UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                    FORM 10-K
                                    ---------

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2003

                                       OR

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

                         COMMISSION FILE NUMBER: 0-30903
                         -------------------------------

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

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

                           411 BOREL AVENUE, 100 SOUTH
                        SAN MATEO, CALIFORNIA 94402-3116
                                 (650) 573-3210
              (Address, including zip code, and telephone number,
     including area code, of the registrant's principal executive offices)
                            ------------------------
        Securities Registered Pursuant to Section 12(b) of the Act: None

           Securities Registered Pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 par value
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

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

As of  June  16,  2003,  there  were  approximately  21,237,000  shares  of  the
registrant's Common Stock outstanding.  The aggregate market value of the voting
and non-voting  stock held by  non-affiliates  of the  registrant,  based on the
closing sale price of the Common Stock on September  30, 2002 as reported on the
Nasdaq National Market was approximately $9,716,000. Shares of Common Stock held
by each current  executive  officer and director  have been  excluded  from this
computation  in that such persons may be deemed to be affiliates of the Company.
This  determination  of affiliate status is not a conclusive  determination  for
other purposes.

                       Documents Incorporated by Reference

Portions of the registrant's  Proxy Statement for the  registrant's  2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K to the extent stated herein.  The Proxy  Statement will be filed within 120
days of registrant's fiscal year ended March 31, 2003.
<PAGE>

                                  VIRAGE, INC.

                                      INDEX
<TABLE>
<CAPTION>

                                                                                                         PAGE
<S>  <C>                                                                                                <C>
PART I

Item 1.        Business...................................................................................1

Item 2.        Properties................................................................................19

Item 3.        Legal Proceedings.........................................................................20

Item 4.        Submission of Matters to a Vote of Security Holders.......................................20

PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters.....................22

Item 6.        Selected Consolidated Financial Data......................................................24

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of
                    Operations...........................................................................25

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk................................41

Item 8.        Financial Statements and Supplementary Data...............................................42

Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial
                    Disclosure...........................................................................71

PART III

Item 10.       Directors and Executive Officers of the Registrant........................................71

Item 11.       Executive Compensation....................................................................71

Item 12.       Security Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters..................................................................71

Item 13.       Certain Relationships and Related Transactions............................................71

Item 14.       Controls and Procedures...................................................................71

PART IV

Item 15.       Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................73

               Signatures................................................................................74
</TABLE>

<PAGE>

                                     PART I

     This annual report on Form 10-K contains forward-looking  statements within
the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act"),
as amended,  and Section 21E of the Securities  Exchange Act of 1934, as amended
(the "Exchange  Act"),  including  statements  using  terminology such as "can,"
"may,"  "believe,"  "designed  to,"  "will,"  "expect,"  "plan,"   "anticipate,"
"estimate,"  "potential,"  or  "continue,"  or the  negative  thereof  or  other
comparable  terminology  regarding  beliefs,  plans,  expectations or intentions
regarding the future. Forward-looking statements involve risks and uncertainties
and  actual  results  could  differ  materially  from  those  discussed  in  the
forward-looking  statements.  All  forward-looking  statements  and risk factors
included in this document are made as of the date hereof,  based on  information
available  to the Company as of the date  thereof,  and the  Company  assumes no
obligation to update any forward-looking statement or risk factors.

Item 1. Business

Overview

     Virage, Inc. is a provider of video and rich media  communication  software
products, professional services and application services. We sell these products
and services to  corporations,  media and  entertainment  companies,  government
agencies, and universities worldwide.

     Our application  products became an  increasingly  significant  part of our
revenues  during  our  fiscal  year  ended  March  31,  2003,   following  their
introduction  to the  marketplace  late in our fiscal year ended March 31, 2002.
Our strongest performing application product was VS Webcasting(TM), which allows
corporations  to schedule  and manage live  webcast  events and then easily turn
each into a searchable,  on-demand presentation.  Our other application products
include VS  Publishing(TM),  a complete  workflow solution that allows media and
entertainment  companies  and others with branded  content to turn their content
into compelling,  rich media programming for the Internet or corporate intranet;
and  VS  Production(TM),  an  integrated  software  solution  that  automates  a
customer's video production process from acquisition to distribution.

     All of our application  products are built around,  and work in conjunction
with,  certain of our platform  products,  which provide much of the  underlying
technology and core  functionality.  More  specifically,  our platform  products
provide the video encoding,  indexing and content  management  capabilities that
are shared by each of our  application  products.  In addition to providing core
functionality to our application  products,  our platform  products are marketed
and sold as stand-alone products.  Historically, these products have represented
the majority of our revenues.  Our platform products include our SmartEncode(TM)
products,  which encode and index video within a single automated  process,  and
our server  products,  which provide basic content  management  capabilities for
video and rich media.

     Owners of rich media  content can  leverage  our  technology  and  know-how
either by licensing  our products and engaging our  professional  services or by
employing our application services to outsource their needs.

     We are based in San Mateo,  California.  We were  founded in April 1994 and
incorporated in Delaware in March 1995. In this report, "Virage," "the Company,"
"our," "us," "we" and similar  expressions  refer to Virage,  Inc. Our principal
executive  offices  are  located  at 411 Borel  Avenue,  100  South,  San Mateo,
California 94402 and our telephone number is (650) 573-3210.


                                       1
<PAGE>

Business Background and Strategy

     Our application  products became an  increasingly  significant  part of our
total revenues during our fiscal year ended March 31, 2003. We first  introduced
these  products  late in our fiscal year ended March 31, 2002 in order to expand
the market for our  technology and to provide  customers with complete  software
solutions.  Our application products are designed to work "out-of-the-box" for a
specific  video  or  rich  media  workflow,  such as  training,  communications,
Internet and intranet publishing,  or video production.  Our development efforts
for these application products focus on functions,  features, and intuitive user
interfaces that allow our customers to implement the intended  workflow  quickly
and easily. Our application products include VS Webcasting, VS Publishing and VS
Production.

     Our application  products are marketed directly to users such as executives
and  managers in sales,  marketing,  communication  and training  positions,  in
addition to information  technology  executives.  For example,  we market our VS
Webcasting product to sales and marketing  executives to assist with new product
introductions  and sales training.  The VS Webcasting  product can be used for a
live event  transmission to a widely  distributed field sales team, and also can
provide an  on-demand  playback  capability  for later  viewing  or  review.  An
investment  in VS  Webcasting  can thus save travel time and costs,  and allow a
sales  representative  to review  materials or topics of interest  whenever more
information  is  required.  We  market  and sell  our  application  products  by
demonstrating  both cost savings and productivity  increases for the users, thus
establishing a quantifiable return on our customer's investment.

     We were able to demonstrate  this return on investment for our  application
products to a number of corporate  enterprise  customers  during our fiscal year
ended March 31, 2003,  particularly  our VS Webcasting  product for which demand
was strongest.  As a result,  corporate  enterprise  customers accounted for the
greatest  percentage of our total revenues of any of our targeted  marketplaces.
This was a measurable  shift in the results of our  business  as,  historically,
customers within the media and entertainment  marketplace purchased our platform
products and contributed most significantly to our revenues.

     Our  application  products are designed to further our enterprise  strategy
and to provide enhanced solutions to customers in all of our target markets.  In
addition  to  licensing  our  products,  we offer our  customers  the  option of
outsourcing  their  requirements  to us by leveraging our  application  services
offerings.  We believe our  application  services  offerings  are an  important,
initially lower-cost,  easily deployable  alternative to licensing our products.
These outsourced offerings are a fast and efficient way for a customer to obtain
the  functionality  and value  that our  technology  offers.  As a key  customer
acquisition  tool, our application  services  offerings  enable our customers to
choose either a longer-term application services contract or a licensed software
solution that may be deployed by the customer in-house.


                                       2
<PAGE>

     In addition,  we continue to derive a  significant  portion of our revenues
from our  platform  products.  Our  platform  products  include our  SmartEncode
products,  which encode and index video within a single automated  process,  and
our server  products,  which enable the publishing and distribution of streaming
video.  Users of our  platform  products  typically  have  some  in-house  video
expertise or are willing to invest in consulting or other  resources in order to
use our platform as part of a video and rich media  solution.  During our fiscal
year ended March 31, 2003, we experienced the strongest  demand for our platform
products from government customers,  particularly defense and security agencies,
who often purchased our platform products and engaged our professional  services
to build  highly  sophisticated  computer  systems,  including  video-monitoring
systems.  This demand by  government  customers  for our  platform  products was
offset  by  weakness  from   customers   within  the  media  and   entertainment
marketplace.  Historically,  media and  entertainment  companies  purchasing our
platform  products have comprised a substantial  portion of our total  revenues.
However,  during  our  fiscal  year  ended  March 31,  2003,  we  experienced  a
measurable decline in purchases from our media and entertainment  customers.  We
believe  this is  primarily  a  function  of  unfavorable  global  macroeconomic
conditions  affecting a number of our  potential  customers  in markets  such as
media and entertainment and resulting in weak demand for information  technology
products.  We expect that a significant portion of our revenues will continue to
be derived  from our  platform  products.  However,  if demand for our  platform
products  does  not  improve,   particularly  with  respect  to  our  media  and
entertainment  customers,  we may not be able to grow  our  revenues  to  levels
required to develop a profitable and sustainable business.

     We actively market our products and services to new prospects as well as to
our installed  base of customers.  We believe that  successful  development  and
marketing of our products is critical to increasing  our future sales to a level
required for profitability.  We have focused our sales force on establishing new
relationships  and developing  existing  relationships  by offering  application
services and other programs in order to demonstrate the value  proposition  that
our products offer. In addition,  we are working with strategic channel partners
such as Sony,  RealNetworks,  and  Sumitomo to extend our sales reach beyond our
own sales  force.  There is no guarantee  that our products  will succeed in the
marketplace or grow to levels required for profitability. If our products do not
succeed, we may not be able to develop a profitable and sustainable business.

Products and Services

     We are a provider of video and rich media communication  software products,
professional  services  and  application  services.  We sell these  products and
services  to  corporations,   media  and  entertainment  companies,   government
agencies, and universities worldwide.

APPLICATION PRODUCTS

VS Webcasting

     VS  Webcasting  allows  corporations  to schedule  and manage live  webcast
events--and then turn each quickly and easily into a searchable on-demand event.
VS Webcasting  enriches the live experience by integrating  streaming video with
slides,  documents,  surveys and other pertinent online media. At the same time,
it  automatically  creates  a  searchable,  on-demand  presentation  that can be
available for review within minutes after an event's conclusion.

VS Publishing

     VS  Publishing  is a  complete  workflow  solution  that  allows  media and
entertainment  companies  and others with branded  content to turn their content
into compelling rich media  programming for the Internet or corporate  intranet.
With VS Publishing,  video can be processed,  assembled,  reviewed and published
minutes after its creation. Whether content comes from an archive or direct from
on-air  production,  VS Publishing  streamlines the workflow to the Internet and
lets content  owners  deliver  video where and when it is most valuable to their
viewers.


                                       3
<PAGE>

VS Production

     VS  Production  is an  integrated  software  solution  that  automates  the
professional  video  production  process from  acquisition to  distribution.  By
transforming  video into a digital asset that is easy to manage,  access,  share
and  distribute,  VS Production  helps content owners  streamline the process of
producing high-quality video content for on-air, tape or digital distribution.

PLATFORM PRODUCTS

SMARTENCODE PRODUCTS

VideoLogger(R) and Media Analysis Plug-ins

     Our  VideoLogger  product indexes video while  simultaneously  encoding (or
digitizing)  the source video into multiple  digital formats - all in real time.
The  resulting  video  index and  digital  video  files  are time  synchronized,
allowing  the index data to  reference  particular  moments  in the  video.  The
indexing  process  converts video into data that  computers can  recognize.  The
index,  or  video  database,  acts  like an  index  found at the back of a book,
allowing pinpoint access into video content. Indexing information can be derived
from automated analysis of the video stream, from external sources of time-coded
data, or from information entered by a user. Our customers can elect to leverage
our media analysis plug-ins in order to automatically  extract  information such
as a visual  storyboard of scene changes,  a transcription  of spoken words (via
speech recognition), audio classification,  closed captioning or teletext, names
of  recognized  faces and  speakers,  on-screen  text,  and time code.  External
sources of data could  include an "edit  decision  list" from  non-linear  video
editing software,  a transcript of words spoken, or a real-time  statistics feed
from a sports stadium.  User entered  information can include clip titles,  clip
descriptions,  categories, clip in and out points, event dates, and other custom
descriptions.  Once the index is produced, it can be integrated with a number of
different back-end  solutions,  including the Virage Solution Server. The Virage
SmartEncode process is available either through the latest release of the Virage
VideoLogger  product  or  in  an  outsourced  fashion  through  our  application
services.

     Customers or  third-party  developers can enhance the  SmartEncode  process
through the  VideoLogger  Software  Developer  Kit (SDK).  The  VideoLogger  SDK
provides  developers  and  systems  integrators  access  to the  full  range  of
VideoLogger  functions  through a programming  interface.  This enables reliable
integration into a wide variety of automated  workflows and allows developers to
add additional indexing and encoding functionality to VideoLogger as necessary.

Virage ControlCenter(TM)

     The Virage  ControlCenter  product is a workflow  application that remotely
schedules,   controls,   and  manages  the  SmartEncode   process  for  multiple
VideoLoggers  from a central console.  Capture of the source video signal is the
starting  point.  Virage software can accept video from a multitude of analog or
digital sources: camera, satellite feed, television, videotape, or digital file.
Capture of multiple  video feeds can be  automated  and  managed  centrally  via
ControlCenter for greater efficiency.

MediaSync(TM)

     Our MediaSync product provides a fully integrated,  end-to-end solution for
rapidly assembling, synchronizing and publishing streaming video with PowerPoint
slides to a website.

Database Plug-Ins

     Virage Database Plug-Ins for Oracle(R) and Informix(R) products help system
integrators  build  sophisticated  video  management  solutions  with the Virage
VideoLogger and relational databases.


                                       4
<PAGE>

SERVER PRODUCTS

Virage Solution Server(TM)

     The  Virage  Solution   Server   provides  a  comprehensive   platform  for
publishing,  managing and  distributing  Virage-enabled  content on the web. The
Virage  Solution  Server  hosts the video  index  generated  by the  SmartEncode
process.  It is designed for high  performance and can scale to  enterprise-wide
and  Internet-wide  deployments.  The Virage Solution Server content  management
capabilities include account setup,  deleting or inserting video assets from the
databases,   editing  existing  video  assets,   and  managing   multiple  video
collections.

     The Virage  Solution  Server is used to publish and  distribute  content to
video-rich websites. With the Virage Solution Server, a customer can efficiently
publish  on-demand video  throughout a website,  seamlessly  integrated with the
existing  website  look  and  feel.   Sample  web  templates   provide  an  easy
"out-of-the-box"  experience,  or customers can develop their own HTML templates
to create search and results pages and player windows tailored to their specific
needs.  The  Virage  Solution  Server  supports  all  common  streaming  formats
including RealVideo,  Windows Media, QuickTime, and MPEG. It can also extend the
viewing  experience beyond the PC-based Internet to set top boxes, game consoles
and handheld and wireless devices.

     Key features of the Virage Solution Server include:

     o   Search:  with Virage Solution Server,  content owners can deliver video
         content to end-users through well-understood navigation paradigms. This
         allows users to quickly find the content of interest;
     o   Dynamic Publishing:  Virage Solution Server can automate the process of
         delivering  video  clips   throughout  a  web  site.   Content  can  be
         automatically published based on its category or keywords.
     o   Content  Distribution  Network Management:  because many content owners
         use multiple content distribution  networks (CDNs), the Virage Solution
         Server provides an abstraction layer to simplify content distribution;
     o   Personalization:   Virage   Solution   Server   provides   a  range  of
         capabilities that allow content owners to deploy  personalized  viewing
         experiences;
     o   Syndication:  Because  Virage  Solution  Server  separates  the content
         database from the HTML templates, it allows a single content collection
         to be syndicated to multiple sites, each with a unique look and feel.

Virage Solution Server SDK

     The Virage Solution Server Software  Developer Kit (SDK) allows  developers
and systems  integrators  to build custom  applications  on the Virage  Solution
Server to suit any publishing environment.

SERVICE OFFERINGS

Software installation and training

     Licensed  software  customers  have the option to contract  with Virage for
generally  basic  software  installation  and training  support.  These services
ensure that  customers can begin to use Virage  software as quickly as possible.
These services are typically billed on an hourly or daily basis.


                                       5
<PAGE>

Development and implementation services

     Virage offers a variety of professional services aimed at helping customers
to  implement,  integrate or customize  our  commercial  software.  The services
typically  consist of building custom web templates,  implementing our products,
building  specialized plug-ins to our products and integrating our products with
websites  or  existing  customer  infrastructure.  We offer  these  services  to
customers  regardless of whether they license software products,  or opt for our
application services.  These services are typically billed on an hourly or daily
basis,  though in some cases we offer a fixed fee project based upon the size of
the project.

Application services

     Our application  services  consist of SmartEncode  services and application
hosting  services.  These services allow  customers to outsource  their needs to
Virage,  in lieu of  purchasing  our  software  and  installing  and managing it
themselves.

     Using  our own  SmartEncode  products,  we  process  content  on  behalf of
customers from a variety of analog or digital  sources.  As part of the service,
we produce  multiple  formats and bit rates of high quality  encoded video files
along  with a  rich  video  database.  Our  editorial  services  include  custom
headlines,  descriptions,  keywords,  and other useful  information added by our
expert content editors to suit a customer's requirements. We can also transcribe
content  to  produce an exact text of the  speech.  We  typically  bill for such
services  as a charge per hour of video  processed  depending  upon the level of
services required.

     Customers   interested  in  our  application  products  can  also  opt  for
Virage-hosted  offerings.  These  services  allow  customers  to  access  Virage
software  directly from a Virage  datacenter.  For example,  some customers have
chosen to deliver live or on-demand  webcasts by  leveraging  our VS  Webcasting
software, hosted in a Virage datacenter.

     As part of most application service agreements,  we provide daily,  weekly,
and monthly  traffic  reports to the  content  owner.  We also  provide a secure
administration  and publishing  interface  that provides our customers  complete
control of how and where their  content gets  published.  We typically  charge a
fixed monthly minimum charge for our application hosting services that increases
based  upon  accesses  to  our  video   database.   Our  data  center   provides
fault-tolerant  servers and 24-by-7  monitoring to ensure  reliable and scalable
hosting.

     We believe our application services offerings are an important, lower-cost,
easily  deployable  alternative to demonstrate the  functionality and value that
our technology  and services  bring to the customer.  We also believe that these
service  offerings will help us engage our customers in longer-term  application
services contracts for these solutions or in a comprehensive end-to-end software
licensing sale.

Sales and Marketing

Sales and distribution strategy

     We sell our products and application  services through a direct sales force
and through  indirect  distribution  channels.  We currently target customers in
several  markets  including  corporate  enterprises,   media  and  entertainment
companies,  government entities and educational institutions. Our sales strategy
is to pursue  multiple  opportunities  for large-scale  deployments  within each
customer account.  We want to provide business users with a quick,  reliable and
scalable solution to their problems and afford them a definitive return on their
investment.


                                       6
<PAGE>

     Through our direct sales force in Boston,  Chicago,  Houston,  London,  Los
Angeles,  Miami,  New York, San Francisco,  Singapore,  Houston,  and Washington
D.C., we focus on larger customers in North America,  Europe, Latin America, and
Asia. In addition,  our direct sales force manages local  relationships with key
resellers.  Our indirect  distribution  channels  include major  high-technology
industry vendors,  domestic and international  distributors,  system integrators
and  value-added  resellers.   Together,   these  distributors  and  value-added
resellers  accounted for  approximately 26% of total revenues for the year ended
March 31,  2003.  If we were to lose one of our  channel  partners or any of our
channel  partners were to delay or default on obligations  under their contracts
with us, our future operating results could be significantly harmed.

Marketing activities

     Since our  inception,  we have  invested a  substantial  percentage  of our
revenues in a broad range of  marketing  activities  to  generate  demand,  gain
corporate brand identity and educate the market about our products and services.
These  activities have focused  primarily on direct  marketing,  direct mail and
email, webinars,  seminars,  telemarketing,  public relations,  co-marketing and
branding with our major customer accounts and strategic partners, targeted trade
shows, conferences,  speaking engagements, and product information through print
collateral and our Internet site. In addition,  we have an established developer
relationship  function to encourage  independent  software developers to develop
products and solutions that are compatible  with our products and  technologies.
Recently,  we have decided to focus a large percentage of our marketing  program
spending on telemarketing  campaigns. We have significantly reduced our spending
budgets for trade shows and other areas in order to fund an increased investment
in these campaigns.  Should our recent focus on telemarketing  campaigns fail to
attract new customers, our revenues may be adversely impacted.

Customers

     Our customers represent large global  enterprises,  media and entertainment
corporations,  educational  institutions  and government  entities.  No customer
accounted  for more than 10% of our total  revenues in either of the years ended
March  31,  2003 or 2001.  For the year  ended  March  31,  2002,  one  customer
accounted for 14% of our total revenues.

     International  revenues  represented 25%, 24% and 29% of our total revenues
during the years ended March 31, 2003, 2002 and 2001, respectively.

Research and Development

     We believe  that our future  success  will depend in part on our ability to
continue  to  develop  new,  and to enhance  existing,  products  and  services.
Accordingly,  we invest a  significant  amount of our  resources in research and
product development  activities.  Our research and development  expenses totaled
$9,248,000,  $9,172,000, and $9,101,000 for the years ended March 31, 2003, 2002
and  2001,  respectively.  Our  focus on  application  product  development  has
increased the complexity and difficulty of our product  development  efforts. In
particular,  we now have several small application product development teams who
must  coordinate  their  efforts with each other and with our  platform  product
development teams. Our ability to successfully  manage product  development in a
more  complex  environment  is  important  in our ability to execute our product
plans, which we believe will help to improve our revenues.


                                       7
<PAGE>

Competition

     The digital  media  marketplace  is new,  rapidly  evolving  and  intensely
competitive.  As more companies begin to leverage streaming video  technologies,
we expect  competition to intensify.  We currently  compete  directly with other
providers  in  the  market  for  web-based  video  solutions  including  Convera
Corporation,  Sonic Foundry,  Inc. and Yahoo!  Broadcast Solutions.  We may also
compete  indirectly with larger system  integrators who embed or integrate these
directly  competing  technologies into their product  offerings.  It is possible
that we may work with  these  same  larger  companies  on one  customer  bid and
compete  with them on another.  In the future,  we may compete  with other video
services  vendors  as well as web  conferencing  vendors.  In  addition,  we may
compete with our current and  potential  customers  who may develop  software or
perform application services internally.

     We believe we compete favorably with our competitors.  However,  the market
for our products is relatively small today, and therefore even continued success
against  competitors  does  not  guarantee  that we can  grow  our  business  to
profitable levels.  Our ability to become a profitable and sustainable  business
is highly  dependent on the growth of the Internet and intranet  streaming video
business.

Intellectual Property

     We depend on our ability to develop and maintain the proprietary aspects of
our technology.  To protect our proprietary  technology,  we rely primarily on a
combination of patent,  trademark and copyright laws, as well as confidentiality
and license  agreements  with our employees and others.  We actively seek patent
protection  for  our  intellectual  property.  We  have  filed  20  U.S.  patent
applications  on our proprietary  technology.  Eight patents have been issued by
the Patent and Trademark  Office.  Our remaining twelve patent  applications are
currently  pending.  In 2002,  we  renewed a  five-year  patent  cross-licensing
agreement with IBM. The terms of this agreement include our nonexclusive license
of IBM's  multimedia  software patents in return for an annual fee and a license
to IBM of all of our current patents as described above and any patents that may
be issued to us in the future.

     We have twenty trademarks,  four of which are registered.  We seek to avoid
disclosure of our trade secrets by limiting access to our proprietary technology
and restricting access to our source code. Despite these precautions,  it may be
possible  for  unauthorized  third  parties to copy  particular  portions of our
technology or reverse  engineer or obtain and use information  that we regard as
proprietary.  In  addition,  the laws of some  foreign  countries do not protect
proprietary  rights to the same  extent as the laws of the  United  States.  Our
means of protecting  our  proprietary  rights in the United States or abroad may
not be adequate  and  competing  companies  may  independently  develop  similar
technology.

Employees

     As of March 31, 2003, we had 108 employees and 6 full-time contractors.  Of
our 114  total  staff,  20 were  employed  in  services,  41  were  employed  in
engineering,  38 were employed in sales and  marketing,  and 15 were employed in
general and  administrative  positions.  None of our  employees are subject to a
collective bargaining agreement,  and we have never experienced a work stoppage.
We consider our relations with our employees to be good.


                                       8
<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

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 March 31, 2003, we had an accumulated  deficit of $107,044,000.  We have made
efforts  to  reduce  our  expenses  over the past  several  quarters,  but it is
possible  that we could incur  increasing  research and  development,  sales and
marketing and general and  administrative  expenses at some point in the future.
Our  revenues  have  been  relatively  flat for the past four  quarters  and any
inability to increase our  revenues  significantly  in the future will result in
continuing  losses  and a  deteriorating  cash  position,  which  will  harm our
business.  In addition,  our cash,  cash  equivalent and  short-term  investment
resources  (collectively,  "cash resources") totaled $16,317,000 as of March 31,
2003 and we used $14,510,000 in our operating  activities  during the year ended
March  31,  2003.  We  anticipate  that  our  operating  activities  will  use a
substantial  portion of our remaining  cash  resources  over the next 12 months.
Absent  a  significant  interim  improvement  in  our  operating  results  or  a
successful  effort  to  raise  additional  capital,  this  will  leave us with a
deteriorated  cash  position in  comparison to our cash position as of March 31,
2003 and this may affect our ability to transact future strategic  operating and
investing  activities,  which may harm our business and cause our stock price to
fall.  In addition,  we may  experience  reluctance  on the part of prospects to
purchase  from us if they believe our  financial  viability is in question.  The
current business  environment is not conducive to raising additional  financing.
If we require  additional  financing,  the terms of such  financing  may heavily
dilute the ownership  interests of current investors,  and cause our stock price
to fall  significantly or we may not be able to secure financing upon acceptable
terms at all.  Accordingly,  our stock price and business'  viability is heavily
dependent upon our ability to grow our revenues and manage our costs in order to
preserve cash resources.

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

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

     o   Submit an application for transfer of our securities for trading to the
         NASDAQ SmallCap Market;
     o   Request a hearing to appeal the delisting notice; or
     o   Have our securities delisted from the NASDAQ National Market.


                                       9
<PAGE>

     We  decided to  initiate  an appeal  process  with  NASDAQ  whereby we have
requested  an  in-person  hearing  with NASDAQ  regulators  to present  relevant
measures the Company is taking in order to improve its operating results and, as
a result,  bolster its stock price to levels  required by NASDAQ.  Should NASDAQ
dismiss our appeal, we believe we will submit an application for transfer to the
NASDAQ SmallCap Market, where we believe we will have at least 180 days from the
date  of  transfer  to  attempt  to  regain  compliance  with  NASDAQ's  listing
requirements.  If we transfer to the NASDAQ SmallCap Market,  we may be eligible
to transfer back to the NASDAQ  National  Market if our bid price  maintains the
$1.00  per  share  requirement  for 30  consecutive  trading  days  and we  have
maintained  compliance with all other  continued  listing  requirements  for the
NASDAQ National Market.

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

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

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

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

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


                                       10
<PAGE>

     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 and/or annual operating results.

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

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

     Our sales contracts are typically based upon standard  agreements that meet
our revenue  recognition  policies.  However,  our future sales may include site
licenses,  professional  services or other  transactions  with customers who may
negotiate  special terms and conditions  that are not part of our standard sales
contracts. In addition,  customers may insist on an extended payment schedule or
may delay  payments to us, which may require us to recognize from sales to those
customers' when amounts become due, rather than upon delivery of our software to
the  customer.  If these special  terms and  conditions  cause sales under these
contracts to not qualify under our revenue recognition  policies, we would defer
revenues to future periods when all revenue recognition  criteria are met, which
may impair our revenues and operating results.

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


                                       11
<PAGE>

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

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

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

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

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

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

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


                                       12
<PAGE>

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

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

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

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

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

     During  the past  several  quarters,  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.  We monitor our expenses closely and benchmark our expenses against
expected   revenues.   Should  our  revenues  not  meet   internal  or  external
expectations  or other  circumstances  arise  that  require  us to better  align
resources required to operate  efficiently in the prevailing market,  additional
restructuring  efforts  will  be  required.  We  believe  workforce  reductions,
management changes and facility consolidation create anxiety and uncertainty and
may adversely affect employee morale.  These measures could adversely affect our
employees  that we wish to retain and may also  adversely  affect our ability to
hire new personnel.  They may also affect customers and/or vendors,  which could
harm our ability to operate as intended and which would harm our business.


                                       13
<PAGE>

     As we have better aligned our resources over the past several quarters,  we
have  consolidated  our  operations  into  facility  space that is less than our
current  facility  commitment,  resulting in excess  operating  lease  capacity.
During the year  ended  March 31,  2003,  we adopted  the  Financial  Accounting
Standards Board's Statement No. 146,  "Accounting for Costs Associated with Exit
and Disposal  Activities"  ("FAS 146"). We consolidated  our space in March 2003
and recorded charges related to our consolidation of approximately $2,239,000 as
FAS 146  requires us to record a charge for excess space as of the date we cease
to use the  space.  This  charge  was our best  estimate  based upon a number of
assumptions and estimates that could prove inaccurate including length of period
that it will take to sublease our excess space,  assumed sublease rate and other
collateral we expect to forfeit to our landlord upon commencement of a sublease.
In addition,  should we continue to have excess  operating lease capacity and we
are unable to find a sublessee at a rate equivalent to our operating lease rate,
we would be required to record  additional  charges for the rental payments that
we owe to our landlord  relating to any excess  facility  capacity,  which would
harm our operating results. Our management reviews our facility requirements and
assesses  whether any excess capacity  exists as part of our on-going  financial
processes.

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

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

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

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

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

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

     Our sales and  marketing  costs are a high  percentage of the revenues from
our orders,  due partly to the expense of developing  leads and relatively  long
sales  cycles  involved  in  selling   products  that  are  not  yet  considered
"mainstream"  technology  investments.  For the years ended March 31, 2003, 2002
and 2001,  sales and marketing  expenses were 91%,  103%,  and 150% of our total
revenues, respectively.


                                       14
<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 53%, 56% and 46% of our total  revenues for the years ended
March  31,  2003,  2002  and  2001,  respectively.  Our  service  revenues  have
substantially lower gross profit margins than our license revenues.  Our cost of
service revenues for the years ended March 31, 2003, 2002 and 2001 were 67%, 94%
and 144% of service  revenues,  respectively.  An increase in the  percentage of
total  revenues  represented  by service  revenues  could  adversely  affect our
overall gross profit margins.

     Service  revenues as a  percentage  of total  revenues  and cost of service
revenues  as a  percentage  of total  revenues  have varied  significantly  from
quarter to quarter due to our relatively  early stage of development.  Recently,
we  have  experienced  an  increase  in  the  percentage  of  license  customers
requesting professional services. We expect that the amount and profitability of
our professional services will depend in large part on:

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

     The relative amount of service revenues as compared to license revenues has
also  varied  based  on  customer  demand  for  our  application  services.  Our
application  services  require a relatively  fixed level of investment in staff,
facilities and equipment.  In the past, we have operated our application service
business  at a loss due to fixed  investments  that  exceeded  actual  levels of
revenues  realized.  We have reduced the application  service fixed  investments
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.

     Service revenues from contracts with federal government  agencies comprised
10% of total  service  revenues  during the year ended March 31, 2003 (less than
10% for the  years  ended  March  31,  2002 and  2001).  Service  revenues  from
contracts  with federal  government  agencies  comprised  less than 10% of total
revenues in each of the years ended March 31,  2003,  2002,  and 2001.  Contract
costs for service revenues to federal  government  agencies,  including indirect
expenses,  are subject to audit and subsequent adjustment by negotiation between
U.S. Government representatives and us. Service revenues are recorded in amounts
expected to be realized upon final settlement and in accordance with our revenue
recognition  policies.  While historically we have had no adverse impact related
to our revenues  from such an audit and believes  that the results of any future
audit  will have no  material  effect on our  financial  position  or results of
operations,  there can be no assurance that no adjustment will be made and that,
if made,  such  adjustment  will not have a  material  effect  on our  financial
position or results of operations (including our gross profit margin).


                                       15
<PAGE>

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

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

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

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

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

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

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

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


                                       16
<PAGE>

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. Although
we  do  not  believe  that  we  are  substantially  dependent  on  any  licensed
technology,  some of the  software  we  license  from  third  parties  could  be
difficult for us to replace.  The loss of any of these  licenses could result in
delays  in the  licensing  of  our  products  until  equivalent  technology,  if
available,  is developed or licensed for potentially higher fees and integrated.
In the event of any such loss,  costs  could be  increased  and delays  could be
incurred,  thereby  harming  our  business.  The use of  additional  third-party
software would require us to negotiate  license  agreements  with other parties,
which  could  result  in  higher   royalty   payments  and  a  loss  of  product
differentiation.  In  addition,  the  effective  implementation  of our products
depends  upon the  successful  operation  of  third-party  licensed  products in
conjunction  with our products,  and therefore  any  undetected  errors in these
licensed  products could prevent the  implementation or impair the functionality
of our products, delay new product introductions and/or damage our reputation.

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

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


                                       17
<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
third party facilities in Santa Clara, California and Palo Alto, California.  We
do not have complete  backup  systems for these  operations.  A problem with, or
failure  of,  our   communications   hardware  or  operations  could  result  in
interruptions  or  increases  in  response  times on the  Internet  sites of our
customers.  Furthermore,  if  these  third  party  partners  fail to  adequately
maintain or operate our  communications  hardware or do not perform our computer
hardware  operations  adequately,  our  services  to our  customers  may  not be
available.  We have  experienced  system  failures in the past. Any  disruptions
could damage our reputation, reduce our revenues or otherwise harm our business.
Our insurance policies may not adequately  compensate us for any losses that may
occur due to any failures or interruptions in our systems.

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

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

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.


                                       18
<PAGE>

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

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

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

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

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

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

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

Item 2.  Properties

     We currently lease approximately  48,000 square feet of our facility in San
Mateo,  California for our principal  administrative,  research and development,
sales, services and marketing activities.  This lease expires in September 2006.
In addition, we lease a property in New York City for services and sales under a
lease that expires in March 2005, a property  near Boston,  Massachusetts  where
the Company performs research and development under a lease that expires in July
2003, a property  near Chicago  where the Company  performs  sales and marketing
activities  that expires in September  2003 and a property near London,  England
where the Company performs sales,  services,  and marketing  activities and that
expires in June 2003.

     In March 2003, we consolidated our employees at our San Mateo headquarters,
leaving  approximately 24,000 square feet available for potential sublease.  Our
lease for this excess property expires in September 2006. See Note 2 of Notes to
Consolidated   Financial   Statements  for   information   regarding  our  lease
obligations.


                                       19
<PAGE>

Item 3.  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.  On  February  19,  2003,  the Court  issued a ruling on the
motions. The Court denied the motions to dismiss the claims under the Securities
Act of 1933.  The Court  granted  the  motions to dismiss  the claims  under the
Securities  Exchange Act of 1934 with prejudice.  We believe we have meritorious
defenses to these claims and intend to defend against 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 4. Submission of Matters to a Vote of Security Holders

     No matters were  submitted to a vote of security  holders during the fourth
quarter of our fiscal year ended March 31, 2003.

Executive Officers of the Registrant

     The following table sets forth certain information  regarding our executive
officers as of June 10, 2003:
<TABLE>
<CAPTION>

                   Name                        Age                         Position
                   ----                        ---                         --------
<S>                                            <C>     <C>
Paul G. Lego.............................      44      President, Chief Executive Officer and Chairman of
                                                       the Board of Directors
Scott C. Gawel...........................      32      Vice President, Finance and Acting Chief
                                                       Financial Officer
Stanford S. Au...........................      43      Vice President, Engineering
David J. Girouard........................      37      Senior Vice President, Marketing and Corporate
                                                       Strategy
Michael H. Lock..........................      40      Senior Vice President, Worldwide Sales
Frank H. Pao.............................      34      Vice President, Business Affairs
</TABLE>


                                       20
<PAGE>

     Paul G.  Lego,  chairman  of the board of  directors,  president  and chief
executive  officer,  joined Virage in January 1996. From January 1995 to January
1996, Mr. Lego was an associate at Sutter Hill Ventures, a venture capital firm.
From June 1988 to December  1994,  Mr. Lego was the chief  operating  officer at
Digidesign, a manufacturer of digital audio recording and editing systems, which
was acquired by Avid  Technology in January 1995. Mr. Lego has also held various
marketing,  manufacturing  and  engineering  positions  with Pyramid  Technology
Corporation, the General Electric Company and Digital Equipment Corporation. Mr.
Lego holds a B.S. in  electrical  engineering  from  Cornell  University  and an
M.B.A. from Harvard Business School.

     Scott C. Gawel has served as our vice  president,  finance and acting chief
financial  officer  since August 2002.  Mr. Gawel joined Virage as the Company's
senior  director of finance and corporate  controller in January 2000.  Prior to
joining Virage, Mr. Gawel worked with a wide array of high technology  companies
while holding  various  staff and  managerial  positions  within Ernst & Young's
Silicon  Valley  practice,  most  recently as an audit  manager.  Mr. Gawel is a
certified  public  accountant  in the state of  California  and holds a B.S.  in
Economics with honors from California  Polytechnic  State  University,  San Luis
Obispo.

     Stanford S. Au, vice president, engineering, joined Virage in January 2002.
Mr. Au came to Virage from AOL-Time Warner's Netscape  Communications,  where he
held various  positions  from 1998 to 2002,  most recently as vice president and
general  manager of AOL's  IBPP  business  unit.  Prior to  Netscape,  he was an
original  member of KIVA  software's  executive  staff,  which was  acquired  by
Netscape.  Mr.  Au has also  held  various  engineering  and  senior  management
positions at Apple Computer, Sun Microsystems, and Hewlett-Packard. Mr. Au holds
a B.S. in electrical  engineering  and computer  science from the  University of
California, Berkeley.

     David J. Girouard, senior vice president, marketing and corporate strategy,
joined  Virage  in May  1997.  Prior to  becoming  our  senior  vice  president,
marketing  and  corporate  strategy,  Mr.  Girouard was our vice  president  and
general manager, Virage Interactive, and was as a director of product marketing.
From  December  1994 to April 1997,  Mr.  Girouard was a product  manager in the
worldwide product  marketing group at Apple Computer.  Mr. Girouard holds a B.A.
in  engineering  sciences and a B.E. from  Dartmouth  College.  He also holds an
M.B.A. from the University of Michigan.

     Michael H. Lock, senior vice president,  worldwide sales,  joined Virage in
January 2001. Prior to joining Virage, Mr. Lock held various sales and marketing
positions at Oracle  Corporation,  most  recently as Vice  President,  Sales and
Marketing,  from 1996 to 2000.  Mr.  Lock also has served in a variety of sales,
marketing and general management positions with IBM, Dun and Bradstreet Software
and Drake  International.  Mr. Lock  received a B.S. in Business  Administration
from Wilfrid Laurier University in Ontario, Canada.

     Frank H. Pao,  vice  president,  business  affairs,  joined Virage in April
1997.  From September 1994 to March 1997,  Mr. Pao  specialized in  intellectual
property  and  licensing  transactions  at the  law  firm of  Gray  Cary  Ware &
Freidenrich.  He  has  also  held  various  engineering  positions  at  Advanced
Cardiovascular Systems and Lawrence Berkeley Laboratories.  Mr. Pao holds a B.S.
in bioengineering  from the University of California at Berkeley and a J.D. from
Boalt Hall School of Law at the University of California at Berkeley.


                                       21
<PAGE>

                                     PART II

Item 5 Market for Registrant's Common Equity and Related Stockholder Matters

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

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

            o  Submit an  application  to  transfer  our  securities  for to the
               NASDAQ SmallCap Market;

            o  Request a hearing to appeal the delisting notice; or

            o  Have our securities delisted from the NASDAQ National Market.

        We initiated an appeal  process with NASDAQ whereby we have requested an
        in-person  hearing with NASDAQ  regulators to present relevant  measures
        the Company is taking in order to improve its operating  results and, as
        a result,  bolster its stock price to levels required by NASDAQ.  Should
        NASDAQ dismiss our appeal,  we believe we will submit an application for
        transfer to the NASDAQ SmallCap Market, where we believe we will have at
        least 180 days from the date of transfer to attempt to regain compliance
        with  NASDAQ's  listing  requirements.  If we  transfer  to  the  NASDAQ
        SmallCap  Market,  we may be  eligible  to  transfer  back to the NASDAQ
        National  Market  if  our  bid  price  maintains  the  $1.00  per  share
        requirement  for 30  consecutive  trading  days  and we have  maintained
        compliance with all other continued listing  requirements for the NASDAQ
        National Market.

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

        The following  high and low closing sales prices were reported by NASDAQ
        in each period indicated:
<TABLE>
<CAPTION>

                                                                   High                      Low
                                                                   ----                      ---
 <S>                                                              <C>                      <C>
        Year Ended March 31, 2003
        -------------------------
             Fourth quarter..........................             $ 0.85                   $ 0.56
             Third quarter...........................             $ 0.98                   $ 0.50
             Second quarter..........................             $ 1.20                   $ 0.50
             First quarter...........................             $ 2.60                   $ 0.75
        Year Ended March 31, 2002
        -------------------------
             Fourth quarter..........................             $ 3.56                   $ 2.00
             Third quarter...........................             $ 3.47                   $ 1.61
             Second quarter..........................             $ 4.15                   $ 1.65
             First quarter...........................             $ 5.90                   $ 1.81
</TABLE>


                                       22
<PAGE>

        The reported last sale price of our common stock on the Nasdaq  National
        Market on June 9, 2003 was $0.98.  The approximate  number of holders of
        record of the  shares of our  common  stock was 220 as of June 9,  2003.
        This number does not include stockholders whose shares are held in trust
        by other  entities.  Because many of our shares of common stock are held
        by brokers  and other  institutions  on behalf of  stockholders,  we are
        unable to estimate the total number of stockholders represented by these
        record holders.

        We have not paid any cash dividends on our capital  stock.  We currently
        intend to retain future  earnings,  if any, to fund the  development and
        growth of our business and, therefore, do not anticipate paying any cash
        dividends  in  the  foreseeable   future.   See  Item  7,  "Management's
        Discussion   and  Analysis  of  Financial   Condition   and  Results  of
        Operations-Liquidity and Capital Resources."

        Equity Compensation Plans

        At March 31,  2003,  common stock  reserved  for future  issuance was as
        follows:

<TABLE>
<CAPTION>

                                                        Number of Securities
                                                         to be Issued upon
                                                            Exercise of           Weighted-      Shares
                                                        Outstanding Options,       Average     Available
                                                        Warrants and Rights    Exercise Price  for Grant
                                                        -------------------    --------------  ---------
<S>                                                            <C>              <C>             <C>
         Equity compensation plans approved
          by stockholders ............................         6,866,805        $       1.96    2,832,050
         Equity compensation plans not approved
          by stockholders ............................         1,200,020        $       2.17       99,980
                                                           -------------                      -----------
            Total.....................................         8,066,825        $       1.99    2,932,030
                                                           =============        ============  ===========
</TABLE>



        Included  in  the  2,832,050  shares  available  for  grant  for  equity
        compensation   plans  approved  by  stockholders  are  1,401,184  shares
        reserved pursuant to the Company's Employee Stock Purchase Plan.

    (b) There has been no change to the  disclosure  contained  in our report on
        Form 10-Q for the nine months ended  December 31, 2002 regarding the use
        of proceeds generated by our initial public offering.


                                       23
<PAGE>
Item 6.  Selected Consolidated Financial Data

                      SELECTED CONSOLIDATED FINANCIAL DATA

     You should read the selected consolidated financial data set forth below in
conjunction  with Item 7,  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations" and our Consolidated  Financial  Statements
and the Notes  thereto  included  elsewhere  in this annual  report.  Historical
results are not  necessarily  indicative of results that may be expected for any
future  period.  Certain prior year balances have been  reclassified  to conform
with current year presentation.
<TABLE>
<CAPTION>
                                                                  Fiscal Years Ended
                                                                       March 31,
                                                ------------------------------------------------------
                                                  2003       2002        2001         2000      1999
                                                --------  ---------- ----------  ---------- ----------
                                                        (in thousands, except per share data)
     Consolidated Statements of Operations Data:
     Revenues:
<S>                                             <C>       <C>        <C>          <C>         <C>
       License revenues........................$  6,029   $ 7,414    $   6,161    $  4,188    $ 1,956
       Service revenues........................   6,900     9,331        5,240       1,373        253
       Other revenues..........................      --        --           --          --      1,141
                                               --------   -------    ---------    --------    -------
              Total revenues...................  12,929    16,745       11,401       5,561      3,350
     Cost of revenues:
       License revenues........................     738       705          723         870        397
       Service revenues........................   4,601     8,760        7,530       2,660        426
       Other revenues..........................      --        --           --          --        859
                                               --------   -------    ---------    --------    -------

              Total cost of revenues...........   5,339     9,465        8,253       3,530      1,682
                                               --------   -------    ---------    --------    -------
     Gross profit..............................   7,590     7,280        3,148       2,031      1,668
     Operating expenses:
       Research and development................   9,248     9,172        9,101       4,182      2,325
       Sales and marketing.....................  11,775    17,301       17,129       8,349      4,362
       General and administrative..............   3,935     4,985        5,298       2,653      1,273
       Stock-based compensation................   1,306     5,113        3,294       1,070         --
                                               --------   -------    ---------    --------    -------
              Total operating expenses.........  26,264    36,571       34,822      16,254      7,960
                                               --------   -------    ---------    --------    -------
     Loss from operations...................... (18,674)  (29,291)     (31,674)    (14,223)    (6,292)
     Interest and other income, net............     554     1,541        2,800         384        123
                                               --------   -------    ---------    --------    -------
     Loss before income taxes.................. (18,120)  (27,750)     (28,874)    (13,839)    (6,169)
     Provision for income taxes................      --        --           --         (36)        --
                                               --------   -------    ---------    ---------   -------
     Net loss.................................. (18,120)  (27,750)     (28,874)    (13,875)    (6,169)
     Series E convertible preferred stock
       dividend................................      --        --           --      (4,544)        --
                                               --------   -------    ---------    ---------   -------
     Net loss applicable to common
       stockholders.........................   $(18,120) $(27,750)   $ (28,874)   $(18,419)   $(6,169)
                                               ========  ========    =========    ========    =======
     Basic and diluted net loss per share
       applicable to common stockholders....   $  (0.87) $  (1.37)   $   (1.88)   $  (8.06)   $ (3.67)
                                               ========  ========    =========    ========    =======
     Shares used in computation of basic and
       diluted net loss per share applicable
       to common stockholders................    20,834    20,327       15,397       2,286      1,679
</TABLE>
<TABLE>
<CAPTION>
                                                                              March 31,
                                                       -------------------------------------------------------
                                                         2003       2002       2001       2000          1999
                                                       --------   --------  ---------  ----------     -------
                                                                             (in thousands)
Consolidated Balance Sheets Data:
<S>                                                    <C>       <C>       <C>        <C>         <C>
Cash, cash equivalents and short-term investments...   $ 16,317  $ 30,694  $ 48,131   $  10,107   $   4,357
Working capital.....................................     11,061    24,077    40,588       8,101       3,879
Total assets........................................     22,318    39,552    60,206      18,872       6,605
Long-term obligations, net of current portion.......         --        --        --          83         241
Redeemable convertible preferred stock..............         --        --        --      36,995      17,936
Accumulated deficit.................................   (107,044)  (88,924)  (61,174)    (32,300)    (13,881)
Total stockholders' equity (net capital deficiency).   $ 13,701  $ 30,059  $ 49,706   $ (23,221)  $ (13,326)
</TABLE>
                                       24
<PAGE>

Item 7. 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.

Fiscal Year 2003 Overview

     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 communication. We sell to the corporate, media and
entertainment, government and educational marketplaces.

Application Products

     During the past year,  we continued to market and sell our new  application
products  that we  introduced  late in our fiscal year ended March 31, 2002:  VS
Webcasting, VS Publishing,  and VS Production. VS Webcasting allows corporations
to  schedule  and manage  live  webcast  events and then easily turn each into a
searchable,  on-demand event. VS Publishing is a complete workflow solution that
allows media and entertainment  companies to turn their content into compelling,
rich media programming for the Internet. VS Production is an integrated software
solution that automates a customer's video  production  process from acquisition
to distribution.

     Though we have  sold  each of these  products  to date,  our VS  Webcasting
product has received the greatest level of interest from its target markets.  We
have  sold  it  into  various  enterprise   environments,   including  financial
institutions, high technology companies, and universities. The VS Publishing and
VS Production  products were released at a later date than VS Webcasting and, as
a result, are newer in the marketplace. To date, VS Publishing and VS Production
have been  sold  into a wide  array of  corporate  and  media and  entertainment
environments,  but have not yet  experienced  the  interest  levels  that our VS
Webcasting  product has. We may discover that the  marketplace  for a product is
not as robust as we had expected. We monitor anticipated market demand and sales
success for our products as we evaluate the allocation and prioritization of our
resources  amongst  our various  product  lines.  We may react to slack  product
demand by leaving the  development  of a product at an early stage or  combining
key features of one or more of our  application  products into a single product.
This may impede market  acceptance of any of our products and therefore hurt our
financial results.

     Our  strategy  of  introducing  an  application  product  suite  has had an
important impact on our business trends. First, our application products bring a
more    readily     identifiable     value    proposition    and    quantifiable
return-on-investment  than our  standard  platform  products.  As a result,  our
application  products command a higher price point with our customers and we are
experiencing a gradual increase in our average license deal size.  Historically,
our  average  license  deal size was in the range of  $50,000  to  $100,000  per
customer. Because of our application products, we are now seeing an average deal
size of over $100,000 per customer.


                                       25
<PAGE>

     Second,  we are seeing a shift in the industry mix of our end users as more
corporate  enterprise customers are purchasing our products and as we experience
weak sales to media and entertainment  companies.  Corporate customers accounted
for 31% of total  revenues  during the year ended  March 31,  2003 versus 24% of
total revenues during the year ended March 31, 2002. Historically, the media and
entertainment marketplace has been our strongest market. Media and entertainment
customers  declined from 44% of total revenues to 21% of total  revenues  during
the years ended March 31, 2002 and 2003, respectively.  We believe the reduction
in revenues from media and  entertainment  customers during the year ended March
31, 2003 is primarily a function of unfavorable global macroeconomic  conditions
affecting a number of our  potential  customers and resulting in weak demand for
information  technology  products.  The corporate  market is our primary  target
market, followed by government, education, and media and entertainment.

     We  continue  to  believe  that the  success of our  application  products,
particularly VS Webcasting,  is critical to our future and have heavily invested
our resources in the  development,  marketing,  and sale of them. The market for
our application  products is in a relatively  early stage. We cannot predict how
much the market  for our  application  products  will  develop,  what our future
average deal sizes will be, or whether our target  industries will  increasingly
adopt our  products,  and part of our  strategic  challenge  will be to convince
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 our application products.

U.S. Government Defense and Security Business

     As a result of an increased focus on national security due primarily to the
September 2001 terrorist  attacks and the war in Iraq, we saw higher demand from
U.S.  Government Defense and Security Agencies,  either from direct arrangements
or subcontracts  with other U.S.  Government  contractors.  We generally perform
these services in conjunction with existing or potential software license sales.
Our  success is due, in large part,  to the efforts of our  Advanced  Technology
Group.   During  fiscal  2003,  our  Advanced  Technology  Group  obtained  over
$1,000,000  in funds for  sophisticated  projects  such as news  monitoring  and
motion  mining.  This funding  represents a 143%  increase  over the $422,000 in
funding signed in fiscal 2002. Service revenues from these agencies  represented
10% of total  service  revenues  in the year ended March 31, 2003 (less than 10%
for the years ended March 31, 2002 and 2001).

Operating Lease Amendment

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

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

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


                                       26
<PAGE>

     In  consideration  for the  above,  we issued  our  landlord  a warrant  to
purchase  200,000 shares of the Company's  common stock at $0.57 per share.  The
fair value of this warrant was determined to be $86,000 and pro-rata amounts are
being  expensed over the earlier of the life of the operating  lease  (September
2006) and the date that we abandoned  certain excess facilities (March 2003). In
addition,  we forfeited  $1,250,000 of  $2,000,000  of  restricted  cash used to
collateralize  a letter of credit.  We also  forgave  approximately  $240,000 of
security  deposits.  The $2,000,000 of restricted  cash and $240,000 of security
deposits were classified as other assets on the Company's  consolidated  balance
sheet at March 31, 2002.

     We  are   obligated  to  forfeit   $750,000  of  restricted   cash,   which
collateralizes  our  obligation  and  is  classified  as  other  assets  on  our
consolidated balance sheet, to our landlord if our landlord is able to lease our
excess  space.  We estimate we will also incur  approximately  $359,000 of other
collateral forfeitures relating to certain provisions set forth within the Lease
Amendment.

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

     We are amortizing the payments and other collateral described above as rent
expense over the life of the lease.  In March 2003,  we abandoned  approximately
half of our headquarters  facility to facilitate the leasing of the excess space
to a third  party.  As a result of this,  we incurred  charges of  approximately
$2,239,000  (including $89,000 of equipment  write-downs)  during the year ended
March 31, 2003. The charges are related to the write-off of  approximately  half
of the unamortized portion of payments and other collateral forfeiture described
above and the  accrual of  approximately  $1,026,000  relating  to the  expected
leasing of the excess space to a third party at a rate that is below the Minimum
Rate guarantee.

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

Business Restructuring Charges

     During  the  year  ended  March  31,  2003,   we   implemented   additional
restructuring  programs to better  align  operating  expenses  with  anticipated
revenues.  We recorded a $3,215,000  restructuring  charge,  which  consisted of
$2,150,000 of excess facility charges  (recorded in our fiscal fourth quarter of
the year ended  March 31,  2003),  $849,000  in  employee  severance  costs (the
significant  majority of which was  recorded  during the three months ended June
30, 2002) and $216,000 in equipment  write-downs across most of the expense line
items in our  consolidated  statement of operations for the year ended March 31,
2003.  The  restructuring  programs  resulted in a reduction in force across all
company  functions of  approximately  50  employees.  At March 31, 2003,  we had
$1,515,000 of accrued  restructuring  costs related to rent for excess  facility
capacity,  and potential  cash  payments and potential  forfeiture of cash-based
collateral in conjunction with the Lease Amendment described above. We expect to
pay out the excess  facility  charges accrued as of March 31, 2003 over the life
of the operating lease,  which runs through September 2006. We expect to forfeit
our  cash-based  collateral  and pay out  cash  payments  related  to our  Lease
Amendment over the course of the next twelve months.

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


                                       27
<PAGE>

     It is difficult  for us to precisely  quantify the material  effects of our
fiscal 2003 restructuring  plans on our future operating results and cash flows.
However,  for the  fourth  quarter  of our  fiscal  2003 our  cost of sales  and
operating expenses totaled $7,842,000  (including non-cash,  stock-based charges
of $356,000 and net charges of $1,413,000) and compared to our cost of sales and
operating expenses during our fourth quarter of fiscal 2002 totaling $12,433,000
(including non-cash,  stock-based charges of $3,865,000 and other net charges of
$396,000).  Excluding  non-cash,  stock-based  charges  and  other  net  charges
totaling $1,769,000 and $4,261,000 during our fiscal fourth quarters ended March
31, 2003 and 2002, respectively,  our total cost of sales and operating expenses
totaled  $6,073,000 and $8,172,000 during our fiscal fourth quarters ended March
31, 2003 and 2002, respectively. We believe these numbers are useful in order to
calculate the decrease in our expenses associated with our restructuring  plans.
Based upon the previous,  we believe our restructuring  plans implemented during
fiscal 2003 will reduce our total  expenses and cash usage on an annual basis in
comparison to our expense rate and cash usage prior to implementing these plans.
The significant majority of these expense reductions are cash based.

     The following  table  depicts the  restructuring  activity  during the year
ended March 31, 2003 (in thousands):
<TABLE>
<CAPTION>

                                                                  Expenditures
                              Balance at                      -------------------                     Balance at
        Category            March 31, 2002    Additions       Cash       Non-cash    Adjustments    March 31, 2003
        --------            --------------    ---------       ----       --------    -----------    --------------
<S>                         <C>               <C>           <C>         <C>           <C>             <C>
  Excess facilities and
      other exit costs.....  $   504          $   2,150      $1,073     $     --      $     66        $     1,515
  Employee severance.......      259                849       1,108           --            --                 --
  Equipment write-downs....       --                216          --          216            --                 --
                            --------          ---------     -------     --------      --------        -----------
      Total................ $    763          $   3,215     $ 2,181     $    216      $     66        $     1,515
                            ========          =========     =======     ========      ========        ===========
</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 and the restructuring
of our San Mateo  office  lease  (see  "Operating  Lease  Amendment"  discussion
above).  Cash expenditures for excess facilities and other exit costs during the
year ended March 31, 2003  represent  the  forfeiture  of security  deposits and
other  cash-based  collateral,  and contractual  ongoing lease  payments.  It is
management's  best  estimate  that we will not be able to recoup the losses from
our lease rental payments recorded as excess facilities by earning a profit from
a sub  lessee at some  point over the  course of our  obligation  period,  which
continues through  September 2006. The current  commercial real estate market in
Northern  California is poor for  sublessors  looking for tenants,  and while we
will make every attempt to secure a sublease,  we believe that we will be unable
to sublease this additional  space at a rate that is consistent with the Minimum
Rate described  above. We have made a number of  assumptions,  such as length of
time required to engage a sublessee, and estimates, such as the assumed sublease
rate, in deriving the  accounting  for our lease  amendment and excess  facility
space. Our assumptions and estimates are based upon the best information that we
have at the time any charges are derived. There are a number of external factors
outside of our control that could prove our assumptions and estimates materially
inaccurate and require us to record  additional  charges in future  periods.  We
monitor  all of these  external  factors and the impact on its  assumptions  and
estimates as part of our on-going financial processes.

     Employee Severance:  Employee severance, which includes severance payments,
related taxes,  outplacement and other benefits,  totaled approximately $849,000
during the year ended March 31, 2003  (representing  approximately 50 terminated
employees),  and  $1,108,000  was paid in cash  during the year ended  March 31,
2003. Personnel affected by the cost reduction initiatives during the year ended
March 31, 2003 include  employees in positions  throughout the company in sales,
marketing,  services,  engineering,  and general and administrative functions in
all geographies.


                                       28
<PAGE>

     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.  We also abandoned certain areas of our
headquarters'  facility  in March 2003 and were  required to  write-off  certain
tenant  improvements and excess  furniture.  The combination of these two events
resulted in a write-off of  approximately  $216,000 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.

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,  provisions  for revenue  adjustments  and
doubtful accounts,  and the accounting and related estimates for our commitments
and contingencies.

Revenue Recognition

     We enter into  arrangements  for the sale of licenses of software  products
and  related  maintenance  contracts,   application  services  and  professional
services   offerings.   Service   revenues  include  revenues  from  maintenance
contracts,   application   services,   and  professional   services,   including
professional  services  performed  directly for and via subcontract for the U.S.
Government.


                                       29
<PAGE>

     Our revenue recognition policy is in accordance with the American Institute
of Certified Public Accountants'  ("AICPA") Statement of Position No. 97-2 ("SOP
97-2"), "Software Revenue Recognition",  as amended by Statement of Position No.
98-4,   "Deferral  of  the  Effective  Date  of  SOP  97-2,   "Software  Revenue
Recognition"" ("SOP 98-4"), and Statement of Position No. 98-9, "Modification of
SOP No.  97-2 with  Respect to Certain  Transactions"  ("SOP  98-9") and is also
consistent  with the  Securities  and  Exchange  Commission's  Staff  Accounting
Bulletin  No. 101,  "Revenue  Recognition  in  Financial  Statements."  For each
arrangement,  we determine whether evidence of an arrangement  exists,  delivery
has occurred,  the fee is fixed or determinable,  and collection is probable. If
any of these  criteria are not met,  revenue  recognition is deferred until such
time as all criteria are met. We consider all  arrangements  with payment  terms
longer than normal not to be fixed and  determinable.  Our normal  payment terms
are generally  considered to be "net 30 days" to "net 60 days." For arrangements
involving  extended  payment terms,  revenue  recognition  generally occurs when
payments become due provided all other revenue recognition  criteria are met. No
customer  has the  right  of  return  and  arrangements  generally  do not  have
acceptance criteria. If right of return or customer acceptance does exist within
an arrangement, revenue is deferred until the earlier of the end of the right of
return/acceptance period or until written notice of  acceptance/cancellation  of
right of return is received from the customer.

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

     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,  (3) the services do not include significant  alterations
to the  features  and  functionality  of the  software  and (4) the services are
deemed  "perfunctory"  both in level of effort to perform  and in  magnitude  of
dollars  based  upon our  objective  evidence  of fair  value  for the  services
relative to the total arrangement fee.


                                       30
<PAGE>

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

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

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

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

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

     Service revenues from contracts with federal government  agencies comprised
10% of total  service  revenues  during the year ended March 31, 2003 (less than
10% for the  years  ended  March  31,  2002 and  2001).  Service  revenues  from
contracts  with federal  government  agencies  comprised  less than 10% of total
revenues in each of the years ended March 31,  2003,  2002,  and 2001.  Contract
costs for service revenues to federal  government  agencies,  including indirect
expenses,  are subject to audit and subsequent adjustment by negotiation between
U.S. Government representatives and us. Service revenues are recorded in amounts
expected to be realized upon final  settlement  and in  accordance  with revenue
recognition  policies described above. While historically we have had no adverse
impact  related to our revenues from such an audit and believes that the results
of any future audit will have no material  effect on our  financial  position or
results of operations, there can be no assurance that no adjustment will be made
and  that,  if made,  such  adjustment  will not have a  material  effect on our
financial position or results of operations.


                                       31
<PAGE>

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

Allowance for Revenue Adjustments and Doubtful Accounts

     If we determine  that payment from the customer is not probable at the time
all other revenue  recognition  criteria (as described  above) have been met, we
defer  revenues  until  payment  from the  customer  is  received.  We also make
judgments as to our ability to collect  outstanding  receivables  (that have not
been  deferred)  and provide an allowance  for the portion of  receivables  when
collection  becomes  doubtful.  We also  provide an  allowance  for  returns and
revenue  adjustments  in the same period as the related  revenues are  recorded.
Allowances are made based upon a specific review of all significant  outstanding
invoices.  Allowances  recorded offset the Company's  gross accounts  receivable
balance.  Allowances totaled $502,000 and $1,153,000 at March 31, 2003 and 2002,
respectively.

Restructuring Costs

     During the years  ended  March 31,  2003 and 2002,  we  undertook  plans to
restructure  our  operations  in  order  to  reduce  operating   expenses.   Our
restructuring  expenses have included  excess  facilities,  employee  severance,
asset write-downs and other exit costs. Given the significance of, and timing of
the execution of such activities,  this process is complex and involves periodic
reassessments  of estimates  made at the time the original  decisions were made.
Our  restructuring  expenses involved  significant  estimates made by management
using the best  information  available at the time that the estimates were made,
some of  which  were  based  upon  information  provided  by third  parties.  We
continually  evaluate  the  adequacy  of the  remaining  liabilities  under  our
restructuring  initiatives.  Although we believe that these estimates accurately
reflect the costs of our restructuring plans, actual results may differ, thereby
requiring  us to record  additional  provisions  or  reverse  a portion  of such
provisions.

     As  discussed  in Note 2 of  Notes  to  Consolidated  Financial  Statements
included in Part II, Item 8, hereof, we have recorded significant  restructuring
expenses in connection with our abandonment of certain leased facilities.  These
excess  facility costs were estimated to include  remaining  lease  liabilities,
forfeiture of certain  collateral  pursuant to our lease amendment and brokerage
fees offset by estimated  sublease income.  Estimates  related to sublease costs
and income are based on  assumptions  regarding the period  required to sublease
the  facilities  and the likely  sublease  rates.  These  estimates are based on
market trend  information  analyses provided by commercial real estate brokerage
firms retained by us. We review these  estimates  each reporting  period and, to
the extent that our assumptions change, adjustments to the restructuring accrual
are recorded.  If the real estate market continues to worsen and we are not able
to sublease the properties as early as, or at the rates  estimated,  the accrual
will be increased,  which would result in additional  restructuring costs in the
period  in  which  such  determination  is  made.  If  the  real  estate  market
strengthens  and we are  able to  sublease  the  properties  earlier  or at more
favorable  rates than  projected,  the  accrual  may be  decreased,  which would
increase net income in the period in which such determination is made.

Commitments and Contingencies

     In the  normal  course of  business,  we are  subject  to  commitments  and
contingencies,  including operating leases, restructuring liabilities, and legal
proceedings   and  claims  that  cover  a  wide  range  of  matters,   including
securities-related  litigation  and other  claims.  We 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.


                                       32
<PAGE>

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

Results of Operations

     The following table sets forth consolidated  financial data for the periods
indicated,  expressed  as a percentage  of total  revenues.  Certain  prior year
balances have been reclassified to conform with current year presentation.

                                                Fiscal Years Ended
                                                     March 31,
                                              2003     2002      2001
                                            -------  -------   ------
Revenues:
  License revenues......................       47%      44%       54%
  Service revenues......................       53       56        46
                                             ----     ----      ----
          Total revenues................      100      100       100
                                             ----     ----      ----
Cost of revenues:
  License revenues......................        6        4         6
  Other revenues........................       35       53        66
                                             ----     ----      ----
          Total cost of revenues........       41       57        72
                                             ----     ----      ----
Gross profit............................       59       43        28
Operating expenses:
  Research and development..............       72       55        80
  Sales and marketing...................       91      103       150
  General and administrative............       30       30        47
  Stock-based compensation..............       10       30        29
                                             ----     ----      ----
          Total operating expenses......      203      218       306
                                             ----     ----      ----
Loss from operations....................     (144)    (175)     (278)
Interest and other income, net..........        4        9        25
                                             ----     ----      ----
Net loss................................     (140)%   (166)%    (253)%
                                             ====     ====      ====


     We incurred net losses of $18,120,000,  $27,750,000, and $28,874,000 during
the three years ended March 31, 2003, 2002, and 2001, respectively.  As of March
31, 2003, we had an accumulated  deficit of $107,044,000.  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.  Any historic revenue growth rates are not necessarily  sustainable
or indicative of any future growth.

Revenues

     The  following  table sets forth a breakdown  of our revenues for the years
ended March 31, 2003 (fiscal  2003),  2002 (fiscal 2002) and 2001 (fiscal 2001),
with changes  expressed in whole dollar amounts and  percentages  versus results
from the  immediately  preceding  fiscal year.  Certain prior year balances have
been  reclassified  to conform  with  current  year  presentation  (all  amounts
presented are in thousands, except percentages):
<TABLE>
<CAPTION>

                                             Increase/(Decrease)                      Increase/(Decrease)
                                               vs. Prior Year                           vs. Prior Year
                              Year Ended     ------------------      Year Ended        ----------------     Year Ended
                            March 31, 2003   Amount     Percent     March 31,2002     Amount    Percent   March 31, 2001
                               ----------  ---------    -------     -------------    --------   -------   --------------
<S>                             <C>        <C>             <C>       <C>             <C>            <C>    <C>
License revenues..............  $  6,029   $  (1,385)      (19)%     $      7,414    $  1,253       20%    $       6,161

Customer support revenues.....     2,737          83         3%             2,654         901       51%            1,753
Professional service revenues.     2,200        (345)      (14)%            2,545       2,401    1,667%              144
Application service revenues..     1,963      (2,169)      (53)%            4,132         789       24%            3,343
                                ---------  ---------                 ------------    --------              -------------
 Total service revenues.......     6,900      (2,431)      (26)%            9,331       4,091       78%            5,240
                                ---------  ---------                 ------------    --------              -------------
  Total revenues..............  $ 12,929   $  (3,816)      (23)%     $     16,745    $  5,344       47%    $      11,401
                                ========   =========    ========     ============    ========   =======    =============
</TABLE>


                                       33
<PAGE>

Fiscal 2003 Revenues vs. Fiscal 2002 Revenues

     Total revenues  decreased to $12,929,000 in fiscal 2003 from $16,745,000 in
fiscal  2002, a decrease of  $3,816,000  or 23%.  This  decrease was a result of
decreases in license,  professional  service,  and application service revenues,
and was slightly offset by increases in customer support revenues. International
revenues decreased in absolute dollars to $3,285,000,  or 25% of total revenues,
in fiscal 2003 from $3,997,000,  or 24% of total revenues, in fiscal 2002. There
were no customers who  accounted  for more than 10% of total  revenues in fiscal
2003. One customer accounted for 14% of total revenues in fiscal 2002.

     License revenues  decreased to $6,029,000 in fiscal 2003 from $7,414,000 in
fiscal 2002, a decline of $1,385,000 or 19%. This decrease was a result of lower
sales of our platform products and was offset in part by increased revenues from
our application products.  The lower sales performance for our platform business
during  fiscal 2003  resulted  primarily  from weak  technology  spending by our
target markets in the United States and abroad, causing delays in the closure of
deals for our  platform  license  products or a  reduction  in the size of those
deals. The reduction in our platform license revenues also stemmed from the loss
of a reseller that sold our platform products.  In late fiscal 2002, our largest
commercial,  platform  reseller  announced  that it would divest its business in
which our products  were most  compatible.  This  reseller was  responsible  for
$1,280,000 and $1,015,0000 of platform  license  revenues during fiscal 2002 and
2001, respectively (none during fiscal 2003).

     We believe that our platform products remain an important  component of our
business and have invested resources in the enhancement of this product line. We
are working on the next  generation  of our platform  products  and  continually
evaluate the level of research and development and sales and marketing resources
we  allocate  to these  products.  We hope to see  improved  performance  in our
platform business during our fiscal 2004, but cannot predict what our sales will
be or whether the overall economy will improve our revenue results in this area.

     The decline in platform  license  revenues was offset by increased sales of
our  application  products,  particularly  VS  Webcasting.  As  discussed in the
"Fiscal Year 2003 Overview"  section,  above, we have  experienced  some initial
demand  for our VS  Webcasting  product  and,  to a  lesser  extent,  for our VS
Publishing and VS Production applications, driving revenue growth in this area.

     Service revenues  decreased to $6,900,000 in fiscal 2003 from $9,331,000 in
fiscal 2002, a decrease of $2,431,000 or 26%. Customer support revenues remained
relatively  flat year over year. We  experienced a number of existing  customers
renew their  support  agreements  with us during  fiscal 2003.  These  renewals,
combined  with  the  significant   majority  of  our  new  customers  purchasing
maintenance  contracts,  resulted in our  customer  support  revenues  remaining
relatively  flat,  despite a  decline  in  license  revenues.  Professional  and
application service revenues declined 14% and 53%, respectively,  in fiscal 2003
in comparison to fiscal 2002.  Professional service revenues typically correlate
with fluctuations in our license business as consulting contracts are frequently
signed upon the purchase of our  software.  Consistent  with the decrease in our
license  revenues  in fiscal  2003,  we  generated  lower  professional  service
revenues from our commercial customers. These decreases were partially offset by
an  increase  in  revenues  earned  from  defense  related  entities of the U.S.
Government,  resulting in these  agencies  comprising  10% of our total  service
revenues in fiscal 2003.  The decline in  application  service  revenues  during
fiscal 2003 is due to lower revenues from Major League  Baseball  Advanced Media
("MLBAM"), which accounted for 14% of total revenues during the year ended March
31, 2002. We completed our application  services contract with MLBAM in the year
ended  March 31, 2002 and were unable to reach  mutually  agreeable  terms for a
renewal. Application service revenues in fiscal 2002 include $648,000 of warrant
amortization recorded as contra-service revenues resulting from a warrant issued
to MLBAM.


                                       34
<PAGE>

Fiscal 2002 Revenues vs. Fiscal 2001 Revenues

     Total revenues  increased to $16,745,000 in fiscal 2002 from $11,401,000 in
fiscal  2001,  an  increase  of  $5,344,000  or 47%.  This  increase  was due to
increases in all revenue streams.  International  revenues increased in absolute
dollars to $3,997,000, or 24% of total revenues, in fiscal 2002 from $3,341,000,
or 29% of total  revenues,  in fiscal 2001.  One customer  accounted  for 14% of
total  revenues in fiscal 2002.  There were no customers  who accounted for more
than 10% of total revenues in fiscal 2001.

     License revenues  increased to $7,414,000 in fiscal 2002 from $6,161,000 in
fiscal 2001.  This increase was a result of higher unit sales of our SmartEncode
and Virage Solution Server products (our platform products).

     Service revenues  increased to $9,331,000 in fiscal 2002 from $5,240,000 in
fiscal 2001, an increase of $4,091,000 or 78%. The increase in service  revenues
is  attributable  to increases  in customer  support,  professional  service and
application  service  revenues.  Customer support  revenues  increased due to an
increase in license  revenues as customer  support  contracts  are sold with the
significant  majority of our license deals.  In addition,  the customer  support
business was able to renew customer support  contracts with a number of existing
customers in fiscal 2002. We began to offer professional services as an offering
in late fiscal 2001 and were  successful  in promoting  and selling the business
during fiscal 2002, causing a significant  increase in revenues in this area. We
also experienced an increase in revenues generated from U.S. Government entities
during fiscal 2002.  The growth in  application  service  revenues was primarily
attributable  to higher  revenues from MLBAM,  which  accounted for 14% of total
revenues during the year ended March 31, 2002.  Service  revenues in fiscal 2002
include $648,000 of warrant  amortization  recorded as  contra-service  revenues
resulting from a warrant issued to MLBAM.

Cost of Revenues

     The  following  table  sets  forth a  breakdown  of our  different  cost of
revenues for fiscal 2003, fiscal 2002 and fiscal 2001, with changes expressed in
whole  dollar  amounts  and  percentages  versus  results  from the  immediately
preceding  fiscal year.  Certain prior year balances have been  reclassified  to
conform with current year  presentation (all amounts presented are in thousands,
except percentages):
<TABLE>
<CAPTION>

                                              Increase/(Decrease)                     Increase/(Decrease)
                                                vs. Prior Year                          vs. Prior Year
                                Year Ended    -------------------     Year Ended      -------------------   Year Ended
                              March 31, 2003    Amount    Percent   March 31, 2002     Amount   Percent   March 31, 2001
                              --------------   --------   -------   --------------    --------  -------   --------------
<S>                           <C>              <C>           <C>     <C>              <C>         <C>      <C>
Cost of license revenues....  $          738   $     33        5%    $         705    $   (18)       (3)%  $          723
Cost of customer
   support revenues.........             851        249       41%              602        126        27%              476
Cost of professional
   service revenues..........          1,978        (79)      (4)%           2,057      1,888     1,117%              169
Cost of application
   service revenues..........          1,772     (4,329)     (71)%           6,101       (784)      (11)%           6,885
                              --------------   --------              -------------    -------              --------------
 Total cost of service
   revenues....................        4,601     (4,159)     (48)%           8,760      1,230        16%            7,530
                              --------------   --------              -------------    -------              --------------
  Total cost of revenues....  $        5,339   $ (4,126)     (44)%   $       9,465    $ 1,212        15%   $        8,253
                              ==============   ========   ======     =============    =======   ========   ==============

License gross profit........              88%                                   90%                                    88%
Customer support
   gross profit................           69%                                   77%                                    73%
Professional service
   gross profit................           10%                                   19%                                    17%
Application service gross
  profit/(loss).............              10%                                  (48)%                                 (106)%
  Total service gross profit              33%                                    6%                                   (44)%
    Total gross profit......              59%                                   43%                                    28%
                                          ===                                 =====                                  =====
</TABLE>


                                       35
<PAGE>


Fiscal 2003 Cost of Revenues vs. Fiscal 2002 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,  related  overhead,  communication  expenses  and
capital equipment  depreciation costs for maintenance and support activities and
application  and  professional  services.  Total cost of revenues  decreased  to
$5,339,000,  or 41% of total revenues, in fiscal 2003 from $9,465,000, or 57% of
total revenues,  in fiscal 2002. This decrease in total cost of revenues was due
primarily to a significant decrease in the cost of application service revenues.
We generally  expect that  increases  or  decreases in the dollar  amount of our
total cost of revenues will  correlate with increases or decreases in the dollar
amount of our total  revenues.  However,  our total cost of  revenues  is highly
variable and has, in the past, been inconsistent with our expectations.

     Cost of license revenues increased to $738,000, or 12% of license revenues,
in fiscal 2003 from $705,000,  or 10% of license revenues,  in fiscal 2002. This
increase 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  $4,601,000,  or 67% of  service
revenues,  in fiscal 2003 from $8,760,000,  or 94% of service revenues in fiscal
2002. This decrease was a result of reductions in the cost of  professional  and
application  service revenues,  and was slightly offset by increases in the cost
of customer support revenues. The cost of customer support revenues increased by
41% year over year,  primarily  due to the  allocation  of the  one-time  charge
recorded in connection with our  restructured  headquarters  lease (as discussed
under "Operating  Lease Amendment"  above) as we allocate rent expense to all of
our departments. Cost of professional service revenues declined as we moderately
reduced  headcount  over the year in  response  to  lower  professional  service
revenues.  The decrease in the cost of  application  service  revenues of 71% is
attributable  to the  termination  of  our  relationship  with  MLBAM,  and  the
subsequent removal of the costs and infrastructure we had implemented to service
this customer.  We expect our cost of service revenues to remain in the range of
relatively  flat to a slight  decrease  in absolute  dollars in the  foreseeable
future as we continue  our efforts to control  costs and  maintain  gross profit
margins in this area.

Fiscal 2002 Cost of Revenues vs. Fiscal 2001 Cost of Revenues

     Total cost of revenues  increased to $9,465,000,  or 57% of total revenues,
in fiscal 2002 from $8,253,000,  or 72% of total revenues,  in fiscal 2001. This
increase in total cost of revenues was due to an increase in the cost of service
revenues, slightly offset by a decrease in the cost of license revenues.

     Cost of license revenues decreased to $705,000, or 10% of license revenues,
in fiscal 2002 from $723,000,  or 12% of license revenues,  in fiscal 2001. This
decrease was due to slightly  lower unit sales of our products  that are subject
to unit-based (rather than fixed-fee) license royalty payments in fiscal 2002 in
comparison to fiscal 2001.

     Cost  of  service  revenues  increased  to  $8,760,000,  or 94% of  service
revenues, in fiscal 2002 from $7,530,000,  or 144% of service revenues in fiscal
2001.  This increase in absolute  dollars was due primarily to  expenditures  to
develop the professional services organization during the year.


                                       36
<PAGE>

Operating Expenses

     The  following  table sets forth a  breakdown  of our  different  operating
expenses for fiscal 2003, fiscal 2002 and fiscal 2001, with changes expressed in
whole  dollar  amounts  and  percentages  versus  results  from the  immediately
preceding  fiscal  year  (all  amounts   presented  are  in  thousands,   except
percentages):
<TABLE>
<CAPTION>


                                              Increase/(Decrease)                   Increase/(Decrease)
                                                vs. Prior Year                        vs. Prior Year
                                Year Ended    --------------------    Year Ended    -----------------     Year Ended
                              March 31, 2003     Amount    Percent   March 31,2002   Amount   Percent   March 31, 2001
                              --------------  -----------  -------   -------------  --------  -------   --------------
<S>                           <C>              <C>            <C>      <C>           <C>           <C>   <C>
Research and development...   $        9,248   $       76       1%     $     9,172   $    71       1%    $        9,101
Sales and marketing........           11,775       (5,526)    (32)%         17,301       172       1%            17,129
General and administrative.            3,935       (1,050)    (21)%          4,985      (313)     (6)%            5,298
Stock-based compensation...            1,306       (3,807)    (75)%          5,113     1,819      55%             3,294
                              --------------   ----------              -----------   -------             --------------
 Total operating expenses..   $       26,264   $  (10,307)    (28)%    $    36,571   $ 1,749       5%    $       34,822
                              ==============   ==========  =======     ===========   =======   ======    ==============
</TABLE>

     Research  and  Development  Expenses.  Research  and  development  expenses
consist  primarily of personnel and related costs for our  development  efforts.
Increases in fiscal 2003 and fiscal 2002 were due to increases in our facilities
expenses for our research and development  departments of $739,000 and $823,000,
respectively,   due  to  an  increase  in  our  rental   rates  and   facilities
restructuring charges for each of these periods.  These increases were offset by
modest  reductions of our research and development  headcount in fiscal 2003 and
fiscal  2002,  resulting  in a  reduction  of payroll  and  related  expenses of
approximately $569,000 and $519,000,  respectively, in comparison to fiscal 2002
and fiscal 2001,  respectively.  As a result of these  increases and  decreases,
research and  development  expenses  remained  relatively  flat from fiscal 2001
through fiscal 2003. We expect research and development  expenses to decrease in
the next fiscal year as we spent  considerable  effort  managing  headcount  and
other costs during  fiscal 2003,  and expect to realize  those  savings over the
course of fiscal 2004. To date, we have not capitalized any software development
costs  as  they  have  been  insignificant   after  establishing   technological
feasibility.

     Sales and  Marketing  Expenses.  Sales and  marketing  expenses  consist of
personnel  and related costs for our direct sales force,  pre-sales  support and
marketing staff, and  discretionary  marketing  programs  including trade shows,
telemarketing campaigns and seminars.  Sales and marketing expenses decreased to
$11,775,000,  or 91% of total revenues, in fiscal 2003 from $17,301,000, or 103%
of total revenues,  in fiscal 2002. The decrease was primarily due to reductions
in  headcount,  resulting in savings of $2,729,000 in comparison to fiscal 2002,
and  discretionary  marketing  spending,  resulting in savings of  $1,743,000 in
comparison  to  fiscal  2002.   Sales  and  marketing   expenses   increased  to
$17,301,000, or 103% of total revenues, in fiscal 2002 from $17,129,000, or 150%
of total  revenues,  in fiscal  2001.  The  increase  in  absolute  dollars  was
primarily due to an increase in facilities  expenses for our sales and marketing
departments  of  $676,000  (a  result of an  increase  in our  rental  rates and
facilities   restructuring   charges)   and  was   partially   offset  by  lower
discretionary  marketing  spending of $637,000.  We expect  sales and  marketing
expenses to  decrease  during  fiscal  2004 as we continue  our efforts to limit
overall expense growth for the company and to focus our marketing  activities in
specific areas, particularly with respect to our new application products.


                                       37
<PAGE>

     General and Administrative  Expenses.  General and administrative  expenses
consist   primarily  of  personnel  and  related  costs  for  general  corporate
functions,  including finance, accounting,  legal, human resources,  facilities,
costs of our external audit firm and costs of our outside legal counsel. General
and administrative  expenses decreased to $3,935,000,  or 30% of total revenues,
in fiscal 2003 from  $4,985,000 or 30% of total  revenues,  in fiscal 2002.  The
decrease in  absolute  dollars was  primarily  due to lower  payroll and related
expenses of $563,000,  reduced  professional  services  fees of $294,000,  and a
reduction  in our bad debt  reserve  of  $365,000.  General  and  administrative
expenses decreased to $4,985,000,  or 30% of total revenues, in fiscal 2002 from
$5,298,000 or 47% of total revenues,  in fiscal 2001. The decrease was primarily
due to lower headcount and related costs of $584,000,  and reduced  professional
services fees of $221,000, and was partially offset by an increase in facilities
expenses for our general and administrative departments of $552,000 (a result of
an increase in our rental rates and facilities restructuring charges). We expect
general and  administrative  expenses to be in the range of relatively flat to a
modest  increase  during fiscal 2004 as the cost benefits we expect receive from
our fiscal  2002 and 2003  restructuring  programs  in fiscal 2004 are offset by
increasing  internal and external  expenses  required for compliance with recent
legislation such as the Sarbanes-Oxley Act.

     Stock-Based  Compensation  Expense. We follow the intrinsic value method of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB Opinion No. 25"), in accounting for our employee stock options
because the  alternative  fair value  accounting  provided  for under the FASB's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing  employee stock options.  Under APB Opinion No. 25,
compensation  expense is based on the difference,  if any, on the date of grant,
between the estimated fair value of the Company's  common stock and the exercise
price.  Stock based  compensation  expense  represents the  amortization of this
deferred compensation for stock options granted to our employees.  We recognized
stock-based  compensation  expense of  $1,306,000,  $5,113,000 and $3,294,000 in
fiscal 2003,  2002 and 2001,  respectively,  in connection  with the granting of
stock options to our employees.  Our stock-based  compensation expense increased
in fiscal 2002 due to the  cancellation  of stock options and recognition of the
related  remaining  unamortized  deferred  stock  compensation   resulting  from
participation  in our voluntary stock option  cancellation  and re-grant program
for our employees.  Stock-based  compensation expense subsequently  decreased in
fiscal  2003  due  to  the   immediate   expensing   of  the   majority  of  our
employee-related  deferred compensation in our fourth fiscal quarter of 2002. 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, and expect these charges to taper off significantly in the
December 2003 quarter.

     Interest and Other Income,  Net.  Interest and other income,  net, includes
interest  income  from cash and cash  equivalents  offset  (in  fiscal  2001) by
interest  on capital  leases  and bank debt.  Interest  and other  income,  net,
decreased  to  $554,000  in fiscal  2003  from  $1,541,000  in  fiscal  2002 and
$2,800,000 in fiscal 2001.  The decreases  were a result of lower interest rates
and lower average cash balances during fiscal 2003, 2002 and 2001.

     Provision  for Income  Taxes.  We have not recorded a provision for federal
and state or foreign  income taxes in fiscal 2003,  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  March  31,  2003,  we had  cash,  cash  equivalents  and  short-term
investments of  $16,317,000,  a decrease of $14,377,000  from March 31, 2002 and
our working  capital,  defined as current assets less current  liabilities,  was
$11,061,000,  a decrease of $13,016,000 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 operating activities.


                                       38
<PAGE>

     Our  operating  activities  resulted in net cash  outflows of  $14,510,000,
$17,871,000,  and $16,863,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.  The cash used in these periods was primarily  attributable to net
losses of $18,120,000, $27,750,000, and $28,874,000 in the years ended March 31,
2003, 2002 and 2001, respectively,  offset by depreciation,  losses on disposals
of assets, and non-cash, stock-based charges.

     Investing activities resulted in cash inflows of $12,567,000 and $1,968,000
for the years ended March 31, 2003 and 2002, respectively,  and cash outflows of
$34,770,000  for the year ended  March 31,  2001.  Our  investing  inflows  were
primarily from the maturity of our short-term  investments and our outflows were
primarily for the purchase of short-term  investments and capital equipment.  We
expect that we will  continue to invest in short-term  investments  and purchase
capital equipment as we replace older equipment with newer models.

     Financing activities provided net cash inflows of $291,000,  $809,000,  and
$61,206,000 during the years ended March 31, 2003, 2002, and 2001, respectively.
These inflows were  primarily  from the proceeds of our employee  stock purchase
plan during  fiscal 2003 and 2002 and from sales of our common stock  (including
our IPO) during fiscal 2001.

     At March 31, 2003,  we have  contractual  and  commercial  commitments  not
included on our balance  sheet for our San Mateo,  California  facility  that we
have an obligation to lease through September 2006, for royalty  commitments and
for other  business  commitments.  Future full fiscal  year  commitments  are as
follows:  $3,188,000  in  2004,  $1,972,000  in  2005,  $1,715,000  in 2006  and
$1,057,000 in 2007  ($7,932,000 in total  commitments as of March 31, 2003). The
aforementioned  amounts include our best estimate of expected fair market rental
rates  in  fiscal  years  ending  March  31,  2004 to March  31,  2007 and if we
underestimate  these fair market  rental  rates,  the amount of our  contractual
commitments will increase.  The aforementioned  amounts also include payments of
cash and forfeiture of other  collateral of $1,000,000 for the year ending March
31,  2004,  pursuant  to  our  Lease  Amendment   described  above.   Additional
information regarding our contractual and commercial  commitments is provided in
Note 2 of our  Consolidated  Financial  Statements and Notes thereto included in
Part II, Item 8, of this Annual Report.

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

     Although  our existing  cash,  cash  equivalents  and  investments  will be
sufficient to meet our  anticipated  cash needs for working  capital and capital
expenditures for the next 12 months,  higher than anticipated expenses and lower
than  anticipated  receipts  may  result in lower  cash,  cash  equivalents  and
investments balances than presently  anticipated and we may find it necessary to
obtain  additional  equity  or debt  financing.  We may  not be  able to  obtain
adequate or favorable financing when necessary to fund our business.  Failure to
raise capital when needed could harm our business.  If we raise additional funds
through the issuance of equity  securities,  the  percentage of ownership of our
stockholders would be reduced.  Furthermore,  these equity securities might have
rights, preferences or privileges senior to our common stock.


                                       39
<PAGE>

Recent Accounting Pronouncements

     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")."  Pursuant to FAS 146,  companies  will record exit or
disposal costs when they are  "incurred" and can be measured at fair value,  and
are also required to subsequently  adjust the recorded  liability for changes in
estimated cash flows.  Liabilities that a company previously recorded under EITF
94-3 are grandfathered.  We adopted FAS 146 during the year ended March 31, 2003
and recorded certain charges related to excess space as of the date it ceased to
use the space.  Based upon the facts and  circumstances  around  charges that we
historically  have been required to record,  we believe that the adoption of FAS
146 may  affect  the  timing  of,  but  ultimately  will not  have a  materially
different impact on, our operations, financial position or cash flows.

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

     In December  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others  ("FIN 45")." FIN 45  elaborates  on the
disclosures  to be made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize,  at the inception of a
guarantee,  a  liability  for the fair  value of the  obligation  undertaken  in
issuing the guarantee.  We have adopted the disclosure requirements of FIN 45 as
of March  31,  2003.  In  addition,  we  adopted  the  initial  recognition  and
measurement  of the fair  value of the  obligation  undertaken  in  issuing  the
guarantee on a prospective basis for all guarantees.  The effect of the adoption
of FIN 45 on our operations, financial position or cash flows was not material.

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


                                       40
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

     We develop products in the United States. We currently license our products
from  the  United  States  and  from  our  subsidiary  in  the  United  Kingdom.
Substantially  all of our sales from the United States operation are denominated
in U.S.  dollars.  Our subsidiary based in the United Kingdom incurs most of its
expenses in pounds sterling and most of its sales are denominated in US dollars.
We expect that future  license and service  revenues will continue to be derived
from  international  markets  and  may be  denominated  in the  currency  of the
applicable  market.  As a  result,  our  financial  results  could  be  affected
adversely by various factors,  including foreign currency exchange rates or weak
economic conditions in foreign markets. Although we will continue to monitor our
exposure  to currency  fluctuations  and,  when  appropriate,  may use  economic
hedging  techniques in the future to minimize the effect of these  fluctuations,
we cannot assure you that exchange rate  fluctuations  will not adversely affect
our financial results in the future. Through March 31, 2003, we have not engaged
in any foreign currency hedging activities.

Interest Rate Risk

     Our exposure to financial market risk, including changes in interest rates,
relates  primarily to our investment  portfolio.  We typically do not attempt to
reduce or eliminate our market exposure on our investment  securities  because a
substantial  majority  of our  investments  are in fixed  rate  securities  with
maturities  not  exceeding  12  months.  We do  not  invest  in  any  derivative
instruments.  The fair value of our investment portfolio or related income as of
March 31, 2003,  would decrease by  approximately  $47,000 for a 100 basis point
increase and increase by approximately $46,000 for a 100 basis point decrease in
interest rates. Our investment  instruments are mainly fixed-rate and relatively
short-term.


                                       41
<PAGE>

Item 8. Financial Statements and Supplementary Data

                                  VIRAGE, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 Report of Ernst & Young LLP, Independent Auditors............................43
 Consolidated Balance Sheets..................................................44
 Consolidated Statements of Operations........................................45
 Consolidated Statements of Redeemable Convertible Preferred
   Stock and Stockholders' Equity (Net Capital Deficiency)....................46
 Consolidated Statements of Cash Flows........................................47
 Notes to Consolidated Financial Statements...................................48


                                       42
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Virage, Inc.

We have audited the accompanying  consolidated balance sheets of Virage, Inc. as
of  March  31,  2003  and  2002,  and the  related  consolidated  statements  of
operations, redeemable convertible preferred stock and stockholders' equity (net
capital  deficiency),  and cash flows for each of the three  years in the period
ended March 31, 2003. Our audits also included the financial  statement schedule
listed in the Index at item 14(a).  These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Virage,  Inc. at
March 31, 2003 and 2002, and the consolidated  results of its operations and its
cash flows for each of the three years in the period  ended March 31,  2003,  in
conformity with accounting  principles  generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects, the information set forth therein.


                                                           /s/ Ernst & Young LLP

San Jose, California
April 18, 2003


                                       43
<PAGE>

                                  VIRAGE, INC.

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                                 March 31,
                                                                      --------------------------------
                                                                            2003             2002
                                                                      ---------------  ---------------

                               ASSETS
<S>                                                                   <C>              <C>
Current assets:
  Cash and cash equivalents.......................................    $         2,934  $         4,586
  Short-term investments..........................................             13,383           26,108
  Accounts receivable, net of allowance for revenue
    adjustments and doubtful accounts of $502 and $1,153 at
    March 31, 2003 and 2002, respectively.........................              2,441            2,366
  Prepaid expenses and other current assets.......................                920              220
                                                                      ---------------  ---------------
      Total current assets........................................             19,678           33,280
Property and equipment:
  Computer equipment and software.................................              5,974            6,143
  Furniture.......................................................                996            1,406
  Leasehold improvements..........................................              1,943            1,943
                                                                      ---------------  ---------------
                                                                                8,913            9,492
  Less:  accumulated depreciation.................................              7,566            5,791
                                                                      ---------------  ---------------
                                                                                1,347            3,701
Other assets......................................................              1,293            2,571
                                                                      ---------------  ---------------
      Total assets................................................    $        22,318  $        39,552
                                                                      ===============  ===============

                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable................................................    $           614  $           831
  Accrued payroll and related expenses............................              1,353            2,376
  Accrued expenses................................................              1,923            2,183
  Accrued restructuring charges...................................              1,515              763
  Deferred revenue................................................              3,212            3,050
                                                                      ---------------  ---------------
      Total current liabilities...................................              8,617            9,203

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

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.001 par value:
    Authorized shares -- 2,000,000
    Issued and outstanding shares-- none..........................                 --               --
  Common stock, $0.001 par value:
    Authorized shares -- 100,000,000
    Issued and outstanding shares-- 20,987,390 and 20,621,535 at
      March 31, 2003 and 2002, respectively.......................                 21               21
  Additional paid-in capital......................................            121,513          121,387
  Deferred compensation...........................................               (789)          (2,425)
  Accumulated deficit.............................................           (107,044)         (88,924)
                                                                      ---------------  ---------------
      Total stockholders' equity..................................             13,701           30,059
                                                                      ---------------  ---------------
      Total liabilities and stockholders' equity..................    $        22,318  $        39,552
                                                                      ===============  ===============
</TABLE>

See accompanying notes.


                                       44
<PAGE>

                                  VIRAGE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                Years Ended March 31,
                                                    -------------------------------------------
                                                         2003           2002           2001
                                                    -------------  -------------  -------------
<S>                                                 <C>            <C>            <C>
   Revenues:
     License revenues...........................    $      6,029   $      7,414   $       6,161
     Service revenues...........................           6,900          9,331           5,240
                                                    ------------   ------------   -------------
       Total revenues...........................          12,929         16,745          11,401
   Cost of revenues:
     License revenues...........................             738            705             723
     Service revenues(1)........................           4,601          8,760           7,530
                                                    ------------   ------------   -------------
       Total cost of revenues...................           5,339          9,465           8,253
                                                    ------------   ------------   -------------
   Gross profit.................................           7,590          7,280           3,148
   Operating expenses:
     Research and development(2)................           9,248          9,172           9,101
     Sales and marketing(3).....................          11,775         17,301          17,129
     General and administrative(4)..............           3,935          4,985           5,298
     Stock-based compensation...................           1,306          5,113           3,294
                                                    ------------   ------------   -------------
       Total operating expenses.................          26,264         36,571          34,822
                                                    ------------   ------------   -------------
   Loss from operations.........................         (18,674)       (29,291)        (31,674)
   Interest and other income....................             554          1,541           2,822
   Interest expense.............................              --             --             (22)
                                                    ------------   ------------   -------------
   Loss before income taxes.....................         (18,120)       (27,750)        (28,874)
   Provision for income taxes...................              --             --              --
                                                    ------------   ------------   -------------
   Net loss.....................................    $    (18,120)  $    (27,750)  $     (28,874)
                                                    ============   ============   =============
   Basic and diluted net loss per share.........    $      (0.87)  $      (1.37)  $       (1.88)
                                                    ============   ============   =============
   Shares used in computation of basic and
     diluted net loss per share.................          20,834         20,327          15,397
                                                    ============   ============   =============
</TABLE>

(1)  Excluding  $21,  $443  and $301 in  amortization  of  deferred  stock-based
     compensation   for  the  years  ended  March  31,  2003,   2002  and  2001,
     respectively.

(2)  Excluding  $89,  $833  and $536 in  amortization  of  deferred  stock-based
     compensation   for  the  years  ended  March  31,  2003,   2002  and  2001,
     respectively.

(3)  Excluding $106,  $2,095 and $983 in  amortization  of deferred  stock-based
     compensation   for  the  years  ended  March  31,  2003,   2002  and  2001,
     respectively.

(4)  Excluding $1,090, $1,742 and $1,474 in amortization of deferred stock-based
     compensation   for  the  years  ended  March  31,  2003,   2002  and  2001,
     respectively.

See accompanying notes.


                                       45
<PAGE>

                                  VIRAGE, INC.

                      CONSOLIDATED STATEMENTS OF REDEEMABLE
                         CONVERTIBLE PREFERRED STOCK AND
                  STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
                        (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                      Stockholders' Equity (Net Capital Deficiency)
                                                     -------------------------------------------------------------------------------

                                                                                                                          Total
                               Redeemable Convertible                                                                  Stockholders'
                                  Preferred Stock              Common Stock      Additional                              Equity (Net
                               ----------------------    -----------------------  Paid-In     Deferred    Accumulated    Capital
                                 Shares       Amount       Shares      Amount     Capital   Compensation    Deficit      Deficiency)
                               ----------    --------     ----------  --------   ---------  ------------  -----------   -----------
<S>                             <C>          <C>           <C>         <C>       <C>          <C>         <C>            <C>
Balance at March 31, 2000...     10,316,199  $ 36,995       3,698,146  $     3   $  23,671    $  (14,595) $   (32,300)   $  (23,221)
 Exercise of warrants for
  cash and net exercise of
  warrants to purchase preferred
  and common stock.........          53,252       125         204,039       --       2,000            --           --          2,000
 Conversion of preferred
  stock to common upon initial
  public offering.............  (10,369,451)  (37,120)     10,369,451       11      37,109            --           --        37,120
 Issuance of common stock
  from initial public offering
  and underwriter overallotment          --        --       4,025,000        4      39,472            --           --        39,476
 Issuance of common stock.....           --        --       1,636,361        2      17,998            --           --        18,000
 Issuance of common stock
  from exercise of options,
  net of repurchases and
  issuance of ESPP stock.....            --        --         295,755       --       1,034            --           --         1,034
 Amortization of warrant
  fair values................            --        --              --       --           6            --           --             6
 Amortization of deferred
  compensation...............            --        --              --       --          --         4,165           --         4,165
 Issuance and
  remeasurement of
  stock options to
  consultants................            --        --              --       --          71           (71)          --            --
 Reversal of deferred
  compensation upon
  employee termination.......            --        --              --       --        (654)          654           --            --
 Net loss and comprehensive
  net loss...................            --        --              --       --          --            --      (28,874)      (28,874)
                               ------------  --------      ----------  -------   ---------    ----------   ----------    ----------
Balance at March 31, 2001....            --        --      20,228,752       20     120,707        (9,847)     (61,174)       49,706

 Issuance of common stock
  from exercise of options,
  net of repurchases and
  issuance of ESPP stock.....            --        --         392,783        1         808            --           --           809
 Amortization of warrant
  fair values................            --        --              --       --         660            --           --           660
 Amortization of deferred
  compensation...............            --        --              --       --          --         6,511           --         6,511
 Acceleration of stock
  option Vesting.............            --        --              --       --         123            --           --           123
 Reversal of deferred
  compensation upon employee
  termination................            --        --              --       --        (911)          911           --            --
 Net loss and
 comprehensive net loss......            --        --              --       --          --            --      (27,750)      (27,750)
                               ------------  --------      ----------  -------   ---------    ----------   ----------    ----------
Balance at March 31, 2002....            --        --      20,621,535       21     121,387        (2,425)     (88,924)       30,059

 Issuance of common stock
  from exercise of options,
  net of repurchases and
  issuance of ESPP stock.....            --        --         365,855       --         291            --           --           291
 Amortization of warrant
  fair values................            --        --              --       --          78            --           --            78
 Amortization of deferred
  compensation...............            --        --              --       --          --         1,306           --         1,306
 Deferred compensation
  related to stock options...            --        --              --       --          69           (69)          --            --
 Issuance, remeasurement
  and acceleration of stock
  options to consultants.....            --        --              --       --          87            --           --            87
 Reversal of deferred
  compensation upon employee
  termination................            --        --              --       --        (399)          399           --            --
 Net loss and
  comprehensive net loss.....            --        --              --       --          --            --      (18,120)      (18,120)
                               ------------  --------      ----------  -------   ---------    ----------   ----------    ----------
Balance at March 31, 2003....            --  $     --      20,987,390  $    21   $ 121,513    $     (789)  $ (107,044)   $   13,701
                               ============  ========      ==========  =======   =========    ==========   ==========    ==========
</TABLE>


See accompanying notes.


                                       46
<PAGE>

                                  VIRAGE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                    Years Ended March 31,
                                                         -----------------------------------------
                                                             2003          2002          2001
                                                         ------------  ------------  -------------
<S>                                                       <C>           <C>           <C>
    Cash flows from operating activities:
    Net loss.........................................     $   (18,120)  $   (27,750)  $   (28,874)
    Adjustments to reconcile net loss to net cash used
    in operating activities:
      Depreciation and amortization..................           2,296         2,911         1,947
      Loss on disposal of assets.....................             216           455            --
      Amortization of deferred compensation related to
        stock options................................           1,306         6,511         4,165
      Issuance of stock options to consultants.......              87            --            --
      Amortization of warrant fair values............             114           695           627
      Acceleration of stock option vesting...........              --           123            --
      Changes in operating assets and liabilities:
        Accounts receivable..........................             (75)          (35)         (539)
        Prepaid expenses and other current assets....            (700)          295           116
        Other assets.................................           1,242           (69)           52
        Accounts payable.............................            (217)         (322)          380
        Accrued payroll and related expenses ........          (1,023)         (903)        2,620
        Accrued expenses and accrued restructuring
          charges ...................................             492           (57)        1,234
        Deferred revenue.............................             162            96         1,298
        Deferred rent................................            (290)          179           111
                                                          -----------   -----------   -----------
    Net cash used in operating activities............         (14,510)      (17,871)      (16,863)

    Cash flows from investing activities:
    Purchase of property and equipment...............            (158)         (375)       (6,319)
    Purchases of short-term investments..............         (58,700)      (59,419)      (49,383)
    Sales and maturities of short-term investments...          71,425        61,762        20,932
                                                          -----------   -----------   -----------
    Net cash provided by (used in) investing activities        12,567         1,968       (34,770)

    Cash flows from financing activities:
    Proceeds from bank line of credit................              --            --           806
    Principal payments on loans and capital leases...              --            --        (1,047)
    Proceeds from exercise of stock options, net of
        repurchases..................................             100            42           537
    Proceeds from employee stock purchase plan.......             191           767           497
    Proceeds from exercise of warrants to purchase
        preferred and common stock...................              --            --         2,125
    Proceeds from issuance of common stock, net of
        offering costs...............................              --            --        58,288
                                                          -----------   -----------   -----------
    Net cash provided by financing activities........             291           809        61,206
                                                          -----------   -----------   -----------
    Net increase (decrease) in cash and cash
        equivalents..................................          (1,652)      (15,094)        9,573
    Cash and cash equivalents at beginning of period.           4,586        19,680        10,107
                                                          -----------   -----------   -----------
    Cash and cash equivalents at end of period.......     $     2,934   $     4,586   $    19,680
                                                          ===========   ===========   ===========

    Supplemental disclosures of cash flow information:
    Cash paid for interest...........................     $        --   $        --   $        22

    Supplemental disclosures of non-cash operating,
       investing and financing activities:
    Conversion of prepaid offering costs to equity at
        IPO..........................................     $        --   $        --   $       812
    Conversion of redeemable preferred stock to equity
        at IPO.......................................     $        --   $        --   $    37,120
    Deferred compensation related to stock options...     $        69   $        --   $        71
    Reversal of deferred compensation upon employee
      termination....................................     $       399   $       911   $       654

See accompanying notes.
</TABLE>


                                       47
<PAGE>

                                  VIRAGE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Description of Business

     Virage,  Inc.  ("Virage"  or  "the  Company")  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 assets for improved productivity and communication. The Company
sells  worldwide  to   corporations,   media  and   entertainment   enterprises,
educational  institutions and government  entities.  The Company's customers can
leverage the Company's technology and know-how either by licensing the Company's
products and engaging its  professional  services or by employing  the Company's
application services to outsource the customer's needs.

     Management  believes  that  its  restructuring  activities,  including  the
restructuring of its headquarters  facility,  have reduced its ongoing operating
expense such that the Company will have  sufficient  working  capital to support
planned  activities  through  fiscal 2004. As of March 31, 2003, the Company had
working  capital  of  approximately  $11,061,000  and  stockholders'  equity  of
approximately  $13,701,000.  During the year ended March 31,  2003,  the Company
used  cash  and  cash  equivalents  in  operating  activities  of  approximately
$14,510,000. During the fourth quarter of fiscal 2003, the Company used cash and
cash equivalents in operating activities of approximately $2,622,000. Management
is committed to the  successful  execution of the Company's  operating  plan and
will take  further  action as necessary to align the  Company's  operations  and
reduce  expenses to ensure the Company  continues as a going concern  through at
least March 31, 2004.

Basis of Presentation

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

Reclassifications

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

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 March 31, 2003, all of the Company's cash
equivalents and short-term investments were classified as available-for-sale and
consisted of obligations  issued by U.S.  government  agencies and multinational
corporations, maturing within one year.


                                       48
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     Short-term  investments  at  each  year-end,  including  those  instruments
classified as cash  equivalents and restricted  instruments  classified as other
assets, were as follows (in thousands):

                                                     March 31,
                                           --------------------------
                                               2003           2002
                                           -----------   ------------
     Money market funds..............      $     2,337   $      2,805
     Commercial paper and corporate
      bonds..........................            6,919         11,818
     US government obligations.......            7,214         17,379
                                           -----------   ------------
       Total investments.............           16,470         32,002
     Amounts classified as cash
      equivalents....................           (2,337)        (3,805)
     Amounts classified as
      other assets...................             (750)        (2,089)
                                           -----------   ------------
                                           $    13,383   $     26,108
                                           ===========   ============

     As of March 31, 2003, the Company had collateralized a letter of credit for
its primary operating  facility with certain short-term  investment  instruments
and has classified these  collateralized  instruments totaling $750,000 as other
assets in the Company's  balance sheet.  As of March 31, 2003 and 2002, the fair
value approximated the amortized cost of available-for-sale securities. Realized
gains and losses from sales of investments  were  insignificant  for all periods
presented.

Property and Equipment

     Property and equipment are carried at cost less  accumulated  depreciation.
Property and equipment are  depreciated for financial  reporting  purposes using
the  straight-line  method over the  estimated  useful lives of generally one to
three years or, in the case of  leasehold  improvements,  over the lesser of the
useful life of the assets or lease term.

Revenue Recognition

     The Company enters into  arrangements  for the sale of licenses of software
products   and  related   maintenance   contracts,   application   services  and
professional   services  offerings.   Service  revenues  include  revenues  from
maintenance   contracts,   application  services,   and  professional  services,
including  professional  services performed directly for and via subcontract for
the U.S. Government.

     The Company's revenue recognition policy is in accordance with the American
Institute of Certified Public  Accountants'  ("AICPA") Statement of Position No.
97-2 ("SOP 97-2"),  "Software Revenue  Recognition",  as amended by Statement of
Position  No.  98-4,  "Deferral  of the  Effective  Date of SOP 97-2,  "Software
Revenue  Recognition""  ("SOP  98-4"),  and  Statement  of  Position  No.  98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP 98-9")
and is also  consistent  with the  Securities  and Exchange  Commission's  Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial  Statements." For
each  arrangement,  the Company  determines  whether  evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable,  and collection
is  probable.  If any of these  criteria  are not met,  revenue  recognition  is
deferred  until such time as all  criteria are met.  The Company  considers  all
arrangements  with  payment  terms  longer  than  normal  not  to be  fixed  and
determinable.  The Company's normal payment terms are generally considered to be
"net 30 days" to "net 60 days."  For  arrangements  involving  extended  payment
terms,  revenue  recognition  generally occurs when payments become due provided
all other  revenue  recognition  criteria  are met. No customer has the right of
return and arrangements  generally do not have acceptance criteria.  If right of
return or  customer  acceptance  does exist  within an  arrangement,  revenue is
deferred until the earlier of the end of the right of  return/acceptance  period
or until  written  notice  of  acceptance/cancellation  of right  of  return  is
received from the customer.


                                       49
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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

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

     When licenses and maintenance are sold together with professional  services
such  as  consulting  and  implementation,  license  fees  are  recognized  upon
shipment,  provided  that (1) the criteria in the previous  paragraph  have been
met, (2) payment of the license fee is not dependent upon the performance of the
professional services,  (3) the services do not include significant  alterations
to the  features  and  functionality  of the  software  and (4) the services are
deemed  "perfunctory"  both in level of effort to perform  and in  magnitude  of
dollars  based  upon the  Company's  objective  evidence  of fair  value for the
services relative to the total arrangement fee.

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


                                       50
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     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.

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

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

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

Allowance for Revenue Adjustments and Doubtful Accounts

     If the Company determines that payment from the customer is not probable at
the time all other revenue  recognition  criteria (as described above) have been
met, the Company  defers  revenues  until payment from the customer is received.
The  Company  also makes  judgments  as to its  ability  to collect  outstanding
receivables  (that have not been  deferred)  and provides an  allowance  for the
portion of  receivables  when  collection  becomes  doubtful.  The Company  also
provides an allowance for returns and revenue  adjustments in the same period as
the related  revenues are  recorded.  Allowances  are made based upon a specific
review of all significant  outstanding invoices.  Allowances recorded offset the
Company's gross accounts  receivable balance.  Allowances totaled  approximately
$502,000 and $1,153,000 at March 31, 2003 and 2002, respectively.

Concentration of Revenues and Credit Risk

     The Company  performs  ongoing  credit  evaluations  of its  customers  and
maintains reserves for potential credit losses, and such losses have been within
management's expectations. The Company generally requires no collateral from its
customers.  If the Company  determines  that  payment  from the  customer is not
probable,  the  Company  defers  revenues  until  payment  from the  customer is
received and all other  criteria for revenue  recognition  (as described  above)
have been met.


                                       51
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     Major  customers  (non-federal  government  agencies).  For the years ended
March 31, 2003 and 2001,  there were no customers that accounted for 10% or more
of the Company's total revenues.  For the year ended March 31, 2002, the Company
had one customer,  Major League Baseball  Advanced Media L.P.  ("MLBAM"),  which
accounted for 14% of the Company's total revenues.

     European customers accounted for approximately 12% and 10% of the Company's
accounts receivable balance as of March 31, 2003 and 2002, respectively.

     Federal Government  Agencies.  For the years ended March 31, 2003, 2002 and
2001 direct and indirect revenues from federal government agencies accounted for
13%, 14%, and 10%, respectively, of total revenues. No single federal government
agency  accounted for more than 10% of total  revenues for the years ended March
31, 2003, 2002 or 2001.

     Service revenues from contracts with federal government  agencies comprised
10% of total  service  revenues  during the year ended March 31, 2003 (less than
10% for the  years  ended  March  31,  2002 and  2001).  Service  revenues  from
contracts  with federal  government  agencies  comprised  less than 10% of total
revenues in each of the years ended March 31,  2003,  2002,  and 2001.  Contract
costs for service revenues to federal  government  agencies,  including indirect
expenses,  are subject to audit and subsequent adjustment by negotiation between
the Company and U.S. Government  representatives.  Service revenues are recorded
in amounts  expected to be realized upon final settlement and in accordance with
revenue recognition policies described above. Historically,  the Company has had
no adverse  impact  related to its revenues from such an audit and believes that
the results of any future  audit will have no material  effect on the  Company's
financial position or results of operations.

Advertising Costs

     Advertising costs are expensed as incurred.  Advertising expense (including
the  amortization of the fair value of a warrant during the year ended March 31,
2001--see  Note 3),  totaled  $6,000,  $54,000 and  $697,000 for the years ended
March 31, 2003, 2002 and 2001, respectively.

Stock-Based Compensation

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


                                       52
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Pro Forma Disclosures of the Effect of Stock-Based Compensation

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

     In order to  determine  this pro  forma net  loss,  the fair  value for the
Company's  options was  estimated  at the date of grant using the  Black-Scholes
option valuation model with the following  assumptions for the years ended March
31,  2003,  2002 and  2001:  risk-free  interest  rates of 2.7%,  3.0% and 6.5%,
respectively,  volatility  factors  of  112%,  113% and  90%,  respectively,  no
dividend yield and an expected life of the options of four years. The fair value
of shares  issued and to be issued  pursuant  to the  Company's  employee  stock
purchase  plan in the years ended March 31, 2003,  2002 and 2001 were  estimated
using the following  weighted average  assumptions:  risk-free  interest rate of
1.7%, 4.4%, and 6.5%,  respectively,  no dividend yield,  volatility  factors of
112%,  113% and 90%,  respectively,  and an  expected  life of the option of six
months. For purposes of pro forma  disclosures,  the estimated fair value of the
options is amortized to expense over the options' vesting period.

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

     Had  compensation  expense  for the  Company's  employee  stock  plans been
determined  using the fair value at the grant dates for awards under those plans
calculated using the  Black-Scholes  valuation model, the Company's net loss and
basic and diluted net loss per share would have been  increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>

                                                                           Years Ended March 31,
                                                                        --------------------------
                                                                      2003            2002            2001
                                                                 ------------    ------------    -----------
<S>                                                              <C>              <C>            <C>
  Net loss, as reported...................................       $    (18,120)    $   (27,750)   $   (28,874)
  Add:  stock-based compensation expense included in
    reported net loss, net of related tax effects.........              1,393           6,634          4,165
  Deduct:  total stock-based compensation expense determined
    under fair value method for all awards................             (3,960)         (8,032)        (6,169)
                                                                 ------------     -----------    -----------
  Net loss, pro forma.....................................       $    (20,687)    $   (29,148)   $   (30,878)
                                                                 ============     ===========    ===========
  Basic and diluted net loss per share, as reported.......       $      (0.87)    $     (1.37)   $     (1.88)
                                                                 ============     ===========    ===========
  Basic and diluted net loss per share, pro forma.........       $      (0.99)    $     (1.43)   $     (2.01)
                                                                 ============     ===========    ===========
</TABLE>

     These  pro  forma  amounts  may not be  representative  of the  effects  on
reported  net loss for  future  years as  options  vest over  several  years and
additional awards are generally made each year.

     The  weighted-average  grant date fair value of options  granted during the
years  ended  March  31,  2003,  2002 and  2001  was  $0.60,  $2.35  and  $5.78,
respectively,  and the weighted-average grant date fair value of ESPP shares was
$0.52,  $1.04 and $2.07  during the years ended March 31,  2003,  2002 and 2001,
respectively.


                                       53
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Comprehensive Net Loss

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

Use of Estimates

     The  preparation  of the  Company's  consolidated  financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the Company's
consolidated  financial  statements and accompanying notes. Actual results could
differ materially from those estimates.

Net Loss per Share

     Basic and diluted net loss per share are  computed in  conformity  with the
FASB's Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"), for all periods  presented,  using the  weighted-average  number of
common shares outstanding less shares subject to repurchase. The following table
presents the  computation of basic and diluted net loss per share (in thousands,
except per share data):
<TABLE>
<CAPTION>

                                                           Years Ended March 31,
                                                -----------------------------------------
                                                    2003           2002           2001
                                                -----------    -----------    -----------
<S>                                             <C>            <C>            <C>
           Net loss........................     $   (18,120)   $   (27,750)   $   (28,874)
                                                ===========    ===========    ===========
           Weighted-average shares of common
             stock outstanding.............          20,842         20,452         15,781
           Less weighted-average shares of
             common stock subject to
             repurchase....................              (8)          (125)          (384)
                                                -----------    -----------    -----------
           Weighted-average shares used in
             computation of basic and
             diluted net loss per share....          20,834         20,327         15,397
                                                ===========    ===========    ===========
           Basic and diluted net loss per
             share.........................     $     (0.87)   $     (1.37)   $     (1.88)
                                                ===========    ===========    ===========
</TABLE>

     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.
Options and warrants to purchase  8,066,825,  7,630,293 and 6,502,656  shares of
common stock and common stock  equivalents  were  outstanding at March 31, 2003,
2002 and 2001, respectively. Such securities, had they been dilutive, would have
been  included  in the  computation  of  diluted  net loss per  share  using the
treasury stock method.

Fair Value of Financial Instruments

     The Company has evaluated the estimated fair value of financial instruments
at March 31, 2003 and 2002. The amounts reported for cash and cash  equivalents,
short-term  investments,  accounts  receivable and accounts payable  approximate
carrying values due to the short-term maturities of these instruments.


                                       54
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Segment Information

     The  Company  has  adopted the FASB's  Statement  of  Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information,"  which  establishes  standards  for  reporting  information  about
operating  segments.   Operating  segments  are  defined  as  components  of  an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly by the chief operating  decision maker or group in deciding
how to allocate  resources and in assessing  performance.  The Company's segment
information is presented in Note 7.

Long-Lived Assets

     The  Company  has  adopted the FASB's  Statement  of  Financial  Accounting
Standards  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets,"  ("FAS  144")  which  requires  impairment  losses to be  recorded  for
long-lived  assets  used  in  operations,   such  as  property,   equipment  and
improvements,  and intangible assets,  when indicators of impairment are present
and the  undiscounted  cash flows  estimated to be generated by those assets are
less than the carrying amount of the assets. Through March 31, 2003, FAS 144 has
had no impact on the Company's financial position or results of operations.

Impact of Recently Issued Accounting Standards

     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")."  Pursuant to FAS 146,  companies  will record exit or
disposal costs when they are  "incurred" and can be measured at fair value,  and
are also required to subsequently  adjust the recorded  liability for changes in
estimated cash flows.  Liabilities that a company previously recorded under EITF
94-3 are grandfathered.  The Company adopted FAS 146 during the year ended March
31, 2003 and recorded  certain charges related to excess space as of the date it
ceased to use the space.  Based upon the facts and circumstances  around charges
that the Company historically has been required to record, the Company currently
believes  that the adoption of FAS 146 may affect the timing of, but  ultimately
will not have a  materially  different  impact  on,  its  operations,  financial
position or cash flows.


                                       55
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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

     In December  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others  ("FIN 45")." FIN 45  elaborates  on the
disclosures  to be made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize,  at the inception of a
guarantee,  a  liability  for the fair  value of the  obligation  undertaken  in
issuing the guarantee.  The Company has adopted the disclosure  requirements  of
FIN 45 as of March 31,  2003.  In  addition,  the  Company  adopted  the initial
recognition  and  measurement of the fair value of the obligation  undertaken in
issuing the guarantee on a prospective  basis for all guarantees.  The effect of
the adoption of FIN 45 on the Company's  operations,  financial position or cash
flows was not material.

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

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.


                                       56
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Lease Commitments and Lease Amendment

Operating Lease Commitment

     The Company leases certain of its facilities under operating  leases,  some
of which have options to extend the lease period.  Rent expense was  $4,056,000,
$4,678,000  and  $2,714,000  for the years ended March 31, 2003,  2002 and 2001,
respectively.

     Future  minimum lease  payments under  non-cancelable  operating  leases at
March 31, 2003 are as follows (in thousands):

                                                Operating
       Years Ending March 31,                    Leases
       ----------------------                  ----------
           2004............................    $    2,694
           2005............................         1,651
           2006............................         1,414
           2007............................           707
                                               ----------
            Total minimum payments.........    $    6,466
                                               ==========

     The aforementioned amounts include estimates of expected fair market rental
rates in fiscal  years  ending March 31, 2004 to March 31, 2007 and the payments
of cash and  forfeiture of other  collateral  of $1,000,000  for the year ending
March 31, 2004, respectively, pursuant to the Lease Amendment described below.

     During the years ended March 31, 2003,  2002 and 2001, the Company was able
to sublease certain of its facilities.  Rental payments  received that relate to
the subleases were $124,000, $2,344,000 and $1,185,000 for the years ended March
31, 2003, 2002 and 2001,  respectively (none for the year ended March 31, 2000).
Sublease income is recorded as contra-rent  expense in the Company's  statements
of  operations.  The sublease  agreements  remaining  provide for payments to be
received by the Company of $66,000 during each of the years ended March 31, 2004
and 2005, respectively.

Operating Lease Amendment

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

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

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


                                       57
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     In  consideration  for the above, the Company issued its landlord a warrant
to purchase 200,000 shares of the Company's common stock at $0.57 per share (see
Note 3).  In  addition,  the  Company  forfeited  $1,250,000  of  $2,000,000  of
restricted  cash used to  collateralize  a letter of credit.  The  Company  also
forgave  approximately   $240,000  of  security  deposits.   The  $2,000,000  of
restricted  cash and  $240,000 of security  deposits  were  classified  as other
assets on the Company's consolidated balance sheet at March 31, 2002.

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

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

     The Company is amortizing the payments and other collateral described above
as rent expense over the life of the lease. In March 2003, the Company abandoned
approximately half of its headquarters facility to facilitate the leasing of the
excess space to a third party. As a result of this and the Company's adoption of
FAS 146 (see Note 1), the Company incurred  charges of approximately  $2,239,000
(including  $89,000 of  equipment  write-downs)  during the year ended March 31,
2003.  The charges are related to the  write-off  of  approximately  half of the
unamortized portion of payments and other collateral  forfeiture described above
and the accrual of approximately  $1,026,000 relating to the expected leasing of
the  excess  space to a third  party at a rate  that is below the  Minimum  Rate
guarantee.

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

Technology Provider Royalty Commitments

     The Company licenses technology from third parties, including software that
is  integrated  with  internally  developed  software and used in the  Company's
products to perform key  functions.  In  consideration  for this, the Company is
obligated  to provide  its third party  technology  partners  with cash  royalty
payments  generally  calculated  as a fee per unit of product  that the  Company
sells that  incorporates the third party's  technology.  In some instances,  the
Company is  obligated  to pay a minimum  royalty  or  fixed-fee  to the  vendor,
regardless of the  quantities of products the Company  actually  sells.  Royalty
expenses are included in the Company's cost of license  revenues,  which totaled
$738,000,  $705,000 and  $723,000  for the years ended March 31, 2003,  2002 and
2001, respectively.


                                       58
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     Future  minimum and fixed fee royalty  payments  under these  agreements at
March 31, 2003 are as follows (in thousands):

                                                        Minimum
            Years Ending March 31,                    Commitments
           -----------------------                    -----------
              2004............................        $      340
              2005............................               300
              2006............................               300
              2007............................               350
                                                      ----------
                 Total minimum payments.......        $    1,290
                                                      ==========

     It is the  Company's  best  estimate  as of March 31, 2003 that the Company
will recoup each period's commitment via future revenue streams generated by its
products.  The  Company has no  loss-type  contracts  related to its  technology
provider royalty commitments as of March 31, 2003.

Other Commitments

     At March 31,  2003,  the  Company  has  other  contractual  and  commercial
commitments  not  included on its balance  sheet that it has entered into in the
ordinary  course of  business.  Examples of these  commitments  include  telecom
costs, marketing contracts, and other infrastructure requirements,  all of which
are  currently  being used by the Company.  Future full fiscal year  commitments
remaining for these  obligations  are as follows:  $154,000 in 2004,  $21,000 in
2005,  and $1,000 in 2006  ($176,000 in total other  commitments as of March 31,
2003).

Guarantees

     The Company  generally  provides a warranty for its  software  products and
services  to its  customers  for a  period  of 90  days  and  accounts  for  its
warranties under the FASB's Statement of Financial  Accounting  Standards No. 5,
"Accounting  for  Contingencies."  The Company's  software  products'  media are
generally  warranted to be free of defects in materials  and  workmanship  under
normal  use and the  products  are also  generally  warranted  to  substantially
perform as described in certain Company  documentation.  The Company's  services
are  generally  warranted  to be  performed  in a  professional  manner  and  to
materially  conform  to the  specifications  set  forth in a  customer's  signed
contract.  In the  event  there is a failure  of such  warranties,  the  Company
generally  will  correct  or provide a  reasonable  work  around or  replacement
product.  The Company's  warranty  accrual as of March 31, 2003 and 2002 was not
significant  and, to date, the Company's  product  warranty expense has not been
significant.

     The Company has two letters of credit that collateralize  certain operating
lease obligations of the Company and total approximately $768,000 and $2,018,000
at March 31,  2003 and 2002,  respectively.  The  Company  collateralizes  these
letters  of  credit  with  cash  deposits  made with  certain  of its  financial
institutions  and has  classified  these cash  deposits  as other  assets on the
Company's  balance sheet as of March 31, 2003 and 2002. The Company's  landlords
are able to withdraw on each  respective  letter of credit in the event that the
Company is found to be in default of its obligations under each of its operating
leases.

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


                                       59
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Restructuring

     The Company  accounted for its restructuring  plans implemented  during its
years  ended March 31,  2003 and 2002  pursuant  to EITF 94-3,  until the fiscal
quarter  ended  December 31, 2002,  at which point the Company early adopted the
provisions of FAS 146.

     During the year ended March 31, 2003,  the Company  implemented  additional
restructuring  programs to better  align  operating  expenses  with  anticipated
revenues.  In each of the  quarterly  fiscal  2003  periods  in which a plan was
implemented,  appropriate  levels of the Company's  management  had approved and
committed the Company to the specific  actions for each of these  programs.  The
Company  recorded  a  $3,215,000   restructuring   charge,  which  consisted  of
$2,150,000 of excess facility  charges  (recorded in the Company's fiscal fourth
quarter of the year ended March 31, 2003),  $849,000 in employee severance costs
(the  significant  majority of which was recorded  during the three months ended
June 30, 2002) and $216,000 in equipment  write-downs across most of the expense
line items in the Company's  consolidated  statement of operations  for the year
ended March 31,  2003.  The  restructuring  programs  resulted in a reduction in
force across all Company  functions of approximately 50 employees.  At March 31,
2003,  the Company had  $1,515,000  of accrued  restructuring  costs  related to
monthly rent for excess  facility  capacity,  and  potential  cash  payments and
potential  forfeiture of cash-based  collateral  in  conjunction  with the Lease
Amendment  described  above.  The Company expects to pay out its excess facility
charges accrued as of March 31, 2003 over the life of the operating lease, which
runs  through  September  2006.  The Company  expects to forfeit its  cash-based
collateral  and pay out cash payments  related to its Lease  Amendment  over the
course of the next twelve months.

     During the year ended March 31,  2003,  the Company made an  adjustment  of
$66,000 to its accrued excess  facilities costs. The excess facility accrual was
originally  recorded  pursuant to EITF 94-3.  The  adjustment is a result of the
Company's  re-occupying  certain  space in  March  2003  that it had  previously
written-off and had not intended to use until April 2003.

    The following table depicts the restructuring activity during the year ended
March 31, 2003 (in thousands):
<TABLE>
<CAPTION>

                               Balance at                          Expenditures                         Balance at
        Category            March 31, 2002      Additions        Cash    Non-cash    Adjustments      March 31, 2003
        --------            --------------      ---------       ------   --------    -----------      --------------
<S>                          <C>                <C>            <C>       <C>         <C>              <C>
  Excess facilities.......   $      460         $   2,150      $ 1,029   $    --     $      66        $        1,515
  Employee severance......          259               849        1,108        --            --                    --
  Equipment write-downs...           --               216           --       216            --                    --
  Other exit costs........           44                --           44        --            --                    --
                             ----------         ---------      -------   -------     ---------        --------------
    Total.................   $      763         $   3,215      $ 2,181   $   216     $      66        $        1,515
                             ==========         =========      =======   =======     =========        ==============
</TABLE>

     During the year ended March 31, 2002, the Company implemented restructuring
programs to better align operating expenses with anticipated  revenues.  In each
of  the  quarterly  fiscal  2002  periods  in  which  a  plan  was  implemented,
appropriate  levels of the Company's  management  had approved and committed the
Company to the specific actions for each of these programs. The Company recorded
a $2,038,000  restructuring  charge, which consists of $611,000 in facility exit
costs, $928,000 in employee severance costs, $455,000 in equipment  write-downs,
and $44,000 in other exit costs  across most of the  expense  line-items  in the
Company's  consolidated  statement  of  operations  for the year ended March 31,
2002.  The  restructuring  programs  resulted in a reduction in force across all
company functions of approximately 60 employees.  At March 31, 2002, the Company
had $763,000 of accrued  restructuring  costs related to monthly rent for excess
facility capacity, employee severance payments and other exit costs. The Company
paid these accrued amounts during the year ended March 31, 2003.


                                       60
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     The following  table  depicts the  restructuring  activity  during the year
ended March 31, 2002 (in thousands):

<TABLE>
<CAPTION>
                                                         Expenditures              Balance at
        Category                       Additions      Cash      Non-cash         March 31, 2002
        --------                       ---------      ----      --------         --------------
<S>                                    <C>           <C>        <C>              <C>
         Excess facilities.........    $     611     $ 151      $     --         $          460
         Employee severance........          928       669            --                    259
         Equipment write-downs.....          455        --           455                     --
         Other exit costs..........           44        --            --                     44
                                       ---------     -----      --------         --------------
          Total......................  $   2,038     $ 820      $    455         $          763
                                       =========     =====      ========         ==============
</TABLE>

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 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.  On February 19, 2003, the Court issued a
ruling on the motions.  The Court denied the motions to dismiss the claims under
the  Securities Act of 1933. The Court granted the motions to dismiss the claims
under the Securities  Exchange Act of 1934 with prejudice.  The Company believes
it has  meritorious  defenses to these claims and intends to defend against 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.

NASDAQ Listing Requirements

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


                                       61
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     The Company received a letter in March 2003 that stated the Company was not
in  compliance  with the minimum  $1.00 per share  listing  requirement.  NASDAQ
indicated that the Company has until April 29, 2003 to regain compliance. In May
2003,  the  Company  received  a  subsequent  letter  from  NASDAQ's  compliance
department--see Note 9.

3. Stockholders' Equity

Preferred Stock

     The Company's  Certificate of Incorporation  authorizes 2,000,000 shares of
preferred  stock and the Board of  Directors  also  adopted  a  preferred  stock
purchase  right plan  intended to guard the  Company  against  certain  takeover
tactics.  The Company's Board of Directors has the authority to fix or alter the
designation,  powers,  preferences  and rights of the  shares of each  preferred
series and qualifications, limitations or restrictions to any unissued series of
preferred stock.

Initial Public Offering

     In July 2000, the Company  completed its initial public offering and issued
3,500,000  shares of its  common  stock to the  public at a price of $11.00  per
share.  The Company received net proceeds of $34,105,000 in cash after deducting
the underwriters'  commissions and  approximately  $1,700,000 of offering costs.
The  Company's  underwriters  also  exercised  their  over-allotment  option  to
purchase an additional  525,000 shares of the Company's  common stock at a price
of $11.00 per share resulting in an additional $5,371,000 of net proceeds to the
Company. All outstanding shares of redeemable  convertible  preferred stock were
converted into an aggregate of 10,369,451  shares of common stock at the closing
of the Company's public offering.

     In addition,  the Company's  stockholders  approved a 1-for-2 reverse stock
split of the  Company's  preferred  and  common  stock  and also  authorized  an
increase in the  authorized  number of common shares from  20,000,000  shares to
100,000,000  shares that became effective upon the consummation of the Company's
initial public offering. All share data has been restated to reflect the reverse
stock split.

Common Stock Purchase Agreement

     In July 2000, the Company  completed an  $18,000,000  common stock purchase
agreement with certain  private  investors  issuing  1,636,361  common shares at
$11.00 per share concurrent with its initial public offering.

Warrants

     In September  1995 and October  1996,  in  connection  with  capital  lease
agreements,  the Company  issued  warrants to purchase  23,332  shares of common
stock at an exercise price of $0.75 per share,  subject to certain  adjustments.
Interest  expense  related to the fair value of the warrants was  insignificant.
The fair value of the warrants was  calculated  using the  Black-Scholes  option
pricing model assuming a fair value of common stock of $0.75, risk-free interest
rate of 6.5%,  volatility  factor of 40%,  and a life of 10 years.  The warrants
were  exercised  during the year ended March 31, 2001 pursuant to a net exercise
provision in the warrant  agreements  resulting in the issuance of 22,221 common
shares.


                                       62
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     In November  1999,  the Company  entered  into a software  development  and
distribution  agreement with SRI, International that provides the Company with a
non-exclusive  license from SRI,  International  to embed and  distribute  SRI's
optical  character  recognition  technology as a plug-in module to the Company's
VideoLogger  product.  The Company is required  to pay SRI,  International  cash
royalty  payments,  subject  to a  minimum  of  $100,000  over  the  term of the
agreement,  based upon annual  license  copy  volumes as are defined  within the
agreement.  The Company also issued an immediately  exercisable,  nonforfeitable
warrant to purchase  19,055  shares of Series E  preferred  stock at an exercise
price of $6.56 per share, subject to certain adjustments.  During the year ended
March 31, 2001,  the warrant was exercised  resulting in $125,000 of proceeds to
the Company.  The Company  determined the fair value of the warrants  ($185,000)
using the  Black-Scholes  valuation  model assuming a fair value of the Series E
preferred  stock of $13.20,  a risk-free  interest  rate of 5.9%,  a  volatility
factor of 90%,  and a life of 3 years.  The fair value of the  warrants has been
recorded as a technology right and is being amortized to cost of goods sold over
the life of the  agreement,  which  expires on December 31,  2004.  Amortization
expense of $36,000,  $35,000 and  $35,000  was  recorded  during the years ended
March 31, 2003, 2002 and 2001, respectively.

     In December 1999, the Company issued an immediately  exercisable warrant to
purchase  75,435  shares  of  Series E  preferred  stock at $6.56  per  share in
consideration for advertising provided by an Internet portal company. During the
year ended March 31, 2001, the warrant was net exercised by the holder resulting
in the issuance of 34,197 shares.  The Company  determined the fair value of the
warrant using the  Black-Scholes  valuation  model  assuming a fair value of the
Series E preferred stock of $13.20,  risk-free interest rate of 6.1%, volatility
factor of 90%, and a life of 4 years.  The fair value of the warrant  ($781,000)
was  recorded as deferred  advertising  costs and was  amortized  into sales and
marketing  expense on a  straight-line  basis  over 12  months,  the term of the
advertising  agreement,  which commenced January 2000.  Amortization  expense of
$586,000 was recorded  during the years ended March 31, 2001 (none for the years
ended March 31, 2003 and 2002).

     In February  2000,  the Company  entered  into a six-year  operating  lease
agreement on a new  building.  As part of the  operating  lease  agreement,  the
Company issued a warrant to the landlord in June 2000 to purchase 181,818 shares
of common  stock at $11.00 per share which was  exercised  during the year ended
March 31, 2001  resulting in proceeds of $2,000,000 to the Company.  The warrant
was  issued  concurrent  with  the  pricing  of  the  Company's  IPO  and if not
exercised,  the warrant  would have expired at the end of the first day that the
Company's stock began trading on NASDAQ. The Company estimated that the value of
the  warrant  is  $72,000  using  a  Black-Scholes   model  with  the  following
assumptions: price of $11.00 as the deemed fair value, a risk-free interest rate
of 6.1%, a volatility factor of 90%, and an expected life of one day (based upon
the foregoing explanation of the warrant's short contractual life). The value of
the warrant is being  amortized  as rent  expense  over the term of the six-year
lease  agreement and $35,000,  $12,000 and $6,000 was recorded  during the years
ended March 31, 2003, 2002 and 2001, respectively.

     In December 2000, the Company entered into a services  agreement with MLBAM
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 year ended March 31, 2002, the Company  recorded a charge of $648,000
as contra-service  revenues  representing the amortization of the warrant's fair
value.


                                       63
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     In  December  2002,   the  Company   entered  into  an  amendment  for  its
headquarters'   operating   lease  (see  Note  2)  and  issued  an   immediately
exercisable,  non-forfeitable warrant to purchase 200,000 shares of common stock
at $0.57 per share.  The  warrant  expires in  December  2005.  The value of the
warrant was estimated to be $86,000 and was based upon a Black-Scholes valuation
model  with the  following  assumptions:  risk free  interest  rate of 1.9%,  no
dividend yield,  volatility of 130%,  expected life of three years, and exercise
price of  $0.57.  The  non-cash  amortization  of the  warrant's  value is being
recorded as rent expense over the life of the lease. During the year ended March
31, 2003, the Company recorded $44,000 as rent expense related to this warrant.

Voluntary Stock Option Cancellation and Re-grant Program

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

     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,  as  interpreted  by  the  FASB's
Interpretation  No. 44,  "Accounting  for Certain  Transactions  involving Stock
Compensation,  an interpretation of APB Opinion No. 25 ("FIN 44")." 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,  resulting in the
Company recording  non-cash,  stock-based  charges of $87,000 for the year ended
March 31, 2003.

Employee Stock Plans

     In December  1997,  the  Company's  stockholders  agreed to  terminate  the
Virage,  Inc.  1995 Stock  Option Plan (the "1995  Plan") and to  introduce  the
Virage,  Inc. 1997 Stock Option Plan (the "1997 Plan"). All options issued under
the  1995  Plan  remained  outstanding  under  that  plan  and  did  not  become
outstanding  under the 1997 Plan.  The 1997 Plan  provides  for the  granting of
incentive stock options and nonqualified stock options to employees,  directors,
and  consultants.  Under the 1997 Plan,  the Board of Directors (or any properly
appointed  officer  of the  Company)  determines  the term of each award and the
award price. In the case of incentive  stock options,  the exercise price may be
established  at an  amount  not less than the fair  market  value at the date of
grant, while nonstatutory  options may have exercise prices not less than 85% of
the fair  market  value as of the date of grant.  Options  granted to any person
owning stock  possessing  more than 10% of the total combined  voting power must
have  exercise  prices of at least 110% of the fair market  value at the date of
grant.  Options  generally vest ratably over a four-year period  commencing with
the grant date and  expire no later  than ten years from the date of grant.  The
1997 Plan  provides  for the  lesser of  1,000,000  shares  or five  percent  of
outstanding  shares to increase  the number of shares  outstanding  on an annual
basis effective every April 1.


                                       64
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     Options  granted  under the 1995 Plan are not  exercisable  until  they are
fully vested.  Options granted under the 1997 Plan are immediately  exercisable,
but  shares so  purchased  that are not yet  vested  may be  repurchased  by the
Company, at the Company's option, upon termination of employment at the exercise
price.  All  shares  subject  to  options  outstanding  under the 1995 Plan that
expired or were terminated, canceled, or repurchased were added to the number of
shares authorized and reserved for issuance under the 1997 Plan.

     In April 2001,  the  Company's  Board of Directors  agreed to establish the
Virage 2001  Nonstatutory  Stock  Option Plan (the "2001  Plan").  The 2001 Plan
provides  for a maximum  aggregate  number of shares of stock that may be issued
under the Plan of 900,000 and provides for the  granting of  nonqualified  stock
options to  employees  (excluding  officers of the Company and any other  person
whose  eligibility to receive an option under the 2001 Plan at the time of grant
would require the approval of the Company's stockholders) and consultants. Under
the 2001 Plan, the Board of Directors (or any properly  appointed officer of the
Company)  determines  the  term  of each  award  and the  award  price.  Options
generally vest ratably over a four-year  period  commencing  with the grant date
and expire no later than ten years from the date of grant.

     A summary of all of the Company's  stock option plans  activity and related
information is set forth below:
<TABLE>
<CAPTION>

                                                                 Options Outstanding
                                                                 -------------------
                                                 Shares                       Weighted
                                                Available      Number of       Average
                                                for Grant       Shares     Exercise Price
                                                ---------      ---------   --------------
<S>                                            <C>            <C>              <C>
        Balance at March 31, 2000.........      3,199,734      3,653,514       $ 6.00
          Options granted.................     (3,252,025)     3,252,025       $ 8.55
          Options exercised...............             --       (266,481)      $ 2.20
          Options canceled................        345,056       (345,056)      $ 8.69
          Options repurchased.............         23,897             --       $ 2.07
                                              -----------    -----------
        Balance at March 31, 2001.........        316,662      6,294,002       $ 7.34
          Options authorized..............      1,900,000             --           --
          Options granted.................     (2,422,525)     2,422,525       $ 3.08
          Options exercised...............             --       (206,787)      $ 0.33
          Options canceled................      3,741,351     (3,741,351)      $ 9.32
          Options repurchased.............         80,050             --       $ 0.34
                                              -----------    -----------
        Balance at March 31, 2002.........      3,615,538      4,768,389       $ 3.92
          Options authorized..............      1,000,000             --           --
          Options granted.................     (5,143,750)     5,143,750       $ 0.78
          Options exercised...............             --       (186,256)      $ 0.53
          Options canceled................      2,059,058     (2,059,058)      $ 3.72
                                              -----------    -----------
        Balance at March 31, 2003.........      1,530,846      7,666,825       $ 1.94
                                              ===========    ===========
</TABLE>

     As of March 31,  2003,  there  were 522  shares of common  stock  exercised
pursuant to stock options that were not fully  vested.  These shares are subject
to  repurchase  solely at the option of the Company at the original  grant price
upon an employee's termination.


                                       65
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

     The following table summarizes  information about stock options outstanding
and exercisable at March 31, 2003:
<TABLE>
<CAPTION>

                                  Options Outstanding                      Options Exercisable
                         -------------------------------------------   ---------------------------
                                         Weighted-
                                          Average
                                         Remaining       Weighted-                     Weighted-
     Range of              Number       Contractual       Average        Number         Average
  Exercise Prices        Outstanding       Life       Exercise Price   Exercisable  Exercise Price
  ---------------        -----------       ----       --------------   -----------  --------------
                                        (in years)
<S>                      <C>               <C>            <C>           <C>             <C>
$  0.15-- $  0.40           178,851        4.92           $ 0.31          178,851       $ 0.31
$  0.41-- $  0.60         2,090,325        9.35           $ 0.59        2,005,115       $ 0.59
$  0.61-- $  1.00         1,907,667        9.30           $ 0.77        1,733,478       $ 0.77
$  1.01-- $  2.50         1,371,995        8.55           $ 2.02        1,309,190       $ 2.03
$  2.51-- $  5.00         1,602,510        7.87           $ 3.72        1,387,034       $ 3.87
$  5.01-- $ 12.00           515,477        6.76           $ 6.72          507,667       $ 6.72
                         ----------                                    ----------
$  0.15-- $ 12.00         7,666,825        8.61           $ 1.94        7,121,335       $ 1.97
                         ==========        ====           ======       ==========       ======
</TABLE>

     In March 2000, the Company's  stockholders  approved the Virage,  Inc. 2000
Employee Stock  Purchase Plan (the "ESPP"),  which is designed to allow eligible
employees  of the Company to purchase  shares of the  Company's  common stock at
semiannual  intervals  through  periodic  payroll  deductions.  An  aggregate of
1,900,000  shares of common stock has been  reserved  for the ESPP,  and 498,816
shares have been issued through March 31, 2003. The number of shares reserved is
increased  cumulatively  by the lesser of 400,000  shares or two  percent of the
number of issued  and  outstanding  shares  of common  stock on the  immediately
preceding  March  31 on  each  April  1  through  April  1,  2010.  The  ESPP is
implemented  in a series of  successive  offering  periods,  each with a maximum
duration  of 24  months.  Eligible  employees  can have up to 10% of their  base
salary  deducted  that is to be used to purchase  shares of the common  stock on
specific dates  determined by the board of directors (up to a maximum of $25,000
per year based upon the fair market  value of the  shares).  The price of common
stock  purchased  under  the ESPP  will be equal to 85% of the lower of the fair
market  value of the  common  stock on the  commencement  date of each  offering
period or the specified purchase date.

Deferred Compensation & Option Vesting Acceleration

     During  the years  ended  March 31,  2003 and 2001,  the  Company  recorded
aggregate   deferred   compensation   of  $69,000  and  $71,000,   respectively,
representing the difference  between the exercise price of stock options granted
and the then deemed fair value of the Company's  common stock (none for the year
ended March 31, 2002). The  amortization of deferred  compensation is charged to
operations  over the  vesting  period of the  options  using  the  straight-line
method,  which is typically four years. For the years ended March 31, 2003, 2002
and  2001,  the  Company  amortized   $1,306,000,   $6,511,000  and  $4,165,000,
respectively,  of deferred  compensation  of which  $1,306,000,  $5,113,000  and
3,294,000, respectively, related to stock options issued to employees (presented
separately in the Company's  statement of operations)  and none,  $1,398,000 and
$871,000, respectively, related to stock options issued to consultants.

     During the year ended March 31, 2002, the Company  accelerated  the vesting
of stock  options  for  certain  employees  upon their  termination  pursuant to
certain  agreements  entered into between the former  employees and the Company.
Pursuant to the FIN 44, the fair value of the options of $123,000 was determined
based upon the intrinsic value of the accelerated  shares as of the modification
date and was recorded as expense during the year ended March 31, 2002.


                                       66
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Options Issued to Consultants

     As described  above,  the Company had two  employees  that were eligible to
participate in its Voluntary Stock Option Cancellation and Re-grant Program that
did not meet certain employee definitional criteria Accordingly, the Company had
to account for the option grants to these two  participants  as though they were
non-employees  pursuant  to FAS 123 and EITF  96-18,  resulting  in the  Company
recording non-cash,  stock-based charges of $87,000 for the year ended March 31,
2003 based upon the  Black-Scholes  valuation  model and the  following  inputs:
exercise  price of $0.59,  fair market value of $0.59 on date of grant and other
prices based upon various  remeasurement dates,  expected lives of three to nine
months, volatility of 121%, interest rate of 2.5% and no dividend yield.

     Through the year ended March 31, 2002,  the Company had granted  options to
purchase  295,523  shares of common  stock to  consultants  at  exercise  prices
ranging from $1.00 to $12.00 per share. The options were granted in exchange for
consulting   services  to  be  rendered  and  vest  over  periods  ranging  from
immediately to four years.  The Company valued these options at $2,846,000 being
their fair value estimated  using a Black-Scholes  valuation model assuming fair
values  of common  stock  ranging  from  $1.52 to $11.00  per  share,  risk-free
interest rates ranging from 4.8% to 6.1%, a volatility  factor of 90% and a life
of four years. The options issued to consultants were marked-to-market using the
estimate  of fair value at the end of each  accounting  period  pursuant to EITF
96-18.  During the year ended March 31, 2001,  the Company  recorded  additional
deferred  compensation of $71,000 pursuant to this provision which was amortized
over the remaining vesting period. The Company recorded a non-cash,  stock-based
charge to operations  of  $1,398,000  and $871,000 for the years ended March 31,
2002  and  2001,   respectively,   representing  the  amortization  of  deferred
compensation related to these options. The Company also reversed the unamortized
portion of deferred  compensation of $29,000 related to these options during the
year ended March 31, 2002 due to the termination of service by these consultants
prior to the full-vesting of the options granted.

4. Shares Reserved

    At March 31, 2003, common stock reserved for future issuance was as follows:
<TABLE>
<CAPTION>

                                                        Number of Securities
                                                         to be Issued upon
                                                            Exercise of         Weighted-       Shares
                                                        Outstanding Options,    Average       Available
                                                        Warrants and Rights  Exercise Price   For Grant
                                                        -------------------  --------------   ---------
<S>                                                           <C>              <C>             <C>
Equity compensation plans approved
  by stockholders...................................          6,866,805        $     1.96      2,832,050
Equity compensation plans not approved
  by stockholders...................................          1,200,020        $     2.17         99,980
                                                             ----------                        ---------
   Total..........................................            8,066,825        $     1.99      2,932,030
                                                             ==========        ==========      =========

</TABLE>

     Included  in  the   2,832,050   shares   available  for  grant  for  equity
compensation  plans  approved by  stockholders  are  1,401,184  shares  reserved
pursuant to the Company's ESPP (see above).

5. Savings Plan

     The Company  maintains a savings plan under Section  401(k) of the Internal
Revenue  Code.  Under the plan,  employees  may defer  certain  amounts of their
pretax  salaries  but not more  than  statutory  limits.  The  Company  may make
discretionary contributions to the plan as determined by the Board of Directors.
The Company has not contributed to the plan through March 31, 2003.


                                       67
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

6. Income Taxes

     Due to operating losses and the Company's  inability to recognize an income
tax benefit from current losses,  there is no provision for income taxes for the
years ended March 31, 2003, 2002 or 2001.

     The  difference  between  the  provision  for  income  taxes and the amount
computed by  applying  the Federal  statutory  income tax rate to income  before
taxes is explained below (in thousands):
<TABLE>
<CAPTION>

                                                                                    March 31,
                                                                    -------------------------------------
                                                                        2003          2002         2001
                                                                    ----------     ---------    ---------
<S>                                                                <C>             <C>          <C>
Tax benefit at federal statutory rate (34%).....................    $   (6,161)    $  (9,435)   $  (9,817)
Loss for which no tax benefit is currently recognizable.........         5,678         6,985        8,664
Nondeductible stock compensation................................           483         2,450        1,153
                                                                    ----------     ---------    ---------
 Total provision...............................................     $       --     $      --    $      --
                                                                    ==========     =========    =========
</TABLE>

     Significant  components of the Company's deferred tax assets are as follows
(in thousands):

                                                        March 31,
                                                   ------------------
                                                     2003      2002
                                                   -------   --------

Deferred tax assets:
  Net operating loss carryforwards..........    $  28,800   $  24,000
  Tax credit carryforwards..................        1,800         870
  Other individually immaterial items.......         (430)      2,170
                                                ---------   ---------
     Total deferred tax assets..............       29,550      27,040
Valuation allowance.........................      (29,550)    (27,040)
                                                ---------   ---------
Net deferred tax assets.....................    $      --   $      --
                                                =========   =========

     FASB Statement No. 109,  "Accounting  for Income  Taxes,"  provides for the
recognition  of deferred tax assets if realization of such assets is more likely
than not.  Based upon the  weight of  available  evidence,  which  includes  the
Company's  historical  operating  performance  and the reported  cumulative  net
losses in all prior years,  the Company has provided a full valuation  allowance
against its net  deferred  tax assets.  The  valuation  allowance  increased  by
$2,510,000  and  $7,872,000  during  the years  ended  March 31,  2003 and 2002,
respectively.

     As of March 31, 2003,  the Company had federal and state net operating loss
carryforwards of approximately $80,206,000 and $26,269,000,  respectively. As of
March 31, 2003, the Company also had federal and state research and  development
tax credit carryforwards of approximately  $759,000 and $647,000,  respectively.
The net operating loss and tax credit carryforwards will expire at various dates
beginning in 2003, if not utilized.

     Utilization of the net operating loss and tax credit  carryforwards  may be
subject  to  substantial   annual   limitations  due  to  the  ownership  change
limitations  provided by the Internal Revenue Code and similar state provisions.
The annual  limitation may result in the expiration of net operating  losses and
tax credit carryforwards before utilization.


                                       68
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


7. Segment Reporting

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

     Information on the Company's  reportable segments for the years ended March
31, 2003,  2002 and 2001 are as follows  (certain  prior year balances have been
reclassified to conform with current year presentation, in thousands):
<TABLE>
<CAPTION>

                                                                  Years Ended March 31,
                                                      -----------------------------------------
                                                           2003          2002           2001
                                                      ------------- -------------  ------------
                 Software:
<S>                                                    <C>           <C>            <C>
                   Total revenues................      $     8,766   $    10,068    $     7,914
                   Total cost of revenues........            1,589         1,307          1,199
                                                       -----------   -----------    -----------
                   Gross profit..................      $     7,177   $     8,761    $     6,715
                                                       ===========   ===========    ===========

                 Application and Professional
                 Services:
                   Total revenues................      $     4,163   $     6,677    $     3,487
                   Total cost of revenues........            3,750         8,158          7,054
                                                       -----------   -----------    -----------
                   Gross profit (loss)...........      $       413   $    (1,481)   $    (3,567)
                                                       ===========   ===========    ===========
</TABLE>

     Total  revenues  to  customers  located  outside  the  United  States  were
approximately $3,285,000,  $3,997,000,  and $3,341,000 for the years ended March
31, 2003, 2002 and 2001,  respectively.  Virage Europe Ltd. and Virage GmbH, the
Company's  European  subsidiaries,   accounted  for  approximately   $1,539,000,
$2,114,000  and  $2,020,000 of the Company's  total revenues for the years ended
March 31, 2003, 2002 and 2001, respectively. The total combined assets of Virage
Europe  Ltd.  and  Virage  GmbH  accounted  for less  than five  percent  of the
Company's total assets as of March 31, 2003 and 2002.

8.  Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
                                                         Three Months Ended
                       ----------------------------------------------------------------------------------------------------
                       March 31,   December 31,  September 30,  June 30,   March 31,  December 31,  September 30,  June 30,
                          2003         2002          2002         2002       2002         2001          2001         2001
                          ----         ----          ----         ----       ----         ----          ----         ----
                                                                   (in thousands)
<S>                   <C>           <C>          <C>            <C>         <C>        <C>          <C>           <C>
Total revenues......  $   3,103     $  3,314     $    3,277     $  3,235    $  3,221   $  4,788     $   4,746     $   3,990
Gross profit........      1,614        2,029          2,058        1,889       1,502      2,459         2,072         1,247
Net loss............     (4,614)      (3,262)        (4,743)      (5,501)     (8,966)    (5,204)       (6,369)       (7,211)
Basic and diluted
  net loss per share  $   (0.22)    $  (0.16)    $    (0.23)    $  (0.27)   $  (0.44)  $  (0.26)    $   (0.31)    $   (0.36)
</TABLE>

                                       69
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

9.  Subsequent Events (Unaudited)

NASDAQ Listing Requirements

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

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

        o   Request a hearing to appeal the delisting notice; or

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

     The  Company  initiated  an  appeal  process  with  NASDAQ  whereby  it has
requested  an  in-person  hearing  with NASDAQ  regulators  to present  relevant
measures the Company is taking in order to improve its operating results and, as
a result,  bolster its stock price to levels  required by NASDAQ.  Should NASDAQ
dismiss the Company's appeal, the Company believes it will submit an application
for  transfer to the NASDAQ  SmallCap  Market,  where if  accepted,  the Company
believes  it will have at least 180 days from the date of transfer to attempt to
regain compliance with NASDAQ's listing  requirements.  If the Company transfers
to the NASDAQ SmallCap Market, 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.


                                       70
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

    There were no matters to be reported under this item.


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

    (a) Executive Officers

        The information with respect to Executive Officers is included in Part I
        hereof after Item 4.

    (b) Directors

        The  information  required  by this  item  is  included  in the  section
        entitled  "Election of  Directors"  in the Proxy  Statement for the 2003
        Annual Meeting of Stockholders  ("Proxy  Statement") and is incorporated
        by reference herein. The information  regarding  compliance with section
        16(a) of the Exchange Act is included in the section  entitled  "Section
        16(a) Beneficial Ownership Reporting  Compliance" in the Proxy Statement
        and incorporated herein by reference.

Item 11. Executive Compensation

     The information  required by this item is included in the section  entitled
"Executive  Compensation"  in the Proxy Statement and is incorporated  herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information  required by this item is included in the section  entitled
"Security  Ownership of Certain  Beneficial  Owners and Management" in the Proxy
Statement and is  incorporated  herein by reference and is also included in Part
II, Item 5 and Note 4 of the Company's  Consolidated  Financial  Statements  and
Notes thereto included in Part II, Item 8, hereof.

Item 13. Certain Relationships and Related Transactions

     The information  required by this item is included in the section  entitled
"Certain  Transactions"  in the Proxy  Statement and is  incorporated  herein by
reference.

Item 14. Controls and Procedures

     Within 90 days prior to the filing date of this Annual Report on Form 10-K,
we carried out an evaluation,  under the supervision and with the  participation
of our management,  including our Chief Executive Officer ("CEO") and our Acting
Chief  Financial  Officer  ("ACFO"),  of the  effectiveness  of the  design  and
operation of our "disclosure  controls and  procedures" and "internal  controls"
pursuant to Item 307 of Regulation S-K.

     Disclosure  controls  and  procedures  are designed  with the  objective of
ensuring  that (i)  information  required to be disclosed  in our reports  filed
under the Securities  Exchange Act of 1934, is recorded,  processed,  summarized
and reported  within the time periods  specified in the  Securities and Exchange
Commission's   rules  and  forms,   and  (ii)  information  is  accumulated  and
communicated to management,  including the CEO and ACFO, as appropriate to allow
timely decisions regarding required disclosure. Internal controls are procedures
designed  with  the  objective  of  providing   reasonable  assurance  that  our
transactions   are  properly   authorized;   assets  are   safeguarded   against
unauthorized  or improper  use;  and  transactions  are  properly  recorded  and
reported, all to permit the preparation of our consolidated financial statements
in conformity with generally accepted accounting principles.


                                       71
<PAGE>

     The  evaluation  of our  disclosure  controls and  procedures  and internal
controls included a review of the objectives and processes, implementation by us
and effect on the  information  generated  for use in this Annual Report on Form
10-K. In the course of this  evaluation,  we sought to identify any  significant
deficiencies  or  material  weaknesses  in  our  controls,  and  whether  we had
identified any acts of fraud involving  personnel who have a significant role in
our internal  controls,  and to confirm that any  necessary  corrective  action,
including process improvements,  were being undertaken.  This type of evaluation
will  be done on a  quarterly  basis  so that  the  conclusions  concerning  the
effectiveness of these controls can be reported in our Quarterly Reports on Form
10-Q and Annual Report on Form 10-K. Our internal controls are also evaluated on
an  ongoing  basis  by our  finance  organization.  The  overall  goals of these
evaluation activities are to monitor our disclosure and internal controls and to
make  modifications  as  necessary.  We intend to  maintain  these  controls  as
processes that may be appropriately modified as circumstances warrant.

     Based on the  evaluation  described  above and  subject  to the  discussion
below, our CEO and ACFO concluded that our controls and procedures are effective
in timely  alerting them to material  information  relating to us (including our
consolidated subsidiaries) required to be included in this Annual Report on Form
10-K.  There have been no  significant  changes in our  internal  controls or in
other factors that could  significantly  affect those controls since the date of
their last evaluation.

     However,  a control system, no matter how well conceived and operated,  can
provide only  reasonable,  not absolute,  assurance  that the  objectives of the
control system are met. Management necessarily applied its judgment in assessing
the  benefits  of  controls  relative to their  costs.  Because of the  inherent
limitations  in all control  systems,  no  evaluation  of  controls  can provide
absolute  assurance  that all control  issues and  instances  of fraud,  if any,
within our company have been  detected.  The design of any system of controls is
based in part upon certain  assumptions  about the  likelihood of future events,
and there can be no  assurance  that any design will  succeed in  achieving  its
stated goals under all potential  future  conditions,  regardless of how remote.
Because  of  the  inherent  limitations  in  a  cost-effective  control  system,
misstatements due to error or fraud may occur and not be detected.


                                       72
<PAGE>

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

    (a) (1) Financial Statements

             The consolidated financial statements of Virage as set forth under
             Item 8 are filed as part of this Annual Report on Form 10-K.

        (2) Financial Statement Schedule Virage, Inc.

                 Schedule II--Valuation and Qualifying Accounts

                                 (in thousands)
<TABLE>
<CAPTION>

                                                                 Additions                         Balance
                                                  Balance at      charged to                        at end
                                                  beginning       costs and                           of
                Description                       of period       expenses        Adjustments       period
                -----------                       ---------       --------        -----------       ------
<S>                                                <C>            <C>                <C>           <C>
Fiscal year ended March 31, 2003
     Allowance for doubtful accounts........       $1,153          $  --             $651          $  502
Fiscal year ended March 31, 2002
     Allowance for doubtful accounts........       $  867          $ 286             $ --          $1,153
Fiscal year ended March 31, 2001
     Allowance for doubtful accounts........       $  591          $ 276             $ --          $  867
</TABLE>

All other  schedules are omitted  because they are not applicable or the amounts
are  insignificant or the required  information is presented in the Consolidated
Financial Statements and Notes thereto in Item 8 above.

          (3) Exhibits

Exhibit
Number                                Description of Document
------                                -----------------------
 3.1+            Amended  and  Restated  Certificate  of  Incorporation  of  the
                 Registrant
 3.2+            Amended and Restated Bylaws of the Registrant
 4.1+            Second Amended and Restated Rights  Agreement,  dated September
                 21, 1999, between Registrant and certain stockholders
 4.2+            Specimen Stock Certificate
 4.3+            Amendment  No.  1  to  Second   Amended  and  Restated   Rights
                 Agreement,  dated  September 21, 1999,  between  Registrant and
                 certain stockholders
 4.5++           Warrant  to  Purchase  Common  Stock  between  Virage  and  MLB
                 Advanced Media, L.P., dated December 31, 2000
 4.6++           Warrant to Purchase  Common Stock  between  Registrant  and JRT
                 Investment  Company, a limited  partnership wholly owned by Jim
                 Joseph Revocable Trust, dated December 23, 2002.
10.1+            Form  of  Indemnification   Agreement  between  Registrant  and
                 Registrant's directors and officers
10.2+            1995 Stock Option Plan
10.3+            1997 Stock Option Plan
10.4+            2000 Employee Stock Purchase Plan
10.5+            Lease  Agreement,  dated January 17, 1996, as amended,  between
                 Casiopea Venture Corporation and Registrant
10.6+            Lease  Agreement,  dated January 17, 1996, as amended,  between
                 Casiopea Venture Corporation and Registrant
10.7+            License  Agreement,  dated  September 27, 1999,  between Office
                 Dynamics Limited, Protege Property and Registrant
10.8+            Security  and  Loan  Agreement,  dated  November  2,  1998,  as
                 amended, between Imperial Bank and Registrant
10.9+            Office  Lease,  dated  February 17,  2000,  between Jim Joseph,
                 Trustee,  Jim Joseph Revocable  Trust,  dated January 19, 2000,
                 and Registrant
10.10+           Agreement,  dated February 28, 2000,  between  Pinewood Studios
                 Limited and Registrant
10.11+++         2001 Nonstatutory Stock Option Plan
10.12++          Severance Agreement with Michael H. Lock
10.13++          Retention Bonus and Severance Agreement with Scott Gawel
10.14++          Amendment to Office Lease, Dated December 23, 2002, between 411
                 Borel LLC and Registrant
23.1             Consent of Ernst & Young LLP, Independent Auditors
24.1             Power of Attorney (included on signature page)
99.1             Certifications  under Section 906 of the  Sarbanes-Oxley Act of
                 2002

+Incorporated  by reference to the Registrant's  Registration  Statement on Form
S-1 (Registration No. 333-96315).

++ Incorporated by reference to the Registrant's Quarterly Reports filed on Form
10-Q on February 6, 2001, November 12, 2002 or February 14, 2003.

+++Incorporated  by reference to the  Registrant's  Annual  Report filed on Form
10-K on June 14, 2002.

   (b)  Reports on Form 8-K: No reports on Form 8-K were filed during the fourth
        quarter ended March 31, 2003.

   (c)  See Item 14(a)(3) above.

   (d)  See Items 8 and 14(a)(2) above.


                                       73
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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, on June 16, 2003.

                                           Virage, Inc.


                                        By:    /s/ Paul G. Lego
                                           -------------------------------------
                                           Paul G. Lego
                                           Chairman of the Board of Directors,
                                           President and Chief Executive Officer

                                POWER OF ATTORNEY

     Know all  persons  by these  presents,  that each  person  whose  signature
appears below constitutes and appoints Paul G. Lego and Scott C. Gawel,  jointly
and severally, his attorneys-in-fact,  each with the power of substitution,  for
him in any and all  capacities,  to sign any  amendments  to this Report on Form
10-K,  and to file the  same,  with  exhibits  thereto  and other  documents  in
connection  therewith,  with the  Securities  and  Exchange  Commission,  hereby
ratifying  and  confirming  all  that  each  of said  attorneys-in-fact,  or his
substitute or substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

                Signature                                      Title                             Date
                ---------                                      -----                             ----
<S>                                            <C>                                           <C>


             /s/ Paul G. Lego                  Chairman, President and                       June 16, 2003
-------------------------------------------    Chief Executive Officer
               Paul G. Lego                    (Principal Executive Officer)


            /s/ Scott C. Gawel                 Vice President, Finance and                   June 16, 2003
-------------------------------------------    Acting Chief Financial Officer
              Scott C. Gawel                   (Principal Financial and Accounting
                                               Officer)


            /s/ Alar E. Arras                  Director                                      June 16, 2003
-------------------------------------------
              Alar E. Arras


           /s/ Ronald E.F. Codd                Director                                      June 16, 2003
-------------------------------------------
             Ronald E.F. Codd


          /s/ Philip W. Halperin               Director                                      June 16, 2003
-------------------------------------------
            Philip W. Halperin


        /s/ Randall S. Livingston              Director                                      June 16, 2003
-------------------------------------------
          Randall S. Livingston


         /s/ Standish H. O'Grady               Director                                      June 16, 2003
-------------------------------------------
           Standish H. O'Grady


       /s/ William H. Younger, Jr.             Director                                      June 16, 2003
-------------------------------------------
         William H. Younger, Jr.
</TABLE>


                                       74
<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number                                Description of Document
------                                -----------------------
3.1+             Amended  and  Restated  Certificate  of  Incorporation  of  the
                 Registrant
 3.2+            Amended and Restated Bylaws of the Registrant
 4.1+            Second Amended and Restated Rights  Agreement,  dated September
                 21, 1999, between Registrant and certain stockholders
 4.2+            Specimen Stock Certificate
 4.3+            Amendment  No.  1  to  Second   Amended  and  Restated   Rights
                 Agreement,  dated  September 21, 1999,  between  Registrant and
                 certain stockholders
 4.5++           Warrant  to  Purchase  Common  Stock  between  Virage  and  MLB
                 Advanced Media, L.P., dated December 31, 2000
 4.6++           Warrant to Purchase  Common Stock  between  Registrant  and JRT
                 Investment  Company, a limited  partnership wholly owned by Jim
                 Joseph Revocable Trust, dated December 23, 2002.
10.1+            Form  of  Indemnification   Agreement  between  Registrant  and
                 Registrant's directors and officers
10.2+            1995 Stock Option Plan
10.3+            1997 Stock Option Plan
10.4+            2000 Employee Stock Purchase Plan
10.5+            Lease  Agreement,  dated January 17, 1996, as amended,  between
                 Casiopea Venture Corporation and Registrant
10.6+            Lease  Agreement,  dated January 17, 1996, as amended,  between
                 Casiopea Venture Corporation and Registrant
10.7+            License  Agreement,  dated  September 27, 1999,  between Office
                 Dynamics Limited, Protege Property and Registrant
10.8+            Security  and  Loan  Agreement,  dated  November  2,  1998,  as
                 amended, between Imperial Bank and Registrant
10.9+            Office  Lease,  dated  February 17,  2000,  between Jim Joseph,
                 Trustee,  Jim Joseph Revocable  Trust,  dated January 19, 2000,
                 and Registrant
10.10+           Agreement,  dated February 28, 2000,  between  Pinewood Studios
                 Limited and Registrant
10.11+++         2001 Nonstatutory Stock Option Plan
10.12++          Severance Agreement with Michael H. Lock
10.13++          Retention Bonus and Severance Agreement with Scott Gawel
10.14++          Amendment to Office Lease, Dated December 23, 2002, between 411
                 Borel LLC and Registrant
23.1             Consent of Ernst & Young LLP, Independent Auditors
24.1             Power of Attorney (included on signature page)
99.1             Certifications  under Section 906 of the  Sarbanes-Oxley Act of
                 2002

+Incorporated  by reference to the Registrant's  Registration  Statement on Form
S-1 (Registration No. 333-96315).

++ Incorporated by reference to the Registrant's Quarterly Reports filed on Form
10-Q on February 6, 2001, November 12, 2002 or February 14, 2003.

+++Incorporated  by reference to the  Registrant's  Annual  Report filed on Form
10-K on June 14, 2002.


                                       75