based  upon  its  assessment  of  the   probability  of  occurrence  and,  where
determinable,  an estimate of the liability.  The Company considers many factors
in making these  assessments  including  past history and the  specifics of each
matter.  The 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  September  30,  2002,  the  Company  has   contractual   and  commercial
commitments  not  included on its  balance  sheet  primarily  for its San Mateo,
California  facility that it has an obligation to lease through  September 2006.
For the remainder of the fiscal year ended March 31, 2003,  the Company's  total
commitments  amount to $1,673,000.  Future full fiscal year  commitments  are as
follows:  $3,338,000  in  2004,  $3,382,000  in  2005,  $3,240,000  in 2006  and
$1,844,000 in 2007 ($13,477,000 in total commitments as of September 30, 2002).


                                       8

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)
Restructuring

    During the six months  ended  September  30, 2002,  the Company  implemented
additional  restructuring  programs  to better  align  operating  expenses  with
anticipated revenues.  The Company recorded a $746,000 restructuring charge (the
significant  majority of which was  recorded  during the three months ended June
30, 2002),  which consisted of $640,000 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 six months ended  September  30,
2002.  The  restructuring  programs  resulted in a reduction in force across all
company functions of approximately 35 employees.  At March 31, 2002, the Company
had $763,000 of accrued  restructuring costs (the significant  majority of which
were  recorded  during the three months ended March 31, 2002) related to monthly
rent for excess facility  capacity,  employee  severance payments and other exit
costs.  The Company expects to pay out all  restructuring  amounts accrued as of
September 30, 2002 over the course of the next 12 months.

    The following table depicts the restructuring activity during the six months
ended September 30, 2002 (in thousands):

<TABLE>
<CAPTION>

                                                                          Expenditures
                                     Balance at                        -------------------           Balance at
   Category                        March 31, 2002      Additions       Cash       Non-cash      September 30, 2002
   --------                        --------------      ---------       ----       --------      ------------------
<S>                                <C>                 <C>            <C>         <C>           <C>
  Excess facilities.............   $          460      $      --      $  260      $     --      $              198
  Employee severance............              259            640         782            --                     117
  Equipment write-downs.........               --            106          --           106                      --
  Other exit costs..............               44             --           9            --                      35
                                   --------------      ---------      ------      --------      ------------------
     Total......................   $          763      $     746      $1,053      $    106      $              350
                                   ==============      =========      ======      ========      ==================
</TABLE>

    During the six months  ended  September  30, 2001,  the Company  implemented
restructuring  programs to better  align  operating  expenses  with  anticipated
revenues.  The Company  recorded a $847,000  restructuring  charge  ($397,000 of
which was  recorded  during the three months ended June 30, 2001 and $450,000 of
which was recorded  during the three months ended  September  30,  2001),  which
consisted of $345,000 in facility exit costs and $502,000 in employee  severance
costs  across  most of the  expense  line  items in the  Company's  consolidated
statement  of  operations  for the six months  ended  September  30,  2001.  The
restructuring  programs  resulted  in a  reduction  in force  across all company
functions of approximately 45 employees.  At September 30, 2001, the Company had
$362,000  of accrued  restructuring  costs  related  to monthly  rent for excess
facility capacity, employee severance payments and other exit costs. The Company
paid these  accrued  amounts out over the course of the 12 months  subsequent to
September 30, 2001.

    The following table depicts the restructuring activity during the six months
ended September 30, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                              Balance at
  Category                           Additions      Cash Expenditures     September 30, 2001
  --------                           ---------      -----------------     ------------------
<S>                                  <C>            <C>                   <C>
  Excess facilities.............     $     345      $             95      $             250
  Employee severance............           502                   390                    112
                                     ---------      -----------------     ------------------
     Total......................     $     847      $            485      $             362
                                     =========      =================     ==================
</TABLE>


                                       9

<PAGE>


                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

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

     The Company has experienced excess facility 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.  The
Company's management reviews its facility  requirements and assesses whether any
excess capacity exists as part of its on-going financial processes.

Litigation

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

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

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


                                       10

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

NASDAQ National Market Trading Requirements

   The NASDAQ National Market  maintains  certain minimum  requirements  for the
Company's  stock to remain  eligible for trading.  One of these  requirements is
that the Company's  common stock price cannot trade below $1.00 per share for 30
consecutive trading days. The Company has, in the past, received  correspondence
from NASDAQ notifying the Company that it was not in compliance with the minimum
bid price  requirement.  The Company  subsequently was able to regain compliance
with  the  requirement.  As of  September  30,  2002,  the  Company  was in full
compliance  with all of NASDAQ's  minimum  listing  requirements,  although  the
closing bid price of the  Company's  common stock was below $1.00 per share.  In
October 2002, the Company  received  notice from NASDAQ that it was no longer in
compliance with its minimum bid price  requirement (see Note 6). There can be no
assurance  that the Company's  common stock will remain  eligible for trading on
the NASDAQ National Market or the NASDAQ SmallCap Market. If the Company's stock
were  delisted,  the ability of the  Company's  stockholders  to sell any of the
Company's common stock at all would be severely, if not completely, limited.

3.   Stockholders' Equity

Voluntary Stock Option Cancellation and Re-grant Program

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

    In addition, the Company had two employees that were eligible to participate
in this  program  that  did not  meet  certain  employee  definitional  criteria
pursuant to APB Opinion No. 25,  "Accounting  for Stock Issued to Employees," as
interpreted  by the  FASB's  Interpretation  No.  44,  "Accounting  for  Certain
Transactions involving Stock Compensation,  an interpretation of APB Opinion No.
25." Accordingly,  the Company had to account for the option grants to these two
participants  as though they were  non-employees  pursuant to EITF Issue  96-18,
"Accounting for Equity  Instruments  That Are Issued to Other Than Employees for
Acquiring,  or in Conjunction with Selling, Goods or Services," resulting in the
Company recording  non-cash,  stock-based  charges of $87,000 for the six months
ended September 30, 2002.


                                       11

<PAGE>


                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

Warrant Issued to a Customer

     In December  2000,  the Company  entered into a services  agreement  with a
customer  and  issued an  immediately  exercisable,  non-forfeitable  warrant to
purchase  200,000 shares of common stock at $5.50 per share. The warrant expires
in December  2003. The value of the warrant was estimated to be $648,000 and was
based upon a Black-Scholes valuation model with the following assumptions:  risk
free interest rate of 7.0%, no dividend yield,  volatility of 90%, expected life
of three years,  exercise  price of $5.50 and fair value of $5.38.  The non-cash
amortization  of the warrant's value was recorded  against  service  revenues as
revenues from services were  recognized  over the one-year  services  agreement.
During the three months and six months  ended  September  30, 2001,  the Company
recorded  $216,000  and  $432,000,   respectively,  as  contra-service  revenues
representing   the  pro-rata   amortization  of  the  warrant's  value  for  the
aforementioned  periods (none during the three or six months ended September 30,
2002).

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).  Discrete financial information for each
segment's profit and loss and each segment's total assets is not provided to the
Company's CODM, nor is it tracked by the Company.

    Information  on the  Company's  reportable  segments  for the  three and six
months ended September 30, 2002 and 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                           Three Months Ended         Six Months Ended
                                              September 30,             September 30,
                                     ---------------------------  -----------------------
                                          2002         2001          2002         2001
                                     ------------  -----------   -----------  -----------
<S>                                   <C>          <C>           <C>          <C>
 Software:

 Total revenues..................     $     2,383  $     3,792   $     4,633  $     6,378

 Total cost of revenues..........             346          402           732          760
                                      -----------  -----------   -----------  -----------

 Gross profit....................     $     2,037  $     3,390   $     3,901  $     5,618
                                      ===========  ===========   ===========  ===========

 Application and Professional
   Services:

 Total revenues..................     $       894  $       954   $     1,879  $     2,358

 Total cost of revenues..........             873        2,272         1,833        4,657
                                      -----------  -----------   -----------  -----------


 Gross profit (loss).............     $        21  $    (1,318)  $        46  $    (2,299)
                                      ===========  ============  ===========  ============
</TABLE>


                                       12

<PAGE>

                                  VIRAGE, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                               September 30, 2002
                                   (unaudited)

5.   Income Taxes

    The  Company has not  recorded a provision  for federal and state or foreign
income  taxes for the three and six  months  ended  September  30,  2002 or 2001
because the Company  has  experienced  net losses  since  inception,  which have
resulted in deferred tax assets. The Company has recorded a valuation  allowance
against  all  deferred  tax assets as a result of  uncertainties  regarding  the
realization of the balances through future taxable profits.

6.   Subsequent Events

NASDAQ National Market Trading Requirements

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

Restructuring

    In October 2002, the Company implemented  additional  restructuring programs
to  further  reduce  its  expenses.   The  Company   reduced  its  workforce  by
approximately  15  additional   employees  and  expects  to  record  a  $200,000
restructuring  charge  during the three  months ended  December 31, 2002,  which
consists  primarily of employee  severance costs. The Company expects to pay out
all  restructuring  amounts  related to this October 2002  reduction in force by
December 31, 2002.


                                       13

<PAGE>


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

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

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

Recent Events

Application Products

     Recently, we introduced four new application  products:  VS Publishing,  VS
Webcasting,  VS Learning,  and VS  Production.  VS  Publishing  offers media and
entertainment  customers a streamlined  workflow for rich-media web  publishing,
including  a  simple   editorial   control  and  greater   website   programming
capabilities.  VS  Webcasting  allows  corporations  to  self-produce  live  and
on-demand  webcasting  events such as executive  communications,  human resource
broadcasts and webinars.  VS Learning is a new enterprise  software  application
for rich-media training and e-learning that enables companies to create, manage,
publish and view on-demand  training courses and presentations  containing video
and other  rich-media  information.  Finally,  VS  Production  is an  integrated
software  solution for media and  entertainment  enterprises  that automates the
professional video production process from acquisition to distribution.

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


                                       14

<PAGE>

Business Restructuring Charges


     During the six months  ended  September  30, 2002,  we executed  additional
restructuring measures to reduce headcount and infrastructure and to consolidate
operations  worldwide.  We  re-evaluated  our cost structure and further reduced
headcount and  infrastructure  across all functional areas of the company in our
continued  efforts to limit our  future  expense  growth.  These  headcount  and
infrastructure  changes  resulted in a reduction  in force of  approximately  35
employees  worldwide  and the  recording  of $746,000 in business  restructuring
charges  during the six months  ended  September  30,  2002.  A breakdown of our
business  restructuring  charges during the six months ended  September 30, 2002
and the remaining restructuring accrual is as follows:

<TABLE>
<CAPTION>
                                                                                       Expenditures
                                                Balance at                          --------------------         Balance at
 Category                                     March 31, 2002      Additions         Cash        Non-cash     September 30, 2002
 --------                                     --------------      ---------         ----        --------     ------------------
<S>                                           <C>                 <C>             <C>           <C>          <C>
Excess facilities and other exit costs......  $          504      $      --       $   271       $     --     $         233
Employee separation and other costs.........             259            640           782             --               117
Equipment write-downs.......................              --            106            --            106                --
                                              --------------      ---------       -------       --------     ------------------
   Total..............................        $          763      $     746       $ 1,053       $    106               350
                                              ==============      =========       =======       ========     ==================
</TABLE>

   Excess  Facilities  and Other Exit Costs:  Excess  facilities  and other exit
costs relate to lease  obligations and closure costs  associated with offices we
have vacated as a result of our cost reduction  initiatives.  Cash  expenditures
for excess facilities and other exit costs during the six months ended September
30, 2002 primarily  represent  contractual  ongoing lease  payments.  In our San
Mateo,  CA  headquarters  location,  we have an operating  lease  commitment for
approximately  48,000  square feet of office  space,  an amount that exceeds our
current  requirements.  It is our  management's  best estimate that some of this
space will  continue  to be  under-utilized  for the next six months and that we
will not be able to recoup all losses  from our rental  payments  for the period
from  October 1, 2002 to March 31, 2003 by earning a profit from a sub lessee at
some point over the course of our obligation  period,  which  continues  through
September  2006.  Should we  continue to have excess  operating  lease  capacity
subsequent  to March  31,  2003 and be  unable  to find a sub  lessee  at a rate
equivalent to our operating lease rate, it is likely that we will be required to
record  additional  charges for the rental  payments that we owe to our landlord
relating to excess capacity within this facility.  Currently,  our management is
working through our facility  requirements  for periods  subsequent to March 31,
2003 and is exploring a number of potential options.  Our management reviews our
facility requirements and assesses whether any excess capacity exists as part of
our on-going financial processes.

   Employee  Separation  and Other Costs:  Employee  separation and other costs,
which include severance, related taxes, outplacement and other benefits, totaled
approximately   $640,000   during  the  six  months  ended  September  30,  2002
(representing  approximately 35 terminated employees),  and $782,000 was paid in
cash during the six months ended September 30, 2002.  Personnel  affected by the
cost  reduction  initiatives  during the six months  ended  September  30,  2002
include  employees  in  positions  throughout  the company in sales,  marketing,
services,   engineering,   and  general  and  administrative  functions  in  all
geographies.

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

   In October 2002, we implemented  additional  restructuring efforts to further
reduce  expenses.  We reduced  our  workforce  by  approximately  15  additional
employees and expect to record a $200,000  restructuring charge, which consisted
primarily of employee  severance  costs. We expect to pay out all  restructuring
amounts related to this reduction in force by December 31, 2002.


                                       15

<PAGE>

Voluntary Stock Option Cancellation and Re-grant Program

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


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


Critical Accounting Policies & Estimates

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

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

Revenue Recognition

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

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

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


                                       16

<PAGE>

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

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

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

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

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

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

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


                                       17

<PAGE>

Commitments and Contingencies

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

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   Six Months Ended
                                              September 30,      September 30,
                                             --------------      -------------
                                             2002      2001      2002     2001
                                             ----      ----      ----     ----

Revenues:
  License revenues .....................       51%       62%       50%      55%
  Service revenues .....................       49        35        50       43
  Other revenues .......................       --         3        --        2
                                             ----      ----      ----     ----
    Total revenues .....................      100       100       100      100
Cost of revenues:
  License revenues .....................        5         4         5        4
  Service revenues .....................       32        50        34       56
  Other revenues .......................       --         2        --        2
                                             ----      ----      ----     ----
    Total cost of revenues .............       37        56        39       62
                                             ----      ----      ----     ----
Gross profit ...........................       63        44        61       38
Operating expenses:
  Research and development .............       75        50        74       55
  Sales and marketing ..................       93        93       104      101
  General and administrative ...........       33        28        34       31
  Stock-based compensation .............       11        16        11       18
                                             ----      ----      ----     ----
    Total operating expenses ...........      212       187       223      205
                                             ----      ----      ----     ----
Loss from operations ...................     (149)     (143)     (162)    (167)
Interest and other income, net .........        4         9         5       12
                                             ----      ----      ----     ----
Net loss ...............................     (145)%    (134)%    (157)%   (155)%
                                             ====      ====      ====     ====


    We incurred net losses of $4,743,000  and  $10,244,000  during the three and
six months ended September 30, 2002, respectively.  As of September 30, 2002, we
had an  accumulated  deficit  of  $99,168,000.  We expect to  continue  to incur
operating  losses for the foreseeable  future.  In view of the rapidly  changing
nature  of our  market  and our  limited  operating  history,  we  believe  that
period-to-period comparisons of our revenues and other operating results are not
necessarily  meaningful  and should not be relied upon as  indications of future
performance. Our historic revenue growth rates have not been sustainable and are
not necessarily indicative of future growth.


                                       18

<PAGE>

    Revenues.  Total revenues decreased to $3,277,000 for the three months ended
September  30, 2002 from  $4,746,000  for the three months ended  September  30,
2001, a decrease of $1,469,000 or 31%. Total revenues decreased by $2,224,000 or
25% to $6,512,000  for the six months ended  September 30, 2002 from  $8,736,000
for the six months ended September 30, 2001.  These decreases were due primarily
to decreases in license  revenue and also  partially due to decreases in service
and other  revenues.  International  revenues  decreased to $830,000,  or 25% of
total revenues,  for the three months ended September 30, 2002 from  $1,450,000,
or 31% of total  revenues,  for the  three  months  ended  September  30,  2001.
International  revenues decreased to $1,544,000,  or 24% of total revenues,  for
the six  months  ended  September  30,  2002  from  $2,614,000,  or 30% of total
revenues,  for the six months ended September 30, 2001. No customer  constituted
more than 10% of total revenues for the three or six months ended  September 30,
2002.  Sales to one customer (who was a reseller of our products)  accounted for
10% and 13% of total  revenues for the three and six months ended  September 30,
2001, respectively.

    License  revenues  decreased  to  $1,673,000  during the three  months ended
September 30, 2002 from  $2,932,000  during the three months ended September 30,
2001, a decrease of $1,259,000 or 43%. License revenues  decreased by $1,530,000
or 32% to  $3,284,000  during  the six  months  ended  September  30,  2002 from
$4,814,000  during the six months ended September 30, 2001.  These decreases are
primarily  due to lower unit sales of our platform  products,  particularly  the
SmartEncode product suite to the media and entertainment marketplace. We believe
the  reduction in revenues for our  platform  products  during the three and six
months ended  September 30, 2002 is primarily a function of  unfavorable  global
macroeconomic   conditions,   particularly  with  respect  to  weak  demand  for
information technology products.

     Service  revenues  decreased  to  $1,604,000  for the  three  months  ended
September  30, 2002 from  $1,663,000  for the three months ended  September  30,
2001,  a  decrease  of  $59,000.  Service  revenues  decreased  by  $482,000  to
$3,228,000 for the six months ended  September 30, 2002 from  $3,710,000 for the
six months ended  September  30, 2001.  These  decreases are the result of lower
revenues in our application services business,  primarily due to the non-renewal
of our contract with Major League  Baseball  Advanced Media  ("MLBAM").  Service
revenues  during the three and six  months  ended  September  30,  2001  include
$216,000  and  $432,000,  respectively,  of  warrant  amortization  recorded  as
contra-service revenues resulting from a warrant issued to MLBAM.

    Other  revenues were  $151,000 and $212,000  during the three and six months
ended  September 30, 2001 (none during the three and six months ended  September
30,  2002).  These  decreases  were  primarily  attributable  to  the  level  of
engineering services performed pursuant to a federal government research grant.

    Cost of Revenues.  Cost of license  revenues  consists  primarily of royalty
fees for third-party software products integrated into our products. Our cost of
service revenues  includes  personnel  expenses and other direct costs,  related
overhead,  communication expenses and capital depreciation costs for maintenance
and support  activities and application and professional  services.  Our cost of
other revenues  primarily  includes  engineering  personnel expenses and related
overhead  for  engineering  research  for  government  projects.  Total  cost of
revenues decreased to $1,219,000, or 37% of total revenues, for the three months
ended  September 30, 2002 from  $2,674,000,  or 56% of total  revenues,  for the
three  months ended  September  30,  2001.  Total cost of revenues  decreased to
$2,565,000,  or 39% of total  revenues,  for the six months ended  September 30,
2002  from  $5,417,000,  or 62% of  total  revenues,  for the six  months  ended
September 30, 2001. These decreases in total cost of revenues were due primarily
to decreases in our cost of service revenues during the three and the six months
ended  September  30,  2002.  We expect our total cost of  revenues  to increase
modestly  during our third fiscal  quarter in  comparison  to our second  fiscal
quarter  ended  September  30,  2002.  Generally,  we 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.


                                       19

<PAGE>

    Cost of license revenues decreased to $160,000,  or 10% of license revenues,
during the three months ended September 30, 2002 from $178,000, or 6% of license
revenues,  during the three months ended  September 30, 2001.  This decrease (in
absolute  dollars) was due to lower unit sales of our products  that are subject
to unit-based  (rather than fixed-fee)  license  royalty  payments for the three
months  ended  September  30,  2002 in  comparison  to the  three  months  ended
September 30, 2001. For the six months ended September 30, 2002, cost of license
revenues increased to $347,000, or 11% of license revenues, from $332,000, or 7%
of license  revenues,  during the same period in the prior year.  This  increase
during  the six  months  ended  September  30,  2002  was  primarily  due to the
introduction  of our new  application  products  and other  recently  introduced
products  for  which  we  incur  a  unit-based  royalty  to  certain  technology
providers.

    Cost  of  service  revenues  decreased  to  $1,059,000,  or 66%  of  service
revenues, for the three months ended September 30, 2002 from $2,405,000, or 145%
of service  revenues for the three months ended  September 30, 2001. For the six
months  ended  September  30,  2002,  cost  of  service  revenues  decreased  to
$2,218,000,  or 69% of service  revenues,  from  $4,937,000,  or 133% of service
revenues for the six months ended  September 30, 2001.  This decrease was due to
lower expenditures for our application  services business,  primarily due to the
non-renewal of our contract with MLBAM.

    Cost of other  revenues  was $91,000 and  $148,000,  or 60% and 70% of other
revenues, during the three and six months ended September 30, 2001, respectively
(none for the three and six months ended  September 30, 2002).  These  decreases
were  attributable to the level of engineering  services  performed  pursuant to
federal government research contracts.

    Research and Development Expenses. Research and development expenses consist
primarily of personnel  and related costs for our product  development  efforts.
Research  and  development  expenses  increased to  $2,444,000,  or 75% of total
revenues, for the three months ended September 30, 2002 from $2,344,000,  or 50%
of total  revenues,  for the three months ended  September 30, 2001. For the six
months ended September 30, 2002, research and development  expenses increased to
$4,826,000, or 74% of total revenues, from $4,817,000, or 55% of total revenues,
for the six months ended September 30, 2001. These increases in absolute dollars
were primarily due to higher variable office and equipment  costs. We expect our
research and development expenses to decrease modestly (in absolute dollars) for
the  foreseeable   future  as  we  begin  to  see  the  effects  of  our  recent
restructuring  efforts on our  expenses.  To date, we have not  capitalized  any
software  development costs as they have been  insignificant  after establishing
technological feasibility.

     Sales and  Marketing  Expenses.  Sales and  marketing  expenses  consist of
personnel  and related costs for our direct sales force,  pre-sales  support and
marketing  staff,  and marketing  programs  including  trade shows and seminars.
Sales and marketing expenses decreased to $3,062,000,  or 93% of total revenues,
during the three  months ended  September  30, 2002 from  $4,423,000,  or 93% of
total  revenues,  during the three months ended  September  30, 2001.  Sales and
marketing  expenses decreased to $6,747,000,  or 104% of total revenues,  during
the six  months  ended  September  30,  2002 from  $8,862,000,  or 101% of total
revenues,  during the six months ended  September 30, 2001.  These  decreases in
absolute dollars were primarily due to lower headcount costs due to prior period
restructuring efforts and reduced  discretionary  marketing program spending. We
expect our sales and  marketing  expenses  to  decrease  modestly  (in  absolute
dollars)  for the  foreseeable  future as we attempt to limit our  expenses  and
focus our marketing activities in specific areas.

    General and Administrative  Expenses.  General and  administrative  expenses
consist   primarily  of  personnel  and  related  costs  for  general  corporate
functions,  including finance, accounting,  legal, human resources, costs of our
external  audit  firm and  costs  of our  outside  legal  counsel.  General  and
administrative  expenses decreased to $1,069,000,  or 33% of total revenues, for
the three  months  ended  September  30,  2002 from  $1,330,000  or 28% of total
revenues,  for the three months  ended  September  30, 2001.  For the six months
ended  September  30, 2002,  general and  administrative  expenses  decreased to
$2,211,000,  or 34% of total revenues, from $2,662,000 or 31% of total revenues,
for the six months ended September 30, 2001. These decreases in absolute dollars
were  primarily  due to  lower  headcount  costs as a  result  of  prior  period
restructuring  efforts. We expect general and administrative  expenses to remain
relatively flat (in absolute  dollars) for the foreseeable  future as we attempt
to limit our overall expenses.


                                       20

<PAGE>

    Stock-Based   Compensation   Expense.   Stock  based  compensation   expense
represents the amortization of deferred  compensation  (calculated primarily for
stock options  granted to our employees  prior to the time of our initial public
offering as the  difference  between  the  exercise  price of the stock  options
granted  and the then  deemed  fair value of our common  stock).  We  recognized
stock-based  compensation  expense of $364,000 and $756,000 for the three months
ended September 30, 2002 and 2001, respectively, and $735,000 and $1,538,000 for
the six months ended  September 30, 2002 and 2001,  respectively,  in connection
with  the  granting  of  stock  options  to  our  employees.   Our   stock-based
compensation  expense  decreased during the three and six months ended September
30, 2002 due to the cancellation of stock options  resulting from  participation
in our  voluntary  stock  option  cancellation  and  re-grant  program  for  our
employees  during the year ended  March 31,  2002.  The  implementation  of this
cancellation  and re-grant  program  resulted in the immediate  expensing of the
majority of our  employee-related  deferred  compensation  in our fourth  fiscal
quarter  of  2002.  As  a  result,   our  fiscal  2003  and  future  stock-based
compensation expenses are, and are expected to continue to be, lower than fiscal
2002 levels.  We will continue to amortize the remaining  deferred  compensation
balance as expense for employees who did not  participate in our voluntary stock
option cancellation and re-grant program.

    Interest and Other Income. Interest and other income include interest income
from cash,  cash  equivalents  and  short-term  investments.  Interest and other
income  decreased  to $138,000  and  $328,000 for the three and six months ended
September 30, 2002,  respectively,  from $412,000 and $980,000 for the three and
six months ended  September  30, 2001.  These  decreases  were a result of lower
interest  rates and lower average cash balances  during the three and six months
ended September 30, 2002.

    Provision  for  Income  Taxes.  We have not  recorded  a  provision  for any
significant federal and state or foreign income taxes in either the three or six
months ended  September 30, 2002 or 2001 because we have  experienced net losses
since inception,  which have resulted in deferred tax assets. We have recorded a
valuation   allowance  for  the  entire  deferred  tax  asset  as  a  result  of
uncertainties  regarding the  realization  of the asset balance  through  future
taxable profits.

Liquidity and Capital Resources

    As of September  30, 2002,  we had cash,  cash  equivalents  and  short-term
investments of $21,641,000, a decrease of $9,053,000 from March 31, 2002 and our
working  capital,  defined as  current  assets  less  current  liabilities,  was
$16,318,000,  a decrease of $7,759,000  in working  capital from March 31, 2002.
The decrease in our cash, cash equivalents,  and short-term  investments and our
working  capital  is  primarily  attributable  to  cash  used  in our  operating
activities.

    Our operating  activities  resulted in net cash outflows of $9,069,000,  and
$11,195,000 for the six months ended September 30, 2002 and 2001,  respectively.
The cash used in these  periods  was  primarily  attributable  to net  losses of
$10,244,000 and $13,580,000 in the six months ended September 30, 2002 and 2001,
respectively, offset by depreciation expense, losses on disposals of assets, and
non-cash, stock-based charges.

    Investing  activities  resulted in cash  inflows of  $7,883,000  for the six
months ended  September  30, 2002 and cash  outflows of  $4,267,000  for the six
months ended September 30, 2001. Our investing activity cash inflows were due to
the sale and maturity of our short-term  investments and our investing  activity
cash outflows were  primarily  for the purchase of  short-term  investments  and
capital equipment during both periods. We expect that we will continue to invest
in short-term  investments  and purchase  capital  equipment as we replace older
equipment with newer models.

    Financing  activities  provided  net cash  inflows of $210,000  and $482,000
during the six months ended September 30, 2002 and 2001, respectively. These net
cash inflows were primarily from the proceeds of our employee stock plans.


                                       21

<PAGE>

    At September 30, 2002, we have  contractual  and commercial  commitments not
included on our balance sheet primarily for our San Mateo,  California  facility
that we have an obligation to lease through September 2006. For the remainder of
our  fiscal  year  ended  March  31,  2003,  our  total  commitments  amount  to
$1,673,000.  Future fiscal year commitments are as follows:  $3,338,000 in 2004,
$3,382,000 in 2005,  $3,240,000 in 2006 and $1,844,000 in 2007  ($13,477,000  in
total commitments as of September 30, 2002).

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


                                       22

<PAGE>

Risk Factors

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

                          Risks Related to Our Business


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

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

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

    For quarters  beyond the current  quarter,  we have very limited  visibility
into potential sales opportunities, and thus we have a lower confidence level in
any revenue  forecast  or  forward-looking  guidance.  In  developing  a revenue
forecast  for such  quarters,  we assess any customer  indications  about future
demand,  general  industry  trends,   marketing  lead  development   activities,
productivity  goals for the sales force and expected growth in sales  personnel,
and any demand for products that we may have.

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


                                       23

<PAGE>

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

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

    Our sales contracts are typically  based upon standard  agreements that meet
our revenue  recognition  policies.  However,  our future sales may include site
licenses,  consulting  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 delay payments to us, which may require us
to account for those  customers'  revenues on a cash basis,  rather than accrual
basis,  of accounting.  If these special terms and conditions  cause sales under
these contracts to not qualify under our revenue recognition  policies, we would
defer revenues to future periods when all revenue recognition  criteria are met,
which may hurt our reported revenues and operating results.

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

We have allocated significant product development, sales and marketing resources
toward the deployment of our new 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
recently  introduced  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.  We cannot predict how the market for our  applications
will develop, and part of our strategic challenge will be to convince enterprise
customers of the productivity,  improved communications,  cost savings and other
benefits of our  application  products.  Our future  revenues and revenue growth
rates will depend in large part on our success in delivering  these new products
effectively and creating market acceptance for these products.  If we fail to do
so, our products and services will not achieve widespread market acceptance, and
we may not generate significant revenues to offset our development and sales and
marketing costs, which will hurt our business.  Additionally, our future success
will  continue to depend  upon our  ability to develop  new  products or product
enhancements  that address  future needs of our target markets and to respond to
these changing standards and practices.

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


                                       24

<PAGE>

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

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

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

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

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

    We have  experienced  operating  losses in each  quarterly and annual period
since we were formed and we expect to incur significant losses in the future. As
of September 30, 2002, we had an  accumulated  deficit of  $99,168,000.  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.
Accordingly,  our failure to increase our revenues  significantly  will harm our
business.  In addition,  our cash,  cash  equivalent and  short-term  investment
resources  (collectively,  "cash resources") totaled $21,641,000 as of September
30,  2002 and we used  $9,069,000  in our  operating  activities  during the six
months ended  September 30, 2002. We  anticipate  that our operating  activities
will use additional cash resources for at least the next 12 months.  This almost
certainly will leave us with a  deteriorated  cash position in comparison to our
cash  position  as of  September  30,  2002 and this may affect  our  ability to
transact future strategic operating and investing activities in a timely manner,
which may harm our  business  and cause our  stock  price to fall.  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.


                                       25

<PAGE>

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

   Our stock is currently traded on the NASDAQ National Market and the bid price
for our common  stock has,  in the past,  been under $1.00 per share for over 30
consecutive trading days. Under NASDAQ's listing maintenance  standards,  if the
closing  bid  price  of our  common  stock  is  under  $1.00  per  share  for 30
consecutive  trading days, NASDAQ may choose to notify us that it may delist our
common stock from the NASDAQ National  Market.  On October 31, 2002, we received
notice  from  NASDAQ  that  we  are  not in  compliance  with  NASDAQ's  listing
maintenance  standards  and  that we  have  until  January  29,  2003 to  regain
compliance.  If at anytime  before January 29, 2003, the bid price of our common
stock closes at $1.00 per share or more for a minimum of 10 consecutive  trading
days,  NASDAQ will  consider  notifying  us that we comply with its  maintenance
standards.  If we are  unable to meet this  minimum  bid  price  requirement  by
January 29,  2003,  we expect to have the option of  transferring  to the NASDAQ
SmallCap Market,  which makes available a 180 calendar day extended grace period
for the minimum $1.00 bid price requirement.  In addition, we expect that we may
also be eligible for an  additional  180 calendar day grace period on the NASDAQ
SmallCap  Market (ie.  until  October 27, 2003)  provided that we meet the other
non-bid price related listing criteria.  However,  we believe that a transfer to
the NASDAQ  SmallCap may be  negatively  perceived  by the market,  analysts who
follow our stock and  stockholders.  There can be no  assurance  that our common
stock will  remain  eligible  for trading on the NASDAQ  National  Market or the
NASDAQ  SmallCap  Market.  If  our  stock  were  delisted,  the  ability  of our
stockholders  to sell any of our common stock at all would be  severely,  if not
completely, limited.

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

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

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

    Our revenues are dependent on the health of the economy (in particular,  the
robustness of information  technology  spending) and the growth of our customers
and potential future customers.  The economic environment has not been conducive
to  companies  involved in  information  technology  infrastructure  for several
quarters and if this trend  continues,  our  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 weak over the past 24
months and believe that this has  contributed to our decline in revenues for our
current year periods in comparison to our prior year periods. If global economic
conditions  continue to weaken,  our revenues  could  continue to suffer and our
stock price could decline further.


                                       26

<PAGE>

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

    During the past several quarters,  including the quarter ended September 30,
2002,  we  took  steps  to  better  align  the  resources  required  to  operate
efficiently  in the  prevailing  market.  Through  these  steps,  we reduced our
headcount and incurred charges for employee severance,  excess facility capacity
and excess equipment.  While we believe that these steps help us achieve greater
operating efficiency, we have limited history with such measures and the results
of these measures are less than  predictable.  The Company monitors its expenses
closely and  benchmarks  its  expenses  against  expected  revenues.  Should the
Company's  revenues  not  meet  internal  or  external   expectations  or  other
circumstances  arise that require the Company to better align resources required
to  operate  efficiently  in the  prevailing  market,  additional  restructuring
efforts may be required.  We believe workforce reductions and management changes
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 company's operations into facility space that is less than
our current facility  commitment,  resulting in excess operating lease capacity.
Should we continue to have excess  operating lease capacity and we are unable to
find a sub lessee at a rate  equivalent to our operating lease rate, we would be
required to record additional charges for the rental payments that we owe to our
landlord  relating  to any  excess  facility  capacity,  which  would  harm  our
operating results. Our management reviews our facility requirements and assesses
whether any excess capacity exists as part of our on-going financial processes.

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

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

    o    purchase volumes;
    o    competitive pricing;
    o    the specific requirements of the order;
    o    the duration of the licensing arrangement; and
    o    the level of sales and service support.

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


    Our sales and marketing costs are a high percentage of the revenues from our
orders,  due partly to the expense of developing leads and relatively long sales
cycles  involved in selling  products that are not yet  considered  "mainstream"
technology  investments.  For the three and six months ended September 30, 2002,
our sales and  marketing  expenses  totaled 93% and 104% of our total  revenues,
respectively.


                                       27

<PAGE>

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

    Our service  revenues,  which include fees for our  application  services as
well as professional  services such as consulting,  implementation,  maintenance
and  training,  were 49% and 50% of our  total  revenues  for the  three and six
months ended September 30, 2002, respectively, and were 35% and 43% of our total
revenues for the three and six months ended  September  30, 2001,  respectively.
Our service  revenues  have  substantially  lower gross profit  margins than our
license  revenues.  Our cost of  service  revenues  for the three and six months
ended September 30, 2002 were 66% and 69%, respectively, of service revenues and
for the  three  and six  months  ended  September  30,  2001were  145% and 133%,
respectively,  of service  revenues.  An  increase  in the  percentage  of total
revenues  represented  by service  revenues could  adversely  affect our overall
gross profit margins.

    Service  revenues  as a  percentage  of total  revenues  and cost of service
revenues  as a  percentage  of total  revenues  have varied  significantly  from
quarter  to  quarter  due  to  our  relatively   early  stage  of   development.
Historically,  the  relative  amount of service  revenues as compared to license
revenues  has  varied  based on  customer  demand for our  application  services
revenues.   Our  application  services  require  a  relatively  fixed  level  of
investment in staff, facilities and equipment. In the past, we have operated our
application  service  business at a loss due to fixed  investments that exceeded
actual  levels of revenues  realized.  We have reduced the  application  service
fixed  investments over the past year.  However,  there is no assurance that the
current  level of  application  service  revenues  will  continue to allow us to
recover our fixed costs and make a positive gross profit margin. In addition, we
have experienced an increase in the percentage of license  customers  requesting
professional  services as a result of our introduction of professional  services
in the fourth quarter of fiscal 2001, which will also impact the relative amount
of service revenues as compared to license  revenues.  We expect that the amount
and profitability of our professional services will depend in large part on:


    o  the software solution that has been licensed;
    o  the complexity of the customers'  information technology  environments;
    o  the resources directed by customers to their implementation projects;
    o  the size and complexity  of  customer  implementations;  and
    o  the extent to which outside  consulting  organizations  provide  services
       directly to customers.

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

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

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

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


                                       28

<PAGE>

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

   The  Sarbanes-Oxley  Act  ("the  Act") of 2002 that  became  law in July 2002
requires changes in some of our corporate  governance and securities  disclosure
and/or  compliance  practices.  The Act also requires the SEC to promulgate  new
rules on a variety of subjects,  in addition to rule proposals already made, and
the NASDAQ  National  Market has  proposed  revisions  to its  requirements  for
companies like Virage that are listed on NASDAQ.  We believe these  developments
could  increase  our legal and  accounting  compliance  costs,  and to make some
activities. 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 may incur as a result of the Act or other, related legislation.

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

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

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

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

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

    The worldwide  socio-political  environment has changed  dramatically  since
September 11, 2001. 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.
Should a major  catastrophe  occur within the vicinity of any of our operations,
our customers'  and/or  potential  customers'  and/or vendors'  operations,  our
operations may be adversely impacted and our business may be harmed.


                                       29

<PAGE>

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

    o    human error;
    o    physical or electronic security breaches;
    o    computer viruses;
    o    fire, earthquake, flood and other natural disasters;
    o    power loss;
    o    telecommunications failure; and
    o    sabotage and vandalism.

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

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


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


                                       30

<PAGE>

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

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

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

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

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

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

    o    compliance with multiple,  conflicting and changing  governmental  laws
         and regulations,  including changes in regulatory requirements that may
         limit our  ability to 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.


                                       31

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

   At September 30, 2002,  the  Company's  cash and cash  equivalents  consisted
primarily of bank  deposits and money market  funds.  The  Company's  short-term
investments  consisted of commercial paper,  municipal bonds, and federal agency
and  related  securities.  The  Company  did not hold any  derivative  financial
instruments.  The  Company's  interest  income is  sensitive  to  changes in the
general level of interest rates.  In this regard,  changes in interest rates can
affect  the  interest  earned  on  cash  and  cash  equivalents  and  short-term
investments.

Item 4.  Controls and Procedures

   We maintain a system of disclosure controls and procedures designed to ensure
that  information  required  to be  disclosed  in our  reports  filed  under the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported  within the time periods  specified in the  Securities and Exchange
Commission's  (SEC) rules and forms.  These controls and procedures are designed
to ensure that such information is accumulated and communicated to the Company's
management,  including the Chief  Executive  Officer and Acting Chief  Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.

   Within  the 90 days  prior  to the  date of this  report,  we  evaluated  the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures,  under the  supervision  and with the  participation  of management,
including our Chief Executive Officer and Acting Chief Financial Officer.  Based
upon that  evaluation,  our Chief  Executive  Officer and Acting Chief Financial
Officer  concluded  that the Company's  disclosure  controls and  procedures are
effective to ensure that information we are required to disclose in reports that
we file under the  Securities  and Exchange Act of 1934 is recorded,  processed,
summarized  and reported  within the time periods  specified in  Securities  and
Exchange Commission rules and forms.

   We  continuously  evaluate our internal  controls and make changes to improve
them. However,  there were no significant changes in our internal controls or in
other factors that could  significantly  affect these controls subsequent to the
date of the evaluation referred to above.


                                       32

<PAGE>

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

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


Item 2. Changes in Securities and Use of Proceeds

    (d) Use of Proceeds.

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

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


                                       33

<PAGE>


Item 3. Defaults Upon Senior Securities

    None.


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

         We held our Annual  Meeting of  Stockholders  on September 4, 2002. The
         following  is a brief  description  of each  matter  voted  upon at the
         meeting and the number of votes cast for, withheld,  or against and the
         number of  abstentions  with  respect  to each  matter.  Each  director
         proposed by us was  elected  and the  stockholders  also  approved  the
         management proposal we proposed.

          (a)  The  stockholders   reelected  the  nominees  for  our  Board  of
               Directors:

                  Director                Shares voted for       Shares withheld
                  --------                ----------------       ---------------

                  Randall S. Livingston      11,761,338              49,978
                  William H. Younger, Jr.    11,760,538              50,778


               The following  directors were not up for election at the meeting:
               Paul  G.  Lego,  Alar E.  Arras,  Ronald  E.F.  Codd,  Philip  W.
               Halperin, and Standish H. O'Grady.


          (b)  The stockholders approved the appointment of Ernst & Young LLP as
               our  independent  auditors  for the fiscal year ending  March 31,
               2003:


                  Shares voted for:         11,751,763
                  Shares voted against:         50,493
                  Shares abstaining:             9,060



Item 5. Other Information


         NASDAQ National Market Trading Requirements

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


                                       34

<PAGE>


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

          (a)  Exhibits

               Exhibit 10.12        Severance Agreement with Michael H. Lock

               Exhibit 10.13        Retention Bonus and Severance Agreement with
                                    Scott Gawel

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


          (b)  Reports on Form 8-K


          1.   Virage filed an amended  current  report on Form 8-K dated August
               29, 2002,  which  amended and restated its  stockholders'  rights
               agreement to: i) provide for an exception to the definition of an
               Acquiring  Person for a  "Grandfathered  Person," so long as such
               person  does  not  acquire  twenty  percent  (20%) or more of the
               Company's Common Stock; (ii) provide that D3 Family Fund, L.P. is
               a  "Grandfathered  Person"  subject to certain  limitations;  and
               (iii)  adjust the section and number  references  in the original
               rights agreement accordingly.


                                       35

<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:  November 12, 2002                By:   /s/ Scott Gawel
                                              ----------------------------------
                                              Scott Gawel
                                              Vice President, Finance &
                                              Acting Chief Financial Officer
                                              (Duly Authorized Officer and
                                              Principal Financial Officer)


                                       36

<PAGE>


I, Paul G. Lego, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date:  November 12, 2002

                                             /s/ Paul G. Lego
                                             -----------------------------------
                                             Paul G. Lego
                                             President & Chief Executive Officer


                                       37

<PAGE>


I, Scott Gawel, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:  November 12, 2002

                                                  /s/ Scott Gawel
                                                  ------------------------------
                                                  Scott Gawel
                                                  Vice President, Finance &
                                                  Acting Chief Financial Officer


                                       38