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, 2002

                                       OR

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


                         COMMISSION FILE NUMBER: 0-30903
                            ------------------------
                                  VIRAGE, INC.
             (Exact name of registrant as specified in its charter)

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

                          411 BOREL AVENUE, 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. [ ]

As of  June  12,  2002,  there  were  approximately  20,754,000  shares  of  the
registrant's Common Stock outstanding.  The aggregate market value of the voting
stock held by non-affiliates of the registrant,  based on the closing sale price
of the Common Stock on June 12, 2002 as reported on the Nasdaq  National  Market
was  approximately  $13,369,000.  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  2002 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, 2002.

<PAGE>


                                  VIRAGE, INC.

                                      INDEX
<TABLE>
<CAPTION>

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

Item 1.          Business.............................................................................................3

Item 2.          Properties..........................................................................................25

Item 3.          Legal Proceedings...................................................................................26


Item 4.          Submission of Matters to a Vote of Security Holders.................................................27


PART II

Item 5.          Market for Registrant's Common Equity and Related Stockholder Matters...............................29

Item 6.          Selected Consolidated Financial Data................................................................30

Item 7.          Management's Discussion and Analysis of Financial Condition and Results of
                      Operations.....................................................................................31

Item 7A.         Quantitative and Qualitative Disclosures About Market Risk..........................................42

Item 8.          Financial Statements and Supplementary Data.........................................................43

Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial
                      Disclosure.....................................................................................69

PART III

Item 10.         Directors and Executive Officers of the Registrant..................................................69

Item 11.         Executive Compensation..............................................................................69

Item 12.         Security Ownership of Certain Beneficial Owners and Management......................................69

Item 13.         Certain Relationships and Related Transactions......................................................69

PART IV

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................70

                 Signatures..........................................................................................71
</TABLE>

                                       2

<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 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.

     Our primary software products are a part of our Video Application  Platform
that  provides  the  necessary   infrastructure   for   seamlessly   integrating
Internet-ready  video into an  internal or external  website.  The Virage  Video
Application  Platform includes our  SmartEncode(TM)  products,  which encode and
index video within a single automated  process,  and our server products,  which
enable the publishing and distribution of streaming video.

     During our  fiscal  year  ended  March 31,  2002,  we also  introduced  the
following  new software  products  designed to further our presence in the media
and  entertainment,  corporate,  educational  and  government  marketplaces:  VS
Webcasting(TM),  which allows  corporations  to schedule and manage live webcast
events  and  then  easily  turn  each  into a  searchable  on-demand  event;  VS
Production(TM),  an integrated  software  solution  that  automates a customer's
video production process from acquisition to distribution; VS Publishing(TM),  a
complete workflow solution that allows media and entertainment companies to turn
their content into  compelling rich media  programming for the Internet;  and VS
Learning(TM) which allows global  corporations to use video and other rich media
to build and deliver personalized, on-demand e-learning courses for use in sales
training, product launches, human resources and other professional development.


     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.

                                       3
<PAGE>


Business Background and Strategy

     The  majority  of our  revenues  are  derived  from our  Video  Application
Platform,  which is  designed  to meet the  needs of users  who have  video  and
rich-media  assets and need to publish,  manage and distribute these assets over
the Internet  and/or their  intranets.  These users 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.  Revenues
from media and entertainment  companies have comprised a substantial  portion of
our total revenues followed by revenues from corporate  enterprises,  government
agencies and educational  institutions.  We expect that a significant portion of
our  revenues  will  continue  to be  derived  from our  SmartEncode  and server
products.  However,  in  order to  expand  the  market  for our  technology  and
expertise beyond that for our SmartEncode and server products,  we recently have
developed products that work "out-of-the-box" for a specific video or rich-media
application,  such as training,  communications,  video production,  or internet
publishing.  Our development  efforts for these applications focus on functions,
features, and intuitive user interfaces that allow those with little or no video
expertise to implement the intended  application  quickly and easily. We believe
that  successful  development  and  marketing  of such  application  products is
critical  to our  ability  to grow  our  future  sales to a level  required  for
profitability. There is no guarantee that such new product areas will succeed in
the marketplace. If these new application products do not succeed, we may not be
able to develop a profitable and sustainable business.


     We introduced  these new  application  products during the year ended March
31, 2002 which together are designed to further our  enterprise  strategy and to
provide  enhanced  solutions  to  our  media  and  entertainment  customers  and
corporate  enterprise  customers.  These  products  include  VS  Webcasting,  VS
Production,  VS Publishing and VS Learning. With the exception of VS Production,
we  offer  our  customers  the  option  of  running  any of these  solutions  by
leveraging  our  application   services.  We  believe  these  offerings  are  an
important,   lower-cost,   easily  deployable  alternative  to  demonstrate  the
functionality and value that our technology and services brings 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 solution sale.

     Our new  application  products  are  marketed  directly  to  users  such as
executives and managers in sales, marketing, and training positions, in addition
to  information  technology  executives.  For  example,  we  can  market  our VS
Webcasting product to sales executives to assist with new product  introductions
and sales force training. The VS Webcasting product can be used for a live event
transmission  to a widely  distributed  field sales force,  and also provides 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  he or she  needs  more
information.  We market and sell this product by demonstrating both cost savings
and  productivity  increases for the users,  thus  establishing  a  quantifiable
return on investment.

     We are actively marketing our recently introduced  application products and
services  to new  enterprise  accounts  as  well  as to our  installed  base  of
enterprise  customers  that have licensed  products  from our Video  Application
Platform.  We have focused our sales force on establishing new relationships and
developing  existing  relationships by offering  entry-level  pilots in order to
demonstrate  the value  proposition  that our  application  products  offer.  In
addition,  we are working with strategic channel partners such as Sony, IBM, and
Sumitomo to extend our sales reach beyond our own sales force.


Products and Services

     We  are  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.

                                       4

<PAGE>

SMARTENCODE AND INDEXING PRODUCTS

VideoLogger(R) and Media Analysis Plug-ins

     With a single  real-time  anlaysis of the video  content,  our  VideoLogger
application  generates a rich information index and  simultaneously  encodes the
video into the selected digital formats. The 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.  The  VideoLogger  interface  allows a customer  to
monitor video capture and indexing,  control multiple encoders, and create clips
on the fly. 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 powerful 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.  For outsourcing needs, Virage production
facilities in the United  States and Europe can capture  content from a range of
professional and consumer satellites and fiber networks, and from all major tape
formats.


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.

                                       5

<PAGE>


SERVER PRODUCTS

Virage Solution Server(TM)

     The powerful  XML-based  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    Reporting:  daily,  weekly and monthly traffic reports provide content
          owners  with  Nielsen-type   ratings  for  published   content,   with
          information on most popular search terms, most accessed clips and best
          traffic drivers;

     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
          & 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.


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.

                                       6

<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.
Built on our award-winning,  open platform, VS Production is scalable,  reliable
and can integrate into any IT infrastructure.

VS Publishing

     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.  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.

VS Learning

     VS Learning  provides rich media  training and  e-learning  solutions  that
bring subject  matter  experts face to face with learners  anywhere and anytime.
Content  authors can assemble  video-based  training  courses quickly and easily
from anywhere in the world. Using VS Learning, global corporations can use video
and other rich media to build and  deliver  personalized,  on-demand  e-learning
courses for use in sales training,  product launches,  human resources and other
professional  development.  Learners can get pinpoint access to mission-critical
training material--either online or on a CD.

SERVICE OFFERINGS

Software installation and training

     License  software  customers  have the option to  contract  with Virage for
software installation and training support. These services ensure that customers
can get up and running successfully with Virage software as quickly as possible.
These services are typically billed on an hourly or daily basis.

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  implementing  our  SmartEncode   products  in  a  unique
production  environment or building specialized plug-ins to our products. We can
also build custom web templates for Virage  Solution  Server  installations  and
help with website  integration.  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.

SmartEncode services

     Instead of  purchasing  our  SmartEncode  products,  customers  can instead
outsource  their  video  processing  needs  to us.  Using  our  own  SmartEncode
products,  we process  content  from a variety of analog or digital  sources and
produce  multiple formats and bit rates of high quality encoded video 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 also can  transcribe  content to
produce an exact text of the speech.  We typically  bill for such  services as a
charge per hour or charge per minute of video processed depending upon the level
of  services  required.  These  services  are  provided  out of  our  production
facilities in the United States and Europe.

                                       7

<PAGE>


Application hosting services

     Instead of purchasing our server products,  customers can instead choose to
have us host the  Virage  Solution  Server  and  related  applications  on their
behalf. We host the video information,  also known as metadata,  and surrounding
application logic while one of our content distribution partners typically hosts
the streaming video files. 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.

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  media  and  entertainment   companies,   corporate
enterprises,  government  entities and  universities.  Our sales  strategy is to
pursue multiple  opportunities for large-scale  deployments within each customer
account.  We also  recently  broadened our sales  strategies  to address  common
business user problems in multiple  areas of an  enterprise.  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.

     Through our direct  sales force in Boston,  Chicago,  London,  Los Angeles,
Miami,  New York, San Francisco,  Singapore,  Atlanta,  Houston,  and Washington
D.C., we focus on larger customers in North America,  Europe, Latin America, and
Asia. Our field  representatives sell our products and services to customers who
have been qualified by our telesales  personnel.  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 31% of total revenues for the year ended March 31, 2002.

     Our historically  largest reseller recently  announced that it is divesting
its business segment in which our products are most complementary.  As a result,
we encountered  very little channel sales activity from this reseller during the
final fiscal  quarter of our fiscal year ended March 31, 2002,  particularly  in
Europe and Latin  America.  We believe this factor  contributed to our quarterly
decline in total  revenues  during the fourth fiscal  quarter of our fiscal year
ended March 31, 2002. As a result of this channel partner loss, or if we were to
lose one of our channel  partners or any of our large  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,  seminars,  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
webinars,  seminars  presented over the Internet utilizing our own VS Webcasting
and VS Learning products. We have significantly reduced our spending budgets for
trade shows and public  relations  in order to fund an increased  investment  in
these webinars.  Should our new focus on webinars fail to attract new customers,
our revenues may be impacted.

                                       8

<PAGE>

Customers

     Our customers represent large media and entertainment  corporations,  other
global corporations,  educational  institutions and government entities. For the
year ended March 31, 2002, one customer accounted for 14% of our total revenues.
No customer accounted for more than 10% of our total revenues for the year ended
March 31, 2001. For the year ended March 31, 2000,  two customers  accounted for
13% and 10% of our total revenues, respectively.


     During the fourth  fiscal  quarter of our fiscal year ended March 31, 2002,
we completed our application services contract with our largest customer for the
fiscal year ended March 31,  2002.  We were unable to reach  mutually  agreeable
terms for a renewal with this  customer and this  customer had no  obligation to
renew its  contract  with us. In addition,  our  historically  largest  reseller
announced  that it is divesting  its business  segment in which our products are
most  complementary.  As a result,  we  encountered  very little  channel  sales
activity from this reseller  during the fourth fiscal quarter of our fiscal year
ended March 31, 2002. We believe these two factors  contributed to our quarterly
decline in total  revenues  during the final  fiscal  quarter of our fiscal year
ended March 31, 2002. As a result of this significant  customer loss and channel
partner loss, our future  operating  results could be significantly  harmed.  In
addition,  if we were to lose one of our  other  large  customers  or any of our
large  customers were to delay or default on obligations  under their  contracts
with us, our future operating results could be significantly harmed.


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
$9,172,000,  $9,101,000 and $4,182,000 for the years ended March 31, 2002,  2001
and 2000 respectively.  Our recent 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  the  base  Video
Application  Platform development teams. We have recently hired an R&D executive
and  development  managers who we believe have  stronger  experience in managing
such  parallel  team  efforts.   Our  ability  to  successfully  manage  product
development  in a more  complex  environment  will be critical to our ability to
execute our product plans and grow our revenues.

Competition

     The Internet video and rich-media  marketplace is new, rapidly evolving and
intensely  competitive.  As  more  companies  begin  to  deploy  searchable  and
interactive  video on the  Internet,  we expect  competition  to  intensify.  We
currently   compete   directly  with  other  providers  in  the  Internet  video
infrastructure and services marketplace  including Convera Corporation,  Inktomi
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 and searchable video portals. In addition,  we may compete with
our  current  and  potential  customers  who may  develop  software  or  perform
application services internally.


                                       9

<PAGE>

     We believe that the principal competitive factors in our market are:

     o    video indexing management functionality;

     o    services experience and expertise;

     o    demonstrated video technology expertise;

     o    customer references;

     o    company reputation;

     o    ease of installation and use;

     o    real-time processing capability;

     o    software reliability and stability;

     o    scalability;

     o    pricing;

     o    customer support; and

     o    adoption by other customers

     We  believe  we  compete  favorably  with  our  competitors  based on these
factors.  However,  the market for our products is relatively  small today,  and
therefore  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 very  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.  Seven patents have been issued by
the Patent and Trademark Office. Our remaining thirteen patent  applications are
currently pending.  In 1997, we entered into a five-year patent  cross-licensing
agreement  with IBM,  which we  renewed  in 2002.  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, 2002, we had 157 employees and 3 full-time contractors.  Of
our 160  total  staff,  28 were  employed  in  services,  45  were  employed  in
engineering,  57 were employed in sales and  marketing,  and 30 were employed in
general and  administrative  positions.  None of our  employees  is subject to a
collective bargaining agreement,  and we have never experienced a work stoppage.
We consider our relations with our employees to be good.

                                       10

<PAGE>

Risk Factors

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

                          Risks Related to Our Business

Our  revenue,  cost of sales,  and  expense  forecasts  are based  upon the best
information  we have  available,  but there  are a number of risks  that make it
difficult for us to foresee or accurately  evaluate factors that may impact such
forecasts.

    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.  Visibility  over  potential  sales is typically
limited to the current  quarter and our visibility for even the current  quarter
is  rather  limited.  In order to  provide a revenue  forecast  for the  current
quarter, we must make assumptions about conversion of these potential sales into
current quarter  revenues.  Such assumptions may be materially  incorrect due to
competition for the customer order including 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 hire and retain qualified  personnel,  our inability to develop new
markets in Europe or Asia, and other factors that may be beyond our control such
as the  strength of  information  technology  investment.  In  addition,  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 such
third  parties.  For example,  during our fiscal fourth  quarter ended March 31,
2002, our total revenues were  significantly  lower than the total revenues that
we forecast and publicly  provided to investors and all other parties in January
2002.

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

    Our cost of sales and  expense  forecasts  are based  upon our  budgets  and
spending  forecasts  for  each  area of the  Company.  Circumstances  we may not
foresee  could  increase cost and expense  levels beyond the levels  forecasted.
Such circumstances may include  competitive  threats in our markets which we may
need to address with  additional  sales and  marketing  expenses,  severance for
involuntary  reductions in headcount  should we determine cost cutting  measures
are  necessary  subsequent to our publicly  provided  guidance,  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.


We have allocated significant product development, sales and marketing resources
toward the  deployment of our new  application  products and we face a number of
risks that may impede market acceptance of these products and therefore hurt our
financial results.

    We have invested  significant  resources  into  developing and marketing our
recently  introduced  application  products.  We believe that these  application
products  broaden  the  value  proposition  to that of the  day-to-day  business
software  application  user and expect to derive future  revenues as a result of
these product  introductions.  The market for these  products is in a relatively
early stage. We cannot predict how the market for our applications will develop,
and part of our strategic challenge will be to convince enterprise  customers of
the  productivity,  communications,  cost and other benefits of our  application
products. Our future revenues and revenue growth rates will depend in large part
on our success in 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,  sales
and marketing costs, which will hurt our business.

                                       11

<PAGE>


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


Because  we  have  only  recently   introduced  our  video  software   products,
application  services  and  professional  services,  and  because  we have  just
introduced  our new  application  products,  we face a number of risks  that may
seriously harm our business.


    We  incorporated  in April 1994 and to date we have  generated  only limited
revenues.  We introduced our first video software products in December 1997, our
application  services in May 1999, our  professional  services in March 2001 and
our  application  products during the second half of our fiscal year ended March
31, 2002.  Because we have a limited  operating  history with our video software
products,  application services,  professional services and application products
and because our revenue sources may continue to shift as our business  develops,
you must consider the risks and  difficulties  that we may encounter when making
your investment decision. These risks include our ability to:


     o    expand our customer base;

     o    increase penetration into key customer accounts;

     o    maintain our pricing structure;

     o    develop new video products and application services; and

     o    adapt our products and services to meet changes in the Internet  video
          infrastructure marketplace.

    If we do  not  successfully  address  these  risks,  our  business  will  be
seriously harmed.

Our business model is unproven and may fail,  which may  significantly  decrease
the market price of our common stock.

    We do not know whether our business  model and strategy will be  successful.
Our  business  model is based on the premise that  content  providers  and other
entities will use our licensed products,  professional  services and application
services to catalog,  manage, and distribute video content over the Internet and
intranets. Our potential customers may elect to rely on their internal resources
or on lower priced  products  and  services  that do not offer the full range of
functionality  offered by our products and  services.  In addition,  we recently
introduced our application products and believe these solutions products broaden
the value proposition of our technology to business  software  application users
within media and entertainment  enterprises,  global  corporations,  educational
institutions and government entities. If the assumptions underlying our business
model are not valid or if we are unable to  implement  our  business  plan,  our
business will suffer.

    The average size of our customer orders has been between $40,000 and $60,000
over the past  several  quarters.  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 year
ended March 31, 2002, our sales and marketing expenses totaled 103% of our total
revenues.  We also have recently  introduced  our new  applications  products in
hopes of increasing both our revenues and average size of our customers'  orders
and these products have pricing models based upon a number of assumptions  about
the market for our  products.  If our  assumptions  are incorrect or our pricing
does not work as  intended,  we may not be able to increase  the average size of
our  customer  orders  or reduce  the costs of  selling  and  marketing  for our
products  and,  therefore,  we may not be  able  to  develop  a  profitable  and
sustainable business.

                                       12

<PAGE>


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, 2002, we had an accumulated  deficit of  $88,924,000.  We may incur
increasing  research  and  development,  sales and  marketing  and  general  and
administrative  expenses.  Accordingly,  our  failure to increase  our  revenues
significantly or improve our gross margins will harm our business.  In addition,
our cash, cash  equivalent and short-term  investment  resources  (collectively,
"cash  resources")  totaled  $30,694,000  as of  March  31,  2002  and  we  used
$17,871,000 in our operating activities during the year ended March 31, 2002. We
anticipate that our operating  activities will use additional cash resources for
at  least  the  next 12  months.  This  almost  certainly  will  leave us with a
deteriorated  cash  position in  comparison to our cash position as of March 31,
2002 and this may affect our ability to transact future strategic  operating and
investing  activities in a timely manner,  which may harm our business and cause
our stock price to fall.  The current  business  environment is not conducive to
raising additional financing.  If we require additional financing,  the terms of
such financing may heavily dilute the ownership  interests of current investors,
and cause our stock price to fall  significantly or we may not be able to secure
financing upon acceptable terms at all. Accordingly,  our stock price is heavily
dependent upon our ability to grow our revenues and manage our costs in order to
preserve cash resources.


Our restructuring efforts may not result in the intended benefits.

   During  our year ended  March 31,  2002,  we took  steps to better  align the
resources  required to operate  efficiently  in the prevailing  market.  Through
these steps,  we reduced our headcount and are attempting to sublease our excess
facility  capacity.  While we believe  that these steps help us achieve  greater
operating  efficiency,  we have no prior  history  with  such  measures  and the
results  of these  measures  are less than  predictable.  These  measures  could
adversely affect our employees that we wish to retain, customers and/or vendors,
which  could harm our  ability to operate as  intended  and which would harm our
business.

Our quarterly  operating  results are volatile and  difficult to predict.  If we
fail to meet the expectations of public market analysts or investors, the market
price of our common stock may decrease significantly.

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


    Our  quarterly  revenues  depend on a number of  factors,  many of which are
beyond our  control,  which makes it  difficult  for us to predict our  revenues
going forward. Our operating expenses may increase and if our revenues and gross
margins do not increase,  our business could be seriously harmed.  Our operating
expenses may increase from 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  subsequent to our publicly  provided  guidance,  write-downs  of
equipment and/or  facilities in the event of unforeseen  excess capacity,  legal
claims,  employee turnover,  additional royalty expenses should we lose a source
of current technology,  losses of key management  personnel,  unknown defects in
our  products,   and  other  factors  we  cannot  foresee.  In  addition,   many
expenditures  are  planned or  committed  in advance in  anticipation  of future
revenues,  and if our  revenues  in a  particular  quarter  are  lower  than  we
anticipate,  we may be unable to reduce  spending in that quarter.  As a result,
any  shortfall  in revenues or a failure to improve  gross  profit  margin would
likely hurt our quarterly operating results.


    For our upcoming fiscal year, we plan to invest significantly in developing,
marketing,  and  selling  our new  application  products.  If we are not able to
achieve  significant  revenue growth from these products,  we may not be able to
meet analyst expectations and our stock price may drop significantly.

                                       13

<PAGE>

Future sales of stock could affect our stock price.

   If our stockholders sell substantial  amounts of our common stock,  including
shares issued upon the exercise of  outstanding  options and in connection  with
acquisitions,  the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related  securities
in the future at a time and price that we deem appropriate.

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.  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.
If the  closing  bid  price  of our  common  stock  does not  thereafter  regain
compliance  for a minimum  of 10  consecutive  trading  days  during the 90 days
following  notification  by NASDAQ,  NASDAQ  may  delist  our common  stock from
trading on the NASDAQ National Market. There can be no assurance that our common
stock will remain  eligible for trading on the NASDAQ  National  Market.  If our
stock were delisted,  the ability of our  stockholders to sell any of our common
stock at all would be severely, if not completely, limited.

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

    Our  revenues  are  dependent on the health of the economy and the growth of
our customers and potential future  customers.  If the economy remains stagnant,
our customers may continue to delay or reduce their spending on our software and
service solutions.  When economic  conditions 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.  If that
continues to happen,  our revenues could suffer and our stock price may decline.
Further,  if U.S. or global  economic  conditions  worsen,  we may  experience a
material  adverse  impact on our  business,  operating  results,  and  financial
condition.

Our service revenues and recently introduced VS Production solution product have
substantially  lower gross  profit  margins  than our license  revenues,  and an
increase in service revenues or the VS Production  solution products relative to
license revenues could harm our gross margins.


    Our service  revenues,  which includes fees for our application  services as
well as professional  services such as consulting,  implementation,  maintenance
and  training,  were 54%, 45% and 20% of our total  revenues for the years ended
March  31,  2002,  2001  and  2000,  respectively.  In  addition,  our  recently
introduced  VS  Production  solution  may  contain a  hardware  element  that is
developed,  manufactured and marketed by a third-party  partner and bundled with
our software and resold by us. Our service  revenues  have  substantially  lower
gross  profit  margins  than our  license  revenues  and we  expect  that our VS
Production  solution may also have substantially lower gross profit margins than
our license revenues. Our cost of service revenues for the years ended March 31,
2002,  2001 and 2000  were  95%,  144% and 218%,  respectively,  of our  service
revenues. An increase in the percentage of total revenues represented by service
revenues and/or our VS Production  solution could  adversely  affect our overall
gross profit margins.

                                       14


<PAGE>

    Service  revenues  as a  percentage  of total  revenues  and cost of service
revenues  as a  percentage  of total  revenues  have varied  significantly  from
quarter  to  quarter  due  to  our  relatively   early  stage  of   development.
Historically,  the  relative  amount of service  revenues as compared to license
revenues  has  varied  based on  customer  demand for our  application  services
revenues.   Our  application  services  require  a  relatively  fixed  level  of
investment in staff,  facilities and  equipment.  We typically 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
level of  application  service  revenues in the new fiscal year will allow us to
recover our fixed costs and make a positive gross profit margin. In addition, we
have experienced an increase in the percentage of license  customers  requesting
professional  services as a result of our introduction of professional  services
in the fourth quarter of fiscal 2001, which will also impact the relative amount
of service revenues as compared to license  revenues.  We expect that the amount
and profitability of our professional services will depend in large part on:

     o    the software solution that has been licensed;

     o    the complexity of the customers' information technology environments;

     o    the resources directed by customers to their implementation projects;

     o    the size and complexity of customer implementations; and

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

If  our   internal   professional   services   organization   does  not  provide
implementation  services effectively and according to schedule, our revenues and
profitability would be harmed.

    Customers that license our products may require consulting,  implementation,
maintenance and training services and obtain them from our internal professional
services,  customer  support and training  organizations.  When we provide these
services,  we may be required to recognize  revenues  from the  licensing of our
software products as the implementation services are performed or based upon the
completed contract method. If our internal  professional  services  organization
does not  effectively  implement and support our products or if we are unable to
expand our internal  professional  services  organization  as needed to meet our
customers'  needs,  our ability to sell software,  and accordingly our revenues,
will be harmed.

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

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

    For example,  although  the  Company's  mix of license and service  revenues
generally  varies  from  quarter  to  quarter  based  upon the timing of license
shipments and other factors,  our service  revenues  decreased  during the three
months ended September 30, 2001 in comparison to the three months ended June 30,
2001 as a result of reduced revenues from a large application services customer.
This application  services customer accounted for approximately 14% of our total
revenues during the year ended March 31, 2002. However,  our revenue recognition
policies  precluded us from  recognizing  revenues from this customer in certain
quarters as we did not receive certain payments from this customer that were due
to us. As a result, this customer accounted for 16% of our total revenues during
the three months ended June 30, 2001,  less than 5% of our total revenues in the
three months ended  September  30,  2001,  and 30% of our total  revenues in the
three  months ended  December 31, 2001 (the fiscal  quarter in which we received
significant  payments from the customer for past services  performed in the June
2001 and September 2001 quarters).


                                       15

<PAGE>

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

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

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

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

If we fail to increase  the size of our  customer  base or increase our revenues
with our existing customers, our business will suffer.

    Increasing  the size of our  customer  base and  increasing  the revenues we
generate from our customer base are critical to the success of our business.  To
expand our customer  base and the revenues we generate  from our  customers,  we
must:

     o    generate additional revenues from different  organizations  within our
          customers;

     o    conduct  effective   marketing  and  sales  programs  to  acquire  new
          customers; and

     o    establish  and maintain  distribution  relationships  with value added
          resellers and system integrators.

    Our  failure  to  achieve  one or more of  these  objectives  will  hurt our
business.

The prices we charge for our products and  services  may  decrease,  which would
reduce our revenues and harm our business.

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

     o    purchase volumes;

     o    competitive pricing;

     o    the specific requirements of the order;

     o    the duration of the licensing arrangement; and

     o    the level of sales and service support.

                                       16

<PAGE>

    If we are unable to sell our  products  or  services  at  acceptable  prices
relative to our costs,  or if we fail to develop and introduce on a timely basis
new products  and services  from which we can derive  additional  revenues,  our
financial results will suffer.

If our customers fail to generate traffic on the video-related sections of their
Internet sites, our recurring revenues may decrease,  which may adversely affect
our business and financial results.

    Our  ability  to achieve  recurring  revenues  from some of our  application
services is partly  dependent  upon the success of our  customers in  generating
traffic on the  video-related  sections of their Internet sites.  Generally,  we
generate recurring revenue from our application  services whenever our customers
add  more  hours  of  video to an  existing  project.  If our  consumer-oriented
customers do not attract and maintain traffic on video-related sections of their
sites, video queries may decrease and customers may decide not to add more hours
of video to  existing  projects.  This  result  would  cause  revenues  from our
application  services  to  decrease,  which  will  prevent us from  growing  our
business.

We rely on, and expect to continue to rely on, a limited number of customers for
a  significant  portion  of our  revenues  and if any of these  customers  stops
licensing our software or purchasing  our services,  our operating  results will
suffer.

     Historically, a limited number of customers has accounted for a significant
portion of our revenues and revenues from media and entertainment companies have
comprised a substantial  portion of our total revenues followed by revenues from
corporate enterprises,  government agencies and educational institutions. During
the fourth fiscal  quarter of our fiscal year ended March 31, 2002, we completed
our  application  services  contract  with our  largest  customer  (a media  and
entertainment customer) for the fiscal year ended March 31, 2002. We were unable
to reach mutually  agreeable terms for a renewal with this former  customer.  In
addition, our historically largest reseller (that generally re-sold our products
to media and  entertainment  enterprises)  announced  that it is  divesting  its
business segment in which our products are most  complementary.  As a result, we
encountered  very little  channel sales  activity from this reseller  during the
fourth fiscal  quarter of our fiscal year ended March 31, 2002. We believe these
two factors  contributed to our quarterly  decline in total revenues  during the
fourth  fiscal  quarter of our fiscal year ended March 31, 2002.  As a result of
this  significant  customer loss and channel partner loss, our future  operating
results could be significantly  harmed.  In addition,  if we were to lose one of
our other large customers or any of our large customers were to delay or default
on obligations under their contracts with us, our future operating results could
be significantly harmed.

    We anticipate  that our operating  results in any given period will continue
to  depend  to a  significant  extent  upon  revenues  from a  small  number  of
customers.  We cannot be certain  that we will retain our current  customers  or
that we will be able to recruit additional or replacement customers.  If we were
to lose one or more  customers,  our operating  results  could be  significantly
harmed.

Any  failure  of our  network  could  lead  to  significant  disruptions  in our
application  services  business  that could  damage our  reputation,  reduce our
revenues or otherwise harm our business.

    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, 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.

                                       17


<PAGE>

    Our failure to protect our network  against  damage from any of these events
will hurt our business.

We depend on outside third parties to maintain our  communications  hardware and
perform most of our computer  hardware  operations  and if these third  parties'
hardware and operations fail, our reputation and business will suffer.

    We have communications  hardware and computer hardware operations located at
Exodus  Communications'  facility in Santa  Clara,  California  and at Palo Alto
Internet  Exchange in Palo Alto, CA. We do not have complete  backup systems for
these operations.  A problem with, or failure of, our communications hardware or
operations  could result in  interruptions or increases in response times on the
Internet sites of our customers. Furthermore, if these third party partners fail
to adequately maintain or operate our communications  hardware or do not perform
our computer hardware operations  adequately,  our services to our customers may
not be available. We have experienced system failures in the past. Other outages
or system  failures may occur.  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.

If we do not successfully  develop new products and services to respond to rapid
market changes due to changing technology and evolving industry  standards,  our
business will be harmed.

    The  market  for our  products  and  services  is  characterized  by rapidly
changing  technology,  evolving  industry  standards,  frequent  new product and
service  introductions and changes in customer demands.  Intense  competition in
our industry may  exacerbate  these market  characteristics.  Our future success
will  depend  to a  substantial  degree on our  ability  to offer  products  and
services  that  incorporate  leading  technology,  and respond to  technological
advances  and  emerging  industry  standards  and  practices  on  a  timely  and
cost-effective  basis.  To  succeed,  we must  anticipate  and adapt to customer
requirements in an effective and timely manner,  and offer products and services
that meet customer demands.  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 costs, which will hurt our business.

    The  development  of new or enhanced  products and services is a complex and
uncertain  process that requires the accurate  anticipation of technological and
market trends.  We may  experience  design,  manufacturing,  marketing and other
technological   difficulties   that  could  delay  our  ability  to  respond  to
technological changes, evolving industry standards,  competitive developments or
customer requirements. You should additionally be aware that:

     o    our technology or systems may become obsolete upon the introduction of
          alternative  technologies,  such as products  that  better  manage and
          search video content;

     o    we could incur substantial costs if we need to modify our products and
          services to respond to these alternative technologies;

     o    we may not  have  sufficient  resources  to  develop  or  acquire  new
          technologies  or to  introduce  new  products or  services  capable of
          competing with future technologies; and

     o    when  introducing  new or  enhanced  products or  services,  we may be
          unable to manage  effectively  the transition  from older products and
          services and ensure that we can deliver  products and services to meet
          anticipated customer demand.

                                       18

<PAGE>


Power outages in California could adversely affect us.


    We have significant  operations in the state of California and are dependent
on a continuous power supply.  California has had energy crises in the past that
resulted in rolling  blackouts  throughout  the state.  These rolling  blackouts
could  have  substantially  disrupted  our  operations  and have  increased  our
expenses.  California may implement  future rolling  blackouts  should the state
find itself in a similar future energy  predicament.  If blackouts interrupt our
power  supply,  we may be  temporarily  unable  to  continue  operations  at our
California  facilities.  Any  such  interruption  in  our  ability  to  continue
operation  at our  facilities  could delay the  development  of our products and
services and disrupt communications with our customers or other third parties on
which we rely, such as web hosting service providers. Future interruptions could
damage our  reputation  and could result in lost revenue,  either of which could
substantially  harm our business and results of operations.  Furthermore,  there
have been, in the past, shortages in wholesale electricity supplies and this has
caused power prices to increase.  If energy prices should  increase again in the
future,  our operating expenses will likely increase which could have a negative
effect on our  operating  results,  which in turn may  cause our stock  price to
fall.


We depend on technology licensed to us by third parties,  and the loss of or our
inability to maintain these  licenses  could result in increased  costs or delay
sales of our products.

    We  license  technology  from  third  parties,  including  software  that is
integrated  with  internally  developed  software  and used in our  products  to
perform key functions. We anticipate that we will continue to license technology
from third parties in the future. This software 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  technology  licenses  could  result in delays in the  licensing of our
products until equivalent technology,  if available, is developed or identified,
licensed  and  integrated.  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.

If we are unable to retain our key personnel, our business may be harmed.

    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.

                                       19

<PAGE>


The threat of  terrorism  and/or  other  major  militaristic  related  responses
creates a greater  amount of  instability  for global  business  operations  and
should a major catastrophe occur, our business may be harmed.

    The worldwide  socio-political  environment has changed  dramatically  since
September 11, 2001. Our customers,  potential  customers and vendors are located
worldwide and  generally  within major  international  metropolitan  areas.  For
example,  we have a number of customers  located in and around New York City and
their  operations  have been  disrupted in many cases by the events of September
11,  2001.  Should a major  catastrophe  occur within the vicinity of any of our
customers'  and/or  potential   customers'  and/or  vendors'   operations,   our
operations may be adversely impacted and our business may be harmed.

    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. We conduct our business in leased
space that is shared with other tenants and that contain ventilation systems and
postal operations. Our business also requires that certain personnel,  including
our  officers,  travel in order to perform  their jobs  appropriately.  Should a
major catastrophe occur nationally,  internationally or in specific cities where
we conduct our operations our business  could be harmed.  In addition,  should a
catastrophe occur related to any of our employees, our business may be harmed.

Our workforce  reductions  and financial  performance  may adversely  affect the
morale and  performance  of our  personnel  we wish to retain and may  adversely
affect our ability to hire new personnel.

   Our  restructuring  efforts included  reductions in our workforce in order to
reduce costs and bring staffing in line with our anticipated requirements. There
were costs  associated  with the workforce  reductions  related to severance and
other  employee-related  costs, and our realignment plan may yield unanticipated
costs and consequences, such as attrition beyond our planned reduction in staff.
In addition,  our common stock has declined in value below the exercise price of
many options granted to employees  pursuant to our stock option plans. Thus, the
intended benefits of the stock options granted to our employees, the creation of
performance  and  retention  incentives,  may  not  be  realized.  In  addition,
workforce  reductions and management  changes create anxiety and uncertainty and
may adversely affect employee morale. As a result, we may lose employees whom we
would prefer to retain.  As a result of these factors,  our remaining  personnel
may seek employment with larger,  more  established  companies or companies they
perceive as having less volatile stock prices.  In addition,  we may be required
to create  additional  performance  and retention  incentives in order to retain
these  employees  including  the granting of  additional  stock options to these
employees at current prices or issuing  incentive cash bonuses.  Such incentives
may  either  dilute  our  existing  stockholder  base or  result  in  unforeseen
operating  expenses,  which may cause our stock price to fall.  For example,  in
February 2002, we introduced a Voluntary Stock Option  Cancellation and Re-grant
Program in which a number of our  employees  cancelled  stock  options  that had
significantly  higher  exercise  prices in  comparison to where our common stock
price currently trades.  These employees will receive new options in August 2002
at exercise  prices  equivalent to our common stock price at that date. This may
cause dilution to our existing stockholder base, which may cause our stock price
to fall. Additionally, the exercise price of the new option could potentially be
higher than the price of the cancelled  options,  which would render the options
less effective as an incentive for our employees.

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.

    We  expect  that we will  need to hire  sales,  development,  marketing  and
administrative  personnel in the foreseeable  future.  Competition for personnel
throughout  our industry is intense.  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.
Some members of our existing  management  team have been  employed at Virage for
less than one year. We may fail to attract and retain qualified personnel, which
could have a negative impact on our business.

                                       20


<PAGE>


Failure to properly  manage our  potential  growth would be  detrimental  to our
business.

    Any  growth  in our  operations  will  place  a  significant  strain  on our
resources,  especially in light of the significant  headcount reductions we have
made to our business during the year ended March 31, 2002 and may be required to
make in the future.  To the extent we acquire  other  businesses,  we would also
need to integrate and assimilate  new  operations,  technologies  and personnel.
Failure to manage any growth effectively could hurt our business.

We have leases for our facilities that expire on various dates through 2006 that
we may not be able to  fully  utilize  and this  may  cause  us to  incur  large
write-offs for excess capacity.

    Our principal administrative,  research and development, sales, services and
marketing  activities  are  conducted  on two  leased  properties  in San Mateo,
California: the first property consists of 21,000 square feet and expires in May
2002 and the second  property  consists  of 48,000  square  feet and  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 June 2003 and a property near London,  England where the Company
performs  sales,  services,  marketing and  administrative  activities  and that
expires in February  2004.  During the years ended March 31, 2002 and 2001,  the
Company was able to sublease its excess  capacity at its facilities and received
rental  payments  from its tenants.  Two of the Company's  sublease  tenants who
accounted for the significant  majority of the Company's  sublease  receipts did
not renew their  sublease  agreements  during the year ended March 31, 2002. The
Company  has not been  successful  in  finding  any new  sublease  tenants  and,
accordingly,  recorded  expense of $396,000  during the three months ended March
31, 2002 to account for its on-going,  excess operating  facilities.  Should the
Company  continue to have excess  operating  lease  capacity  and the Company is
unable to find a sub lessee at a rate  equivalent to its  operating  lease rate,
the Company  would be required to record a charge for the rental  payments  that
the Company owes to its landlord relating to this excess facility capacity.  The
Company's management reviews its facility  requirements and assesses whether any
excess capacity exists as part of its on-going financial processes.

If demand for our application  services  decreases,  we may not be able to fully
utilize our  capacity  and this may cause us to incur  large  charges for excess
capacity.

   Our  application   services  use  significant  capital  equipment  and  other
infrastructure  resources  that have been  purchased  and engaged to support its
current customer requirements. Our application services are new and unproven and
revenues and related  expenses are  difficult to forecast.  Customers  typically
engage in contracts for our  application  services for a period of six to twelve
months and no customer has any obligation to renew.  During the year ended March
31, 2002,  the Company  incurred  equipment  write-downs of $455,000 as a direct
result of a decline in demand for its application  services.  Should the Company
lose other customers for its application  services,  the Company may have excess
capacity  and be  required  to record  additional  charges  for  excess  capital
equipment and/or other  infrastructure  costs. The Company's  management reviews
its capacity  requirements  and assesses  whether any excess  capacity exists as
part of its on-going financial processes.

Defects in our software  products could diminish demand for our products,  which
may cause our stock price to fall.

    Our  software  products  are  complex  and may  contain  errors  that may be
detected  at any point in the life of the  product.  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,  resulting  in loss of
revenues,  delay in  market  acceptance  and  sales,  diversion  of  development
resources,  injury to our reputation or increased service and warranty costs. If
any of these were to occur,  our business  would be  adversely  affected and our
stock price could fall.

                                       21
<PAGE>


    Because our  products  are  generally  used in systems  with other  vendors'
products,  they must integrate successfully with these existing systems.  System
errors,  whether  caused  by our  products  or those of  another  vendor,  could
adversely  affect the  market  acceptance  of our  products,  and any  necessary
revisions could cause us to incur significant expenses.

We could be subject to liability claims and negative publicity if our customers'
systems, information or video content is damaged through the use of our products
or our application services.

    If our  customers'  systems,  information  or video  content  is  damaged by
software errors,  product design defects or use of our application services, our
business may be harmed.  In  addition,  these errors or defects may cause severe
customer  service  and  public  relations  problems.  Errors,  bugs,  viruses 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.

Others may bring  infringement  or other  claims  against us which could be time
consuming and expensive for us to defend.

    Other  companies,  including our  competitors,  may obtain  patents or other
proprietary  rights that would  prevent,  limit or interfere with our ability to
conduct our business.  These companies could assert,  and it may be found,  that
our technologies  infringe their proprietary  rights. We could incur substantial
costs to defend any litigation, and intellectual property litigation could force
us to do one or more of the following:

     o    cease  using  key  aspects  of our  technology  that  incorporate  the
          challenged intellectual property;

     o    obtain  a  license  from  the  holder  of the  infringed  intellectual
          property right; and

     o    redesign some or all of our products.

    From time to time, we have  received  notices  claiming that our  technology
infringes  patents  held by  third  parties.  In the  event  any such a claim is
successful and we are unable to license the infringed technology on commercially
reasonable  terms,  our business and operating  results  would be  significantly
harmed.

    In addition,  from time to time, we 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,  we could  incur
substantial costs to defend any litigation, which could harm our operations.

If the protection of our  intellectual  property is inadequate,  our competitors
may gain access to our technology, and we may lose customers.

    We depend on our ability to develop and maintain the proprietary  aspects of
our technology. We seek to protect our software, documentation and other written
materials  under trade  secret and  copyright  laws,  which  afford only limited
protection.  Our  proprietary  rights  may not  prove  viable or of value in the
future since the validity,  enforceability and type of protection of proprietary
rights in Internet related industries are uncertain and still evolving.

                                       22

<PAGE>

    Unauthorized  parties  may  attempt to copy  aspects of our  products  or to
obtain and use information that we regard as proprietary.  Policing unauthorized
use of our  products  is  difficult,  and while we are unable to  determine  the
extent to which piracy of our software or code  exists,  software  piracy can be
expected to be a persistent  problem. We license our proprietary rights to third
parties, and these licensees may not abide by our compliance and quality control
guidelines or they may take actions that would  materially  adversely affect us.
In addition,  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,  and effective
patent, copyright, trademark and trade secret protection may not be available in
these foreign  jurisdictions.  To date, we have not sought patent  protection of
our proprietary rights in any foreign  jurisdiction.  Our efforts to protect our
intellectual  property  rights through  patent,  copyright,  trademark and trade
secret laws may not be effective to prevent  misappropriation of our technology,
or may not  prevent  the  development  and  design  by  others  of  products  or
technologies  similar to or competitive  with those developed by us. Our failure
or inability to protect our proprietary rights could harm our business.

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

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

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

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

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

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

Failure to increase our brand  awareness  among  content  owners could limit our
ability to compete effectively.

    We  believe  that  establishing  and  maintaining  a  strong  brand  name is
important to the success of our business.  Competitive  pressures may require us
to increase our expenses to promote our brand name, and the benefits  associated
with brand creation may not outweigh the risks and costs  associated  with brand
name establishment. Our failure to develop a strong brand name or the incurrence
of excessive  costs  associated with  establishing  our brand name, may harm our
business.

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.

                                       23
<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  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.

We have adopted certain  anti-takeover  measures that may make it more difficult
for a third party to acquire us.

    Our board of directors has the authority to issue up to 2,000,000  shares of
preferred stock and to determine the price,  rights,  preferences and privileges
of those  shares  without any further  vote or action by the  stockholders.  The
rights of the holders of common  stock will be subject to, and may be  adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future.  The issuance of shares of  preferred  stock,  while  potentially
providing desirable flexibility in connection with possible acquisitions and for
other corporate purposes,  could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding  voting stock. We have no
present  intention to issue shares of preferred stock.  Further,  on November 8,
2000,  our board of directors  adopted a preferred  stock  purchase  rights plan
intended to guard against certain  takeover  tactics.  The adoption of this plan
was not in response to any proposal to acquire us, and the board is not aware of
any such effort. The existence of this plan could also have the effect of making
it more  difficult  for a third party to acquire a majority  of our  outstanding
voting  stock.   In  addition,   certain   provisions  of  our   certificate  of
incorporation may have the effect of delaying or preventing a change of control,
which could adversely affect the market price of our common stock.

         Risks Relating to the Internet Video Infrastructure Marketplace

Competition among Internet video infrastructure  companies is intense. If we are
unable to compete successfully, our business will fail.

    Competition among Internet video infrastructure companies seeking to attract
new customers is intense and we expect this intensity of competition to increase
in the future.  Our competitors vary in size and in the scope and breadth of the
products and services they offer and may have  significantly  greater financial,
technical and marketing  resources.  Our direct  competition in the  marketplace
comes primarily from Convera  Corporation.  We may also compete  indirectly with
system  integrators  to  the  extent  they  may  embed  or  integrate  competing
technologies into their product offerings, and in the future we may compete with
video service  providers  and  searchable  video  portals.  In addition,  we may
compete with our current and potential customers who may contemplate  developing
software or performing  application  services  internally.  Furthermore,  we may
compete  with  new or  different  competitors  who  sell  similar  or  competing
solutions  in  the  vertical   markets   applicable  to  our  various   solution
applications.  Increased  competition could result in price reductions,  reduced
margins or loss of market share, any of which will cause our business to suffer.

If  broadband  technology  is not  adopted or  deployed as quickly as we expect,
demand for our products and services may not grow as quickly as anticipated.

Broadband  technology such as digital subscriber lines,  commonly referred to as
DSL, and cable  modems,  which allows video content to be  transmitted  over the
Internet  more  quickly  than  current  technologies,  has  only  recently  been
developed  and is just  beginning  to be  deployed.  The growth of our  business
depends in part on the broad market acceptance of broadband  technology.  If the
market  does not adopt  broadband  technology,  or adopts it more slowly than we
anticipate,  demand for our  products and services may not grow as quickly as we
anticipate, which will harm our business.

                                       24

<PAGE>

    We depend on the  efforts  of third  parties  to  develop  and  provide  the
technology for broadband  transmission.  Even if broadband access becomes widely
available,  heavy use of the Internet may negatively impact the quality of media
delivered  through  broadband  connections.  If these third  parties  experience
delays  or  difficulties  establishing  the  technology  to  support  widespread
broadband transmission,  or if heavy usage limits the broadband experience,  the
market may not accept our products and services.

     Because the anticipated growth of our business depends in part on broadband
transmission infrastructure, we are subject to a number of risks, including:

     o    changes in content delivery methods and protocols;

     o    the need for  continued  development  by our  customers of  compelling
          content  that takes  advantage  of  broadband  access and helps  drive
          market acceptance of our products and services;

     o    the emergence of new competitors,  including traditional broadcast and
          cable television companies, which have significant control over access
          to content,  substantial resources and established  relationships with
          media providers;

     o    the development of  relationships  by our  competitors  with companies
          that  have  significant  access  to  or  control  over  the  broadband
          transmission technology or content; and

     o    the need to establish new relationships with non-PC based providers of
          broadband  access,  such as providers of television  set-top boxes and
          cable television.

Government regulation of the Internet could limit our growth.

    We are not currently subject to direct regulation by any government  agency,
other than laws and  regulations  generally  applicable to businesses,  although
certain U.S. export controls and import controls of other countries may apply to
our  products.   While  there  are  currently  few  laws  or  regulations   that
specifically  regulate  communications  or commerce on the Internet,  due to the
increasing  popularity and use of the Internet,  it is possible that a number of
laws and  regulations  may be adopted in the U.S.  and abroad in the near future
with particular  applicability to the Internet.  It is possible that governments
will enact  legislation  that may be  applicable to us in areas such as content,
network security,  access charges and retransmission  activities.  Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership,  content, taxation, defamation and personal privacy is uncertain. The
adoption of new laws or the  adaptation  of existing  laws to the  Internet  may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our services,  increase the cost of doing  business or otherwise hurt
our business.

Item 2.  Properties

     Our principal administrative, research and development, sales, services and
marketing  activities  are  conducted  on two  leased  properties  in San Mateo,
California: the first property consists of 21,000 square feet and expires in May
2002 and the second  property  consists  of 48,000  square  feet and  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 June 2003 and a property near London,  England where the Company
performs  sales,  services,  marketing and  administrative  activities  and that
expires in February 2004.

                                       25
<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,  two of our  officers,  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.


     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.  Defendants'  time to respond to the  complaints has
been  stayed  pending  a plan for  further  coordination.  We  believe  that the
allegations  against our  officers  and us are without  merit,  and we intend to
contest them vigorously.

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

                                       26

<PAGE>


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, 2002.

Executive Officers of the Registrant

   The following  table sets forth certain  information  regarding our executive
officers as of June 12, 2002:

<TABLE>
<CAPTION>

                   Name                        Age                          Position
                   ----                        ---                          --------
<S>                                            <C>     <C>
Paul G. Lego.............................      43      President, Chief Executive Officer and Chairman
                                                       of the Board of Directors
Alfred J. Castino........................      50      Chief Financial Officer
Stanford S. Au...........................      39      Vice President, Engineering
David J. Girouard........................      36      Senior Vice President, Marketing and Corporate
                                                       Strategy
Michael H. Lock..........................      39      Senior Vice President, Worldwide Sales
Frank H. Pao.............................      33      Vice President, Business Affairs

</TABLE>

     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.

     Alfred J. Castino, chief financial officer,  joined Virage in January 2000.
From September 1999 to January 2000, Mr. Castino was the chief financial officer
of RightPoint,  a marketing  software firm that was acquired by E.piphany.  From
September  1997 to August 1999,  Mr.  Castino was employed at PeopleSoft as vice
president of finance and chief accounting  officer,  as senior vice president of
finance and  administration,  and chief  financial  officer.  From April 1996 to
September  1997,  Mr.  Castino was vice  president and  corporate  controller at
Chiron Corporation, a biotechnology company. From August 1989 to March 1996, Mr.
Castino held finance positions at Sun Microsystems including finance director of
United  States  operations,  director  of  finance  and  planning  for  European
operations,  and assistant corporate controller.  Mr. Castino's prior experience
also  includes  seven  years at  Hewlett-Packard  Company in  various  financial
management positions. Mr. Castino is a certified public accountant.  Mr. Castino
holds a B.A. in economics  from Holy Cross  College and an M.B.A.  from Stanford
University.

     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.

                                       27

<PAGE>

     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.

                                       28

<PAGE>

                                     PART II

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

     (a) Our common  stock is listed on the  Nasdaq  National  Market  under the
symbol "VRGE".

     Following our initial public  offering on June 29, 2000, the following high
and low closing sales prices were reported by Nasdaq in each period indicated:

                                                          High              Low
                                                          ----              ---
   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
   Year Ended March 31, 2001
   -------------------------
        Fourth quarter                                   $ 7.50           $ 2.00
        Third quarter                                    $18.38           $ 4.63
        Second quarter                                   $30.63           $10.00
        First quarter (from June 29, 2000)               $22.00           $14.47

     The  reported  last sale price of our common  stock on the Nasdaq  National
Market on June 12, 2002 was $1.02.  The approximate  number of holders of record
of the shares of our common stock was 255 as of June 12, 2002.  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."

     (b) There has been no change to the  disclosure  contained in our report on
Form 10-Q for the nine  months  ended  December  31, 2001  regarding  the use of
proceeds generated by our initial public offering.

                                       29

<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.

<TABLE>
<CAPTION>
                                                                                      Fiscal Years Ended
                                                                                            March 31,
                                                               --------------------------------------------------------------------
                                                                 2002           2001           2000           1999           1998
                                                               --------       --------       --------       --------       --------
                                                                              (in thousands, except per share data)
<S>                                                            <C>            <C>            <C>            <C>            <C>
Consolidated Statements of Operations Data:
Revenues:
  License revenues ......................................      $  7,414       $  6,161       $  4,188       $  1,956       $  1,438
  Service revenues ......................................         9,099          5,136          1,102            253            130
  Other revenues ........................................           232            104            271          1,141          1,134
                                                               --------       --------       --------       --------       --------
         Total revenues .................................        16,745         11,401          5,561          3,350          2,702
Cost of revenues:
  License revenues ......................................           705            723            870            397            454
  Service revenues ......................................         8,607          7,381          2,400            426             62
  Other revenues ........................................           153            149            260            859            809
                                                               --------       --------       --------       --------       --------
         Total cost of revenues .........................         9,465          8,253          3,530          1,682          1,325
                                                               --------       --------       --------       --------       --------
Gross profit ............................................         7,280          3,148          2,031          1,668          1,377
Operating expenses:
  Research and development ..............................         9,172          9,101          4,182          2,325          1,751
  Sales and marketing ...................................        17,301         17,129          8,349          4,362          2,810
  General and administrative ............................         4,985          5,298          2,653          1,273            935
  Stock-based compensation ..............................         5,113          3,294          1,070             --             --
                                                               --------       --------       --------       --------       --------
         Total operating expenses .......................        36,571         34,822         16,254          7,960          5,496
                                                               --------       --------       --------       --------       --------
Loss from operations ....................................       (29,291)       (31,674)       (14,223)        (6,292)        (4,119)
Interest and other income, net ..........................         1,541          2,800            384            123             19
                                                               --------       --------       --------       --------       --------
Loss before income taxes ................................       (27,750)       (28,874)       (13,839)        (6,169)        (4,100)
Provision for income taxes ..............................            --             --            (36)            --             --
                                                               --------       --------       --------       --------       --------
Net loss ................................................       (27,750)       (28,874)       (13,875)        (6,169)        (4,100)
Series E convertible preferred stock
  dividend ..............................................            --             --         (4,544)            --             --
                                                               --------       --------       --------       --------       --------
Net loss applicable to common
  stockholders ..........................................      $(27,750)      $(28,874)      $(18,419)      $ (6,169)      $ (4,100)
                                                               ========       ========       ========       ========       ========
Basic and diluted net loss per share
  applicable to common stockholders .....................      $  (1.37)      $  (1.88)      $  (8.06)      $  (3.67)      $  (2.84)
                                                               ========       ========       ========       ========       ========
Shares used in computation of basic and
  diluted net loss per share applicable
  to common stockholders ................................        20,327         15,397          2,286          1,679          1,443

</TABLE>

<TABLE>
<CAPTION>
                                                                                              March 31,
                                                                   ----------------------------------------------------------------
                                                                     2002          2001          2000          1999          1998
                                                                   --------      --------      --------      --------      --------
                                                                                           (in thousands)
<S>                                                                <C>           <C>           <C>           <C>           <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments ............     $ 30,694      $ 48,131      $ 10,107      $  4,357      $  5,780
Working capital ..............................................       24,077        40,588         8,101         3,879         4,723
Total assets .................................................       39,552        60,206        18,872         6,605         7,289
Long-term obligations, net of current portion ................           --            --            83           241           311
Redeemable convertible preferred stock .......................           --            --        36,995        17,936        12,472
Accumulated deficit ..........................................      (88,924)      (61,174)      (32,300)      (13,881)       (7,712)
Total stockholders' equity (net capital deficiency) ..........     $ 30,059      $ 49,706      $(23,221)     $(13,326)     $ (7,257)
</TABLE>

                                       30


<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 2002 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  communications.  Depending on their  particular
needs and resources, our customers may elect to license our software products or
employ our application or professional services. Our customers include media and
entertainment companies, other corporations, government agencies and educational
institutions.

Application Products Launches

   Our  traditional  video software  offerings,  including our  SmartEncode  and
server  suite of  products,  have  historically  met the needs of users who have
video and rich-media  assets and need to publish,  manage,  and distribute these
assets over the Internet and/or their  intranets.  In order to expand the market
for our technology beyond these products, we have recently refocused our product
development,  sales,  and marketing  strategies  in an effort to address  common
business user problems in multiple  areas of an  enterprise.  We want to provide
these users with a quick,  reliable,  and  scalable  solution to their  problems
while affording them a definitive return on their investment.


   Pursuant  to this  goal,  in  December  2001,  we  announced  our  first  two
rich-media application products: VS Publishing and VS Webcasting.  VS Publishing
offers media and entertainment  customers a streamlined  workflow for rich-media
web  publishing,  including  a simple  editorial  control  and  greater  website
programming capabilities.  The new product allows content owners to publish more
content with fewer  resources.  VS  Publishing  is available as either  in-house
software  or  as  a  hosted  service.   VS  Webcasting  allows  corporations  to
self-produce   live  and   on-demand   webcasting   events  such  as   executive
communications,  human resource  broadcasts  and webinars.  Webcasts can include
audio and video  synchronized with slide  presentations and documents as well as
audience  polls  and  questions.  At the same  time,  VS  Webcasting  creates  a
searchable,  on-demand  version  of the event that is  available  after the live
broadcast is completed.  VS Webcasting is available as either in-house  software
or as a hosted service.

   In February and April 2002,  respectively,  we announced our third and fourth
software application products,  VS Learning and VS Production.  VS Learning is a
new enterprise software  application for rich media training and e-learning that
enables companies to create, manage, publish and view on-demand training courses
and  presentations  containing  video  and other  rich  media  information.  The
solution  is  available  both as a  licensed  software  product  and as a hosted
service.  VS  Production  is an  integrated  software  solution  for  media  and
entertainment  enterprises  that  automates the  professional  video  production
process from acquisition to distribution.

                                       31
<PAGE>

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

Business Restructuring Charges

   During the year ended  March 31,  2002,  we  continually  evaluated  our cost
structure,  reviewed the relative success of our various service offerings,  and
analyzed our  geographical  office needs based on historical and expected future
market   demands.   As  part  of  these  reviews,   we  reduced   headcount  and
infrastructure,   particularly  in  our  application   services  business,   and
consolidated  operations throughout the world, resulting in headcount reductions
of  approximately  60  employees  and the  recording of  $2,038,000  in business
restructuring charges during the year. A breakdown of our business restructuring
charges  and the  remaining  restructuring  accrual  as of March 31,  2002 is as
follows:
<TABLE>
<CAPTION>
                                                                       Expenditures       Balance at
   Category                                          Additions       Cash       Non-cash  March 31, 2002
   --------                                          ---------       ----       --------  --------------
<S>                                                    <C>          <C>          <C>          <C>
Excess facilities and other exit costs .........       $  655       $  151       $   --       $  504
Employee separation and other costs ............          928          669           --          259
Equipment write-downs ..........................          455           --          455           --
                                                       ------       ------       ------       ------
  Total ........................................       $2,038       $  820       $  455       $  763
                                                       ======       ======       ======       ======
</TABLE>

   Excess  Facilities  and Other Exit Costs:  Excess  facilities  and other exit
costs relate to lease  obligation and closure costs  associated  with offices we
have vacated as a result of our cost reduction initiatives. The office locations
affected by our cost  restructuring  efforts include our San Mateo,  California,
and Munich,  Germany offices. In our San Mateo headquarters location, we have an
operating lease commitment for approximately 48,000 square feet of office space,
an amount higher than our current needs. As a result,  we have vacated a portion
of this  facility  and recorded  $396,000 in expense.  It is  management's  best
estimate  that this space will  continue to be vacant for the next 12 months and
that we will not be able to recoup the losses from our rental  payments  for the
period  from  April 1, 2002 to March  31,  2003 by  earning a profit  from a sub
lessee at some point over the course of our obligation  period,  which continues
through  September  2006. The current  commercial real estate market in Northern
California is poor for sub lessors  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 reasonable rate for the next 12 months.  We
also recorded other excess facilities costs of $215,000 primarily related to our
21,000  square  foot  facility  in San Mateo.  Should we continue to have excess
operating lease capacity and be unable to find a sub lessee at a rate equivalent
to our operating lease rate, we would be required to record  additional  charges
for the rental  payments  that we owe to our  landlord  relating  to this excess
facility.  Our management reviews its facility requirements and assesses whether
any excess capacity exists as part of our on-going financial processes.

   Due to an  unfavorable  market  environment  in  Germany  and most of Central
Europe,  we decided to close our satellite sales office in Munich,  Germany,  in
March 2002. Pursuant to this closure, we recorded  approximately $44,000 in exit
costs,  primarily attributable to equipment lease commitments and legal fees. We
do not have any outstanding  operating  lease  commitments in Germany for office
space after the closure of the office in March 2002.

   Employee  Severance:  Employee  separation  and other  costs,  which  include
severance, related taxes, outplacement and other benefits, totaled approximately
$928,000  during the year ended March 31, 2002  (representing  approximately  60
terminated  employees),  of which $669,000 had been paid in cash as of March 31,
2002. Personnel affected by the cost reduction  initiatives include employees in
positions throughout the company in sales, marketing, services, engineering, and
general and  administrative  functions  in all  geographies,  with a  particular
emphasis on our  application  services  employees as we further  downsized  this
business.

                                       32
<PAGE>

   Equipment Write-Downs:  As part of our cost restructuring efforts, we decided
to substantially downsize our application services offering, both in response to
weak market  conditions and to the  termination of our contract with our largest
customer  during the year ended March 31, 2002.  Pursuant to these  efforts,  we
reduced  our  application  services  infrastructure  by taking a portion  of our
production  equipment out of service and subsequently  writing off approximately
$455,000 in assets at net book value,  primarily in our New York office.  Should
we lose other application services customers, we may have excess capacity and be
required to record additional  charges for excess capital equipment and/or other
infrastructure  costs.  Our  management  reviews its capacity  requirements  and
assesses  whether any excess capacity  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 approximately  August 7, 2002, we currently have an
obligation to issue  2,653,250  stock options with a new exercise price equal to
the  closing  fair market  value of our stock on August 7, 2002.  As a result of
this program,  we were required to accelerate the  amortization of the remaining
deferred compensation related to these canceled stock options. This acceleration
of amortization is included in the $6,511,000 of deferred  compensation  expense
recorded in our statement of operations for the year ended March 31, 2002.

   We believe that this program will 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.  Additionally,  the
exercise  price of the new option could  potentially be higher than the price of
the  cancelled  options,  which would  render the options  less  effective as an
incentive for our employees.

Critical Accounting Policies & Estimates

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

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

Revenue Recognition

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

                                       33

<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
extending beyond twelve months and other  arrangements with payment terms longer
than normal not to be fixed or determinable. If collectibility is not considered
probable,  revenue is recognized when the fee is collected.  No customer has the
right of return.

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

    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,  we
recognize revenue on 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 or other criteria in
SOP 97-2  are not  met.  We  recognize  royalty  revenues  upon  receipt  of the
quarterly reports from the vendors.

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

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

                                       34
<PAGE>

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

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

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

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

Commitments and Contingencies

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

                                       35
<PAGE>

Results of Operations

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


                                                        Fiscal Years Ended
                                                             March 31,
                                                      ------------------------
                                                      2002      2001      2000
                                                      ----      ----      ----
Revenues:
  License revenues ...............................      44%       54%       75%
  Service revenues ...............................      54        45        20
  Other revenues .................................       2         1         5
                                                      ----      ----      ----
          Total revenues .........................     100       100       100
                                                      ----      ----      ----
Cost of revenues:
  License revenues ...............................       4         6        16
  Service revenues ...............................      52        65        43
  Other revenues .................................       1         1         5
                                                      ----      ----      ----
          Total cost of revenues .................      57        72        64
                                                      ----      ----      ----
Gross profit .....................................      43        28        36
Operating expenses:
  Research and development .......................      55        80        75
  Sales and marketing ............................     103       150       150
  General and administrative .....................      30        47        48
  Stock-based compensation .......................      30        29        19
                                                      ----      ----      ----
          Total operating expenses ...............     218       306       292
                                                      ----      ----      ----
Loss from operations .............................    (175)     (278)     (256)
Interest and other income, net ...................       9        25         7
                                                      ----      ----      ----
Loss before income taxes .........................    (166)     (253)     (249)
Provision for income taxes .......................      --        --        --
                                                      ----      ----      ----
Net loss .........................................    (166)     (253)     (249)
Series E convertible preferred stock dividend ....      --        --       (82)
                                                      ----      ----      ----
Net loss applicable to common stockholders .......    (166)%    (253)%    (331)%
                                                      ====      ====      ====


    We incurred net losses  applicable to common  stockholders  of  $27,750,000,
$28,874,000,  and $18,419,000  during the three years ended March 31, 2002, 2001
and 2000,  respectively.  As of March 31, 2002, we had an accumulated deficit of
$88,924,000. We expect to continue to incur operating losses for the foreseeable
future.  In view of the  rapidly  changing  nature of our market and our limited
operating history, we believe that period-to-period  comparisons of our revenues
and other  operating  results are not  necessarily  meaningful and should not be
relied upon as indications of future  performance.  Our historic  revenue growth
rates are not necessarily sustainable or indicative of our future growth.

Fiscal Years Ended March 31, 2002 and 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.  This increase was due to
increases  in  license,  service  and  other  revenues.  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 both  higher  unit  sales of our
VideoLogger  and Virage  Solution  Server  products and the  introduction of new
product lines.  Recently, our largest reseller announced that it will divest its
business segment in which our products are most  complementary.  As a result, we
encountered  very little  channel sales  activity from this reseller  during the
final fiscal  quarter of our fiscal year ended March 31,  2002.  We believe this
factor  contributed to our quarterly  decline in total revenues during the final
fiscal  quarter of our fiscal year ended March 31, 2002. As a result of the loss
of this channel partner, or if we were to lose one of our other large customers,
or if this  customer  or any other  large  customer  were to delay or default on
obligations under their contracts with us, our future operating results could be
significantly harmed.

                                       36
<PAGE>

    Service  revenues  increased to $9,099,000 in fiscal 2002 from $5,136,000 in
fiscal 2001, an increase of $3,963,000.  Approximately  56% of this increase was
due to revenue growth from our application  services  offering while 22% of this
increase was due to higher revenues from our professional  services and training
offerings.  The  remainder  was due to an  increase  in the number of  customers
purchasing  maintenance  contracts.  Service  revenues  in fiscal  2002  include
$648,000 of warrant amortization  recorded as contra-service  revenues resulting
from a warrant issued to MLBAM. The growth in application  services revenues was
primarily attributable to higher revenues from MLBAM, which accounted for 14% of
total  revenues  during  the year  ended  March 31,  2002.  We do not expect any
revenues from MLBAM in the current fiscal year since we could not mutually agree
on terms for a renewal of this contract.  We believe this factor  contributed to
our quarterly  decline in total revenues  during the final fiscal quarter of our
fiscal year ended March 31, 2002.

    Other revenues  increased to $232,000 in fiscal 2002 from $104,000 in fiscal
2001, an increase of $128,000.  This increase was  attributable  to the level of
engineering   services  performed   pursuant  to  federal  government   research
contracts.

    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  depreciation  costs for maintenance and support activities
and application and professional  services. Our cost of other revenues primarily
includes  engineering  personnel  expenses and related  overhead for engineering
research  for  government   projects.   Total  cost  of  revenues  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 increases  in the cost of service and other  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  $8,607,000,  or 95%  of  service
revenues, in fiscal 2002 from $7,381,000,  or 144% of service revenues in fiscal
2001.  This increase in absolute  dollars was due to expenditures to support the
growth of our  application  services  business,  particularly  in support of our
contract with MLBAM.  As a result of both the  termination  of our contract with
MLBAM and lower demand for our application services offering, we expect our cost
of service  revenues to decline in the  foreseeable  future as we  continue  our
efforts to control costs and improve gross profit margins in this area.

    Cost of other revenues increased to $153,000,  or 66% of other revenues,  in
fiscal 2002 from  $149,000,  or 143% of other  revenues,  in fiscal  2001.  This
absolute dollar increase was  attributable to the level of engineering  services
performed pursuant to federal government research contracts.

    Research and Development Expenses. Research and development expenses consist
primarily of personnel and related costs for our development  efforts.  Research
and development expenses increased to $9,172,000,  or 55% of total revenues,  in
fiscal 2002 from  $9,101,000,  or 80% of total  revenues,  in fiscal  2001.  The
increase in absolute  dollars was  primarily  due to our business  restructuring
charges,  particularly  in  connection  with  our  lease  write-downs,  and  was
partially  offset by lower  variable  headcount  costs and reduced  localization
expenses.  We expect  research  and  development  expenses to  increase  for the
foreseeable   future  as  we  believe  that  significant   product   development
expenditures  are essential  for us to maintain and enhance our market  position
and expand into new user markets.  To date, we have not capitalized any software
development   costs  as  they  have  been   insignificant   after   establishing
technological feasibility.

                                       37
<PAGE>

    Sales and  Marketing  Expenses.  Sales and  marketing  expenses  consist  of
personnel  and related costs for our direct sales force,  pre-sales  support and
marketing  staff,  and marketing  programs  including  trade shows and seminars.
Sales  and  marketing  expenses  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 our  business
restructuring  charges,  particularly in connection with our lease  write-downs,
and was partially  offset by lower travel  costs.  We expect sales and marketing
expenses to remain in the range of relatively  flat to a modest increase for the
foreseeable  future as we attempt to limit our  overall  expense  growth for the
company and to focus our marketing  activities in specific  areas,  particularly
with respect to our new application products.

    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 $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  variable  headcount  costs  and  reduced
professional  services fees, and was partially offset by business  restructuring
charges,  particularly  in  connection  with our  lease  write-downs.  We expect
general and administrative expenses to increase for the foreseeable future as we
incur additional  professional  services costs,  including higher legal fees and
insurance premiums,  especially for our director and officer liability insurance
coverage.

    Stock-Based   Compensation   Expense.   Stock  based  compensation   expense
represents  the  amortization  of  deferred  compensation   (calculated  as  the
difference  between the exercise price of stock options granted to our employees
and the then deemed fair value of our common stock) for stock options granted to
our employees. We recognized stock-based  compensation expense of $5,113,000 and
$3,294,000  in  fiscal  2002 and  2001,  respectively,  in  connection  with the
granting of stock options to our employees. Our stock-based compensation expense
in fiscal 2002 increased due to the cancellation of stock options resulting from
participation  in our voluntary stock option  cancellation  and re-grant program
for  our  employees.  Effective  April  1,  2002,  we  expect  that  stock-based
compensation  expense  will  decrease  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.

    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  $1,541,000  in fiscal  2002 from  $2,800,000  in fiscal  2001,  a
decrease of  $1,259,000.  The decrease was a result of lower  interest rates and
lower average cash balances during fiscal 2002.

    Provision for Income Taxes. We have not recorded a provision for federal and
state or foreign  income  taxes in either  fiscal  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.

Fiscal Years Ended March 31, 2001 and 2000

    Total Revenues.  Total revenues increased to $11,401,000 in fiscal 2001 from
$5,561,000 in fiscal 2000, an increase of  $5,840,000.  This increase was due to
increases  in license and service  revenues,  partially  offset by a decrease in
other revenues.  International revenues increased to $3,341,000, or 29% of total
revenues,  in fiscal 2001 from $1,241,000,  or 22% of total revenues,  in fiscal
2000.  There were no customers who accounted for more than 10% of total revenues
in fiscal 2001.  Sales to our two largest  customers  accounted for 13% and 10%,
respectively,  of total  revenues in fiscal 2000.  Sales to agencies of the U.S.
government  accounted for 10% of total  revenues in fiscal 2001 and 12% of total
revenues in fiscal 2000.

                                       38
<PAGE>

    License  revenues  increased to $6,161,000 in fiscal 2001 from $4,188,000 in
fiscal 2000,  an increase of  $1,973,000.  The increase was primarily due to the
introduction of new product lines, expansion of our domestic sales and marketing
operations, and the opening of European sales offices.

    Service  revenues  increased to $5,136,000 in fiscal 2001 from $1,102,000 in
fiscal 2000, an increase of $4,034,000. Approximately 73% of this growth was due
to revenue growth from our application services offering which was introduced in
May 1999 and the  remainder  was due to an increase  in the number of  customers
purchasing maintenance contracts.

    Other revenues  decreased to $104,000 in fiscal 2001 from $271,000 in fiscal
2000, a decrease of $167,000.  This  decrease was  attributable  to the level of
engineering services performed for the federal government.

    Total Cost of Revenues.  Total cost of revenues increased to $8,253,000,  or
72% of total revenues, in fiscal 2001 from $3,530,000, or 64% of total revenues,
in fiscal 2000.  This increase in total cost of revenues was due to increases in
cost of license and service revenues,  partially offset by a decrease in cost of
other revenues.

    Cost of license revenues decreased to $723,000,  or 12% of license revenues,
in fiscal 2001 from $870,000,  or 21% of license revenues,  in fiscal 2000. This
decrease was due to an increase in the  proportion of revenues from our products
that are subject to fixed,  rather than unit-based,  license royalty payments in
fiscal 2001.

    Cost of  service  revenues  increased  to  $7,381,000,  or  144% of  service
revenues, in fiscal 2001 from $2,400,000,  or 218% of service revenues in fiscal
2000.  This  increase  in  absolute  dollars  was due almost  entirely to larger
expenditures to support the growth in our application services.

    Cost of other revenues decreased to $149,000,  or 143% of other revenues, in
fiscal  2001 from  $260,000,  or 96% of other  revenues,  in fiscal  2000.  This
absolute dollar decrease was due to a reduction in other revenues.

    Research  and  Development  Expenses.   Research  and  development  expenses
increased  to  $9,101,000,  or  80% of  total  revenues,  in  fiscal  2001  from
$4,182,000,  or 75% of total revenues,  in fiscal 2000. The increase in absolute
dollars was primarily due to an increase in our research and development staff.

    Sales and  Marketing  Expenses.  Sales and marketing  expenses  increased to
$17,129,000,  or 150% of total revenues, in fiscal 2001 from $8,349,000, or 150%
of total  revenues,  in fiscal  2000.  Approximately  half of this  increase  in
absolute  dollars was due to growth in our sales and marketing  personnel  while
the remainder was due to increased  expenses  incurred in connection  with trade
shows and additional marketing programs. The increase in our sales and marketing
staff  related  to the  opening of new sales  offices  in the United  States and
Europe.

    General and Administrative  Expenses.  General and  administrative  expenses
increased  to  $5,298,000,  or  47% of  total  revenues,  in  fiscal  2001  from
$2,653,000 or 48% of total revenues, in fiscal 2000. The significant majority of
this  increase was due to an increase in  headcount,  with the  remainder due to
increased external legal and audit costs.

    Stock-Based   Compensation   Expense.   Stock  based  compensation   expense
represents  the  amortization  of  deferred  compensation   (calculated  as  the
difference  between the exercise price of stock options granted to our employees
and the then deemed fair value of our common stock) for stock options granted to
our employees. We recognized stock-based  compensation expense of $3,294,000 and
$1,070,000  in  fiscal  2001 and  2000,  respectively,  in  connection  with the
granting of stock options to our employees.

    Interest and Other Income, Net. Interest and other income, net, increased to
$2,800,000  in fiscal  2001  from  $384,000  in  fiscal  2000,  an  increase  of
$2,416,000.  The  increase  was  due to  interest  income  from  increased  cash
balances, primarily due to the proceeds from our initial public offering in June
2000.


                                       39

<PAGE>

    Provision for Income Taxes. We have not recorded a provision for fiscal 2001
income taxes.  We recorded a provision  for fiscal 2000 for current  foreign and
state income taxes of $36,000.  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,  2002,  we  had  cash,  cash  equivalents  and  short-term
investments of  $30,694,000,  a decrease of $17,437,000  from March 31, 2001 and
our working  capital,  defined as current assets less current  liabilities,  was
$24,077,000,  a decrease of $16,511,000 in working  capital from March 31, 2001.
The decrease in our cash, cash equivalents,  and short-term  investments and our
working capital is primarily attributable to cash used in operating activities.

    Our  operating  activities  resulted in net cash  outflows  of  $17,871,000,
$16,863,000,  and $12,331,000 for the years ended March 31, 2002, 2001 and 2000,
respectively.  The cash used in these periods was primarily  attributable to net
losses  applicable  to common  stockholders  of  $27,750,000,  $28,874,000,  and
$18,419,000  in the years ended  March 31,  2002,  2001 and 2000,  respectively,
offset by depreciation, losses on disposals of assets, and non-cash, stock-based
charges.

    Investing  activities  resulted in cash inflows of  $1,968,000  for the year
ended March 31, 2002 and cash outflows of  $34,770,000  and  $2,021,000  for the
years ended March 31, 2001 and 2000,  respectively.  Our investing  inflows were
primarily from the maturity of our short-term  investments and our outflows were
primarily for the purchase of short-term  investments and capital equipment.  We
expect that we will  continue to invest in short-term  investments  and purchase
capital equipment as we replace older equipment with newer models.

    Financing activities provided net cash inflows of $809,000, $61,206,000, and
$20,103,000 during the years ended March 31, 2002, 2001 and 2000,  respectively.
These inflows were  primarily  from the proceeds of our employee  stock purchase
plan  during  fiscal  2002 and from  sales of our  preferred  and  common  stock
(including our IPO in fiscal 2001) during fiscal 2001 and 2000.

    At March 31,  2002,  we have  contractual  and  commercial  commitments  not
included on our balance sheet primarily for our San Mateo,  California  facility
that we have an obligation to lease through  September 2006.  These  commitments
are payable in each of our fiscal years ended March 31 as follows: $3,486,000 in
2003,  $3,445,000 in 2004, $3,382,000 in 2005, $3,240,000 in 2006 and $1,844,000
in 2007 ($15,397,000 in total). 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.

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


                                       40

<PAGE>

Recent Accounting Pronouncements

    In June 2001, the FASB issued  Statement of Financial  Accounting  Standards
No.  141,  "Business  Combinations  ("FAS  141")." FAS 141  requires  use of the
purchase  method for all business  combinations  initiated  after June 30, 2001,
thereby  eliminating  use of the  pooling  method.  FAS 141  also  provides  new
criteria to determine whether an acquired  intangible asset should be recognized
separately from goodwill.  Under the new criteria,  an acquired intangible asset
would not be recognized  separately from goodwill unless either control over the
future economic  benefits  results from contractual or legal rights or the asset
is  capable  of being  separated  or divided  and sold,  transferred,  licensed,
rented, or exchanged.  The adoption of FAS 141 did not have a material impact on
its financial position or its results of operations or cash flows as the Company
has not participated in any business combinations through March 31, 2002.

    In June 2001, the FASB issued  Statement of Financial  Accounting  Standards
No. 142,  "Goodwill  and  Intangible  Assets  ("FAS  142")." FAS 142 states that
amortization  of goodwill  will no longer be required.  Instead,  impairment  to
goodwill is to be tested at least  annually at the reporting  unit level using a
two-step  impairment  test  whereby  the first step  determines  if  goodwill is
impaired and the second step measures the amount of the impairment  loss.  While
goodwill is to be tested for impairment annually, companies may need to test for
goodwill  impairment on an interim basis if an event or circumstance occurs that
might significantly reduce the fair value of a reporting unit below its carrying
amount.  Regarding amortization of intangible assets with finite lives, the FASB
requires  intangible assets to be amortized over their useful economic lives and
reviewed for  impairment.  Intangible  assets that have economic  lives that are
indefinite  would not be subject to  amortization  until there is evidence  that
their  lives no  longer  are  indefinite,  and would be  tested  for  impairment
annually using a lower of cost or fair value approach. The provisions of FAS 142
will be  effective  for fiscal years  beginning  after  December  15, 2001.  The
Company  currently  believes that FAS 142 will not have a material impact on its
financial position or its results of operations or cash flows as the Company has
no goodwill or intangible assets subject to the requirements of FAS 142.

    In August 2001, the FASB issued Statement of Financial  Accounting Standards
No. 144,  "Accounting  for the Impairment or Disposal of Long-Lived  Assets (FAS
144)," which addresses financial  accounting and reporting for the impairment or
disposal of long-lived  assets and  supersedes  FAS 121 and the  accounting  and
reporting  provisions of Accounting  Principles Board Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." FAS 144 is
effective  for fiscal years  beginning  after  December  15, 2001,  with earlier
application  encouraged.  The Company adopted FAS 144 as of April 1, 2002 and it
does not expect that the  adoption  of this  statement  will have a  significant
impact on the Company's financial position and results of operations.

    In November 2001, the FASB issued a Staff Announcement (the "Announcement"),
Topic D-103, which concluded that the reimbursement of "out-of-pocket"  expenses
should  be  classified  as  revenue  in  the  statement  of   operations.   This
Announcement  is to be applied in financial  reporting  periods  beginning after
December 15, 2001. Upon application of this Announcement,  comparative financial
statements for prior periods should be  reclassified to comply with the guidance
in this Announcement.  The Company adopted the Announcement in its fiscal fourth
quarter of its year ended  March 31,  2002 and the  Announcement  did not have a
material affect on the Company's operations, financial position or cash flows.


                                       41

<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 are unaware of any known trends or uncertainties that have had or will have a
material impact on total revenues,  expenses or loss from continuing  operations
related to the Euro  conversion.  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,  2002,  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, 2002, would decrease by  approximately  $116,000 for a 100 basis point
increase and increase by  approximately  $117,000 for a 100 basis point decrease
in  interest  rates.  Our  investment  instruments  are  mainly  fixed-rate  and
relatively short-term.


                                       42

<PAGE>


Item 8. Financial Statements and Supplementary Data

                                  VIRAGE, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 Report of Ernst & Young LLP, Independent Auditors............................44
 Consolidated Balance Sheets..................................................45
 Consolidated Statements of Operations........................................46
 Consolidated Statements of Redeemable Convertible Preferred
   Stock and Stockholders' Equity (Net Capital Deficiency)....................47
 Consolidated Statements of Cash Flows........................................48
 Notes to Consolidated Financial Statements...................................49


                                       43

<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,  2002  and  2001,  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, 2002. 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, 2002 and 2001, and the consolidated  results of its operations and its
cash flows for each of the three years in the period  ended March 31,  2002,  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 12, 2002


                                       44

<PAGE>

<TABLE>
<CAPTION>

                                                            VIRAGE, INC.

                                                     CONSOLIDATED BALANCE SHEETS
                                                  (in thousands, except share data)




                                                                                                                March 31,
                                                                                                     ------------------------------
                                                                                                        2002                2001
                                                                                                     ---------            ---------
<S>                                                                                                  <C>                  <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents ..............................................................           $   4,586            $  19,680
  Short-term investments .................................................................              26,108               28,451
  Accounts receivable, net of allowance for doubtful
    accounts of $1,153 and $867 at March 31, 2002
    and 2001, respectively ...............................................................               2,366                2,331
  Prepaid expenses and other current assets ..............................................                 220                  515
                                                                                                     ---------            ---------
      Total current assets ...............................................................              33,280               50,977
Property and equipment:
  Computer equipment and software ........................................................               6,143                6,819
  Furniture ..............................................................................               1,406                  963
  Leasehold improvements .................................................................               1,943                2,157
                                                                                                     ---------            ---------
                                                                                                         9,492                9,939
  Less:  accumulated depreciation ........................................................               5,791                3,247
                                                                                                     ---------            ---------
                                                                                                         3,701                6,692
Other assets .............................................................................               2,571                2,537
                                                                                                     ---------            ---------
      Total assets .......................................................................           $  39,552            $  60,206
                                                                                                     =========            =========

                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .......................................................................           $     831            $   1,153
  Accrued payroll and related expenses ...................................................               2,376                3,279
  Accrued expenses .......................................................................               2,946                3,003
  Deferred revenue .......................................................................               3,050                2,954
                                                                                                     ---------            ---------
      Total current liabilities ..........................................................               9,203               10,389

Deferred rent ............................................................................                 290                  111

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-- 20,621,535 and 20,228,752 at March
      31, 2002 and 2001, respectively ....................................................                  21                   20
  Additional paid-in capital .............................................................             121,387              120,707
  Deferred compensation ..................................................................              (2,425)              (9,847)
  Accumulated deficit ....................................................................             (88,924)             (61,174)
                                                                                                     ---------            ---------
      Total stockholders' equity .........................................................              30,059               49,706
                                                                                                     ---------            ---------
      Total liabilities and stockholders' equity .........................................           $  39,552            $  60,206
                                                                                                     =========            =========
</TABLE>

See accompanying notes

                                                                 45
<PAGE>
<TABLE>
                                                            VIRAGE, INC.

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

<CAPTION>
                                                                                                Years Ended March 31,
                                                                                 --------------------------------------------------
                                                                                   2002                 2001                 2000
                                                                                 --------             --------             --------
<S>                                                                              <C>                  <C>                  <C>
Revenues:
  License revenues ..................................................            $  7,414             $  6,161             $  4,188
  Service revenues ..................................................               9,099                5,136                1,102
  Other revenues ....................................................                 232                  104                  271
                                                                                 --------             --------             --------
    Total revenues ..................................................              16,745               11,401                5,561
Cost of revenues:
  License revenues ..................................................                 705                  723                  870
  Service revenues(1) ...............................................               8,607                7,381                2,400
  Other revenues ....................................................                 153                  149                  260
                                                                                 --------             --------             --------
    Total cost of revenues ..........................................               9,465                8,253                3,530
                                                                                 --------             --------             --------
Gross profit ........................................................               7,280                3,148                2,031
Operating expenses:
  Research and development(2) .......................................               9,172                9,101                4,182
  Sales and marketing(3) ............................................              17,301               17,129                8,349
  General and administrative(4) .....................................               4,985                5,298                2,653
  Stock-based compensation ..........................................               5,113                3,294                1,070
                                                                                 --------             --------             --------
    Total operating expenses ........................................              36,571               34,822               16,254
                                                                                 --------             --------             --------
Loss from operations ................................................             (29,291)             (31,674)             (14,223)
Interest and other income ...........................................               1,541                2,822                  421
Interest expense ....................................................                  --                  (22)                 (37)
                                                                                 --------             --------             --------
Loss before income taxes ............................................             (27,750)             (28,874)             (13,839)
Provision for income taxes ..........................................                  --                   --                  (36)
                                                                                 --------             --------             --------
Net loss ............................................................             (27,750)             (28,874)             (13,875)
Series E convertible preferred stock dividend .......................                  --                   --               (4,544)
                                                                                 --------             --------             --------
Net loss applicable to common stockholders ..........................            $(27,750)            $(28,874)            $(18,419)
                                                                                 ========             ========             ========
Basic and diluted net loss per share
  applicable to common stockholders .................................            $  (1.37)            $  (1.88)            $  (8.06)
                                                                                 ========             ========             ========
Shares used in computation of basic and
  diluted net loss per share applicable to
  common stockholders ...............................................              20,327               15,397                2,286
                                                                                 ========             ========             ========
</TABLE>

(1)  Excluding  $443,  $301  and $98 in  amortization  of  deferred  stock-based
     compensation   for  the  years  ended  March  31,  2002,   2001  and  2000,
     respectively.

(2)  Excluding  $833,  $536 and $199 in  amortization  of  deferred  stock-based
     compensation   for  the  years  ended  March  31,  2002,   2001  and  2000,
     respectively.

(3)  Excluding  $2,095,  $983 and $394 in amortization  of deferred  stock-based
     compensation   for  the  years  ended  March  31,  2002,   2001  and  2000,
     respectively.

(4)  Excluding $1,742,  $1,474 and $379 in amortization of deferred  stock-based
     compensation   for  the  years  ended  March  31,  2002,   2001  and  2000,
     respectively.

See accompanying notes.

                                     46
<PAGE>
<TABLE>
                                                            VIRAGE, INC.

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

<CAPTION>
                                                                     Stockholders' Equity (Net Capital Deficiency)
                                                                     ---------------------------------------------
                                            Redeemable Convertible
                                               Preferred Stock          Common Stock             Additional
                                        --------------------------    -------------------------    Paid-In
                                           Shares        Amount          Shares        Amount      Capital
                                        -----------    -----------    -----------   -----------   -----------
<S>                                       <C>          <C>              <C>         <C>           <C>
Balance at March 31, 1999 ...........     7,282,499    $    17,936      2,323,383   $         2   $       952
  Issuance of Series E preferred
    stock, net of issuance costs ....     3,033,700         19,059             --            --            --
  Deemed dividend on Series E
    preferred stock .................            --             --             --            --         4,544
  Issuance of common stock ..........            --             --         44,583            --           185
  Exercise of stock options for cash,
    net of  repurchases .............            --             --      1,330,180             1         1,139
  Deferred compensation related
    to grant of stock options .......            --             --             --            --        15,886
  Amortization of deferred
    compensation ....................            --             --             --            --            --
  Issuance of warrants in
    consideration for advertising ...            --             --             --            --           780
  Issuance of warrants in
    consideration for technology
     right ..........................            --             --             --            --           185
  Net loss and comprehensive net
     loss ...........................            --             --             --            --            --
                                        -----------    -----------    -----------   -----------   -----------
Balance at March 31, 2000 ...........    10,316,199         36,995      3,698,146             3        23,671
  Exercise of warrants for cash and
     net exercise of warrants to
     purchase preferred and common
     stock ..........................        53,252            125         04,039            --         2,000
  Conversion of preferred stock to
     common upon initial public
     offering .......................   (10,369,451)       (37,120)    10,369,451            11        37,109
  Issuance of common stock from
    initial public offering and
    underwriter overallotment .......            --             --      4,025,000             4        39,472
  Issuance of common stock ..........            --             --      1,636,361             2        17,998
  Issuance of common stock from
    exercise of options, net of
    repurchases and issuance of ESPP
    stock ...........................            --             --        295,755            --         1,034
  Amortization of warrant fair values            --             --             --            --             6
  Amortization of deferred
    compensation ....................            --             --             --            --            --
  Issuance and remeasurement of
    stock options to consultants ....            --             --             --            --            71
  Reversal of deferred compensation
    upon employee termination .......            --             --             --            --          (654)
  Net loss and comprehensive net
    loss ............................            --             --             --            --            --
                                        -----------    -----------    -----------   -----------   -----------
Balance at March 31, 2001 ...........            --             --     20,228,752            20       120,707
  Issuance of common stock from
    exercise of options, net of
    repurchases and issuance of ESPP
    stock ...........................            --             --        392,783             1           808
  Amortization of warrant fair values            --             --             --            --           660
  Amortization of deferred
    compensation ....................            --             --             --            --            --
  Acceleration of stock option
     vesting ........................            --             --             --            --           123
  Reversal of deferred compensation
    upon employee termination .......            --             --             --            --          (911)
  Net loss and comprehensive net
    loss ............................            --             --             --            --            --
                                        -----------    -----------    -----------   -----------   -----------
Balance at March 31, 2002 ...........            --    $        --     20,621,535   $        21   $   121,387
                                        ===========    ===========    ===========   ===========   ===========
</TABLE>
<TABLE>
<CAPTION>
                                         Stockholders' Equity (Net Capital Deficiency)
                                         ---------------------------------------------
                                                                            Total
                                                                        Equity (Net
                                           Deferred       Accumulated      Capital
                                          Compensation      Deficit      Deficiency)
                                           -----------    -----------    -----------
<S>                                        <C>            <C>            <C>
Balance at March 31, 1999 ...........      $      (399)   $   (13,881)   $   (13,326)
  Issuance of Series E preferred
    stock, net of issuance costs ....               --             --             --
  Deemed dividend on Series E
    preferred stock .................               --         (4,544)            --
  Issuance of common stock ..........               --             --            185
  Exercise of stock options for cash,
    net of  repurchases .............               --             --          1,140
  Deferred compensation related
    to grant of stock options .......          (15,886)            --             --
  Amortization of deferred
    compensation ....................            1,690             --          1,690
  Issuance of warrants in
    consideration for advertising ...               --             --            780
  Issuance of warrants in
    consideration for technology
     right ..........................               --             --            185
  Net loss and comprehensive net
     loss ...........................               --        (13,875)       (13,875)
                                           -----------    -----------    -----------
Balance at March 31, 2000 ...........          (14,595)       (32,300)       (23,221)
  Exercise of warrants for cash and
     net exercise of warrants to
     purchase preferred and common
     stock ..........................               --             --          2,000
  Conversion of preferred stock to
     common upon initial public
     offering .......................               --             --         37,120
  Issuance of common stock from
    initial public offering and
    underwriter overallotment .......               --             --         39,476
  Issuance of common stock ..........               --             --         18,000
  Issuance of common stock from
    exercise of options, net of
    repurchases and issuance of ESPP
    stock ...........................               --             --          1,034
  Amortization of warrant fair values               --             --              6
  Amortization of deferred
    compensation ....................            4,165             --          4,165
  Issuance and remeasurement of
    stock options to consultants ....              (71)            --             --
  Reversal of deferred compensation
    upon employee termination .......              654             --             --
  Net loss and comprehensive net
    loss ............................               --        (28,874)       (28,874)
                                           -----------    -----------    -----------
Balance at March 31, 2001 ...........           (9,847)       (61,174)        49,706
  Issuance of common stock from
    exercise of options, net of
    repurchases and issuance of ESPP
    stock ...........................               --             --            809
  Amortization of warrant fair values               --             --            660
  Amortization of deferred
    compensation ....................            6,511             --          6,511
  Acceleration of stock option
     vesting ........................               --             --            123
  Reversal of deferred compensation
    upon employee termination .......              911             --             --
  Net loss and comprehensive net
    loss ............................               --        (27,750)       (27,750)
                                           -----------    -----------    -----------
Balance at March 31, 2002 ...........      $    (2,425)   $   (88,924)   $    30,059
                                           ===========    ===========    ===========


See accompanying notes.
</TABLE>

                                                                 47
<PAGE>
<TABLE>
                                                            VIRAGE, INC.

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (in thousands)

<CAPTION>
                                                                                            Years Ended March 31,
                                                                                   ------------------------------------------------
                                                                                     2002                2001                2000
                                                                                   --------            --------            --------
<S>                                                                                <C>                 <C>                 <C>
Cash flows from operating activities:
Net loss ...............................................................           $(27,750)           $(28,874)           $(13,875)
Adjustments to reconcile net loss to net cash used
  in operating activities:
  Depreciation and amortization ........................................              2,911               1,947                 444
  Loss on disposal of assets ...........................................                455                  --                  --
  Amortization of deferred compensation related to
    stock options ......................................................              6,511               4,165               1,689
  Amortization of warrant fair values ..................................                695                 627                 210
  Acceleration of stock option vesting .................................                123                  --                  --
  Write-off of investment in Scimagix ..................................                 --                  --                  79
  Changes in operating assets and liabilities:
    Accounts receivable ................................................                (35)               (539)               (832)
    Prepaid expenses and other current assets ..........................                295                 116                (314)
    Other assets .......................................................                (69)                 52              (3,116)
    Accounts payable ...................................................               (322)                380                 589
    Accrued payroll and related expenses ...............................               (903)              2,620                  22
    Accrued expenses ...................................................                (57)              1,234               1,555
    Deferred revenue ...................................................                 96               1,298               1,218
    Deferred rent ......................................................                179                 111                  --
                                                                                   --------            --------            --------
Net cash used in operating activities ..................................            (17,871)            (16,863)            (12,331)

Cash flows from investing activities:
Purchase of property and equipment .....................................               (375)             (6,319)             (2,021)
Purchases of short-term investments ....................................            (59,419)            (49,383)                 --
Sales and maturities of short-term investments .........................             61,762              20,932                  --
                                                                                   --------            --------            --------
Net cash provided by (used in) investing activities ....................              1,968             (34,770)             (2,021)

Cash flows from financing activities:
Proceeds from bank line of credit ......................................                 --                 806                  --
Principal payments on loans and capital leases .........................                 --              (1,047)               (281)
Proceeds from exercise of stock options, net of
  repurchases ..........................................................                 42                 537               1,140
Proceeds from employee stock purchase plan .............................                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                 185
Proceeds from issuance of preferred stock ..............................                 --                  --              19,059
                                                                                   --------            --------            --------
Net cash provided by financing activities ..............................                809              61,206              20,103
                                                                                   --------            --------            --------
Net increase (decrease) in cash and cash
  equivalents ..........................................................            (15,094)              9,573               5,751
Cash and cash equivalents at beginning of period .......................             19,680              10,107               4,356
                                                                                   --------            --------            --------
Cash and cash equivalents at end of period .............................           $  4,586            $ 19,680            $ 10,107
                                                                                   ========            ========            ========

Supplemental disclosures of cash flow information:
Cash paid for interest .................................................           $     --            $     22            $     37

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 .........................           $     --            $     71            $ 15,886
Reversal of deferred compensation upon employee
  termination ..........................................................           $    911            $    654            $     --
Series E convertible preferred stock dividend ..........................           $     --            $     --            $  4,544
Intangible assets resulting from fair value of
  warrants .............................................................           $     --            $     --            $    966
Book value of equipment write-downs ....................................           $    822            $     --            $     --
Accumulated depreciation of equipment write-downs ......................           $    367            $     --            $     --
</TABLE>

See accompanying notes.
                                       48
<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  communications.  The Company sells
worldwide  to media and  entertainment  enterprises,  corporations,  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.

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.


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, 2002, all of the Company's cash
equivalents and short-term investments were classified as available-for-sale and
consisted of obligations  issued by U.S.  government  agencies and multinational
corporations, maturing within one year.

    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,
                                                       ------------------------
                                                         2002            2001
                                                       --------        --------
Money market funds .............................       $  2,805        $  1,877
Commercial paper and corporate
  bonds ........................................         11,818          22,966
US government obligations ......................         17,379          22,108
                                                       --------        --------
  Total investments ............................         32,002          46,951
Amounts classified as cash
  equivalents ..................................         (3,805)        (18,500)
Amounts classified as other assets .............         (2,089)             --
                                                       --------        --------
                                                       $ 26,108        $ 28,451
                                                       ========        ========

    As of March 31, 2002, 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 $2,089,000 as other
assets in the Company's  balance sheet.  As of March 31, 2002 and 2001, 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.

                                       49
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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  property  under  capital  leases and  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;   and  also  receives  revenues  under  U.S.
government  agency  research  grants.  Service  revenues  include  revenues from
maintenance contracts,  application services,  and professional services.  Other
revenues are primarily U.S. government agency research grants.

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

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

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

                                       50
<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


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

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

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

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

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

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 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.  The
Company and MLBAM's application services contract was successfully completed and
the contract expired in February 2002. The two parties were not able to mutually
agree on terms  with each  other for a renewal  of this  contract.  For the year
ended March 31, 2001,  there were no customers that accounted for 10% or more of
the Company's total  revenues.  For the year ended March 31, 2000, two customers
each accounted for 13% and 10% of the Company's total revenues.

    European customers  accounted for approximately 10% and 18% of the Company's
accounts receivable balance as of March 31, 2002 and 2001, respectively.

    Federal  Government  Agencies.  For the years ended March 31, 2002, 2001 and
2000 direct and indirect revenues from federal government agencies accounted for
14%, 10%, and 12%, respectively, of total revenues. No single federal government
agency  accounted for more than 10% of total  revenues for the years ended March
31, 2002, 2001 or 2000.

Advertising Costs

    Advertising costs are expensed as incurred.  Advertising  expense (including
the amortization of the fair value of a warrant during the years ended March 31,
2001 and 2000--see Note 3), totaled $54,000, $697,000 and $256,000 for the years
ended March 31, 2002, 2001and 2000, respectively.

Comprehensive Net Loss Applicable to Common Stockholders

    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 applicable to common stockholders
equals total comprehensive net loss applicable to common stockholders.

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 Applicable to Common Stockholders

    Basic and diluted net loss per share  applicable to common  stockholders 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.


                                       52

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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


                                                   Years Ended March 31,
                                             ----------------------------------
                                               2002         2001         2000
                                             --------     --------     --------
Net loss applicable to common
  stockholders ..........................    $(27,750)    $(28,874)    $(18,419)
                                             ========     ========     ========
Weighted-average shares of common
  stock outstanding .....................      20,452       15,781        2,710
Less weighted-average shares of
  common stock subject to repurchase ....        (125)        (384)        (424)
                                             --------     --------     --------

Weighted-average shares used in
  computation of basic and
  diluted net loss per share
  applicable to common
  stockholders ..........................      20,327       15,397        2,286
                                             ========     ========     ========

Basic and diluted net loss per
  share applicable to common
  stockholders ..........................    $  (1.37)    $  (1.88)    $  (8.06)
                                             ========     ========     ========

    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   applicable  to  common   stockholders   because  these   securities  are
antidilutive  for all  periods  presented.  Options  and  warrants  to  purchase
7,630,293,  6,502,656  and  3,779,990  shares of common  stock and common  stock
equivalents  were  outstanding at March 31, 2002,  2001 and 2000,  respectively.
Such  securities,  had they  been  dilutive,  would  have been  included  in the
computation  of diluted  net loss per share  applicable  to common  stockholders
using the treasury stock method.

Fair Value of Financial Instruments

     The Company has evaluated the estimated fair value of financial instruments
at March 31, 2002 and 2001. The amounts reported for cash and cash  equivalents,
short-term  investments,  accounts  receivable and accounts payable  approximate
their carrying values due to the short-term maturities of these instruments.

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. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets to be Disposed  of," ("FAS 121")  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,  2002,  FAS 121 has had no impact on the  Company's  financial  position  or
results of operations other than that disclosed in Note 2.


                                       53

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Impact of Recently Issued Accounting Standards

     In June 2001, the FASB issued Statement of Financial  Accounting  Standards
No.  141,  "Business  Combinations  ("FAS  141")." FAS 141  requires  use of the
purchase  method for all business  combinations  initiated  after June 30, 2001,
thereby  eliminating  use of the  pooling  method.  FAS 141  also  provides  new
criteria to determine whether an acquired  intangible asset should be recognized
separately from goodwill.  Under the new criteria,  an acquired intangible asset
would not be recognized  separately from goodwill unless either control over the
future economic  benefits  results from contractual or legal rights or the asset
is  capable  of being  separated  or divided  and sold,  transferred,  licensed,
rented, or exchanged.  The adoption of FAS 141 did not have a material impact on
its financial position or its results of operations or cash flows as the Company
has not participated in any business combinations through March 31, 2002.

    In June 2001, the FASB issued  Statement of Financial  Accounting  Standards
No. 142,  "Goodwill  and  Intangible  Assets  ("FAS  142")." FAS 142 states that
amortization  of goodwill  will no longer be required.  Instead,  impairment  to
goodwill is to be tested at least  annually at the reporting  unit level using a
two-step  impairment  test  whereby  the first step  determines  if  goodwill is
impaired and the second step measures the amount of the impairment  loss.  While
goodwill is to be tested for impairment annually, companies may need to test for
goodwill  impairment on an interim basis if an event or circumstance occurs that
might significantly reduce the fair value of a reporting unit below its carrying
amount.  Regarding amortization of intangible assets with finite lives, the FASB
requires  intangible assets to be amortized over their useful economic lives and
reviewed for  impairment.  Intangible  assets that have economic  lives that are
indefinite  would not be subject to  amortization  until there is evidence  that
their  lives no  longer  are  indefinite,  and would be  tested  for  impairment
annually using a lower of cost or fair value approach. The provisions of FAS 142
will be  effective  for fiscal years  beginning  after  December  15, 2001.  The
Company  currently  believes that FAS 142 will not have a material impact on its
financial position or its results of operations or cash flows as the Company has
no goodwill or intangible assets subject to the requirements of FAS 142.

    In August 2001, the FASB issued Statement of Financial  Accounting Standards
No. 144,  "Accounting  for the Impairment or Disposal of Long-Lived  Assets (FAS
144)," which addresses financial  accounting and reporting for the impairment or
disposal of long-lived  assets and  supersedes  FAS 121 and the  accounting  and
reporting  provisions of Accounting  Principles Board Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." FAS 144 is
effective  for fiscal years  beginning  after  December  15, 2001,  with earlier
application  encouraged.  The Company adopted FAS 144 as of April 1, 2002 and it
does not expect that the  adoption  of this  statement  will have a  significant
impact on the Company's financial position and results of operations.


                                       54

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)


    In November 2001, the FASB issued a Staff Announcement (the "Announcement"),
Topic D-103, which concluded that the reimbursement of "out-of-pocket"  expenses
should  be  classified  as  revenue  in  the  statement  of   operations.   This
Announcement  is to be applied in financial  reporting  periods  beginning after
December 15, 2001. Upon application of this Announcement,  comparative financial
statements for prior periods should be  reclassified to comply with the guidance
in this Announcement.  The Company adopted the Announcement in its fiscal fourth
quarter of its year ended  March 31,  2002 and the  Announcement  did not have a
material affect on the Company's operations, financial position or cash flows.


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.

Leases

    The Company leases certain of its facilities under operating leases, some of
which have  options to extend the lease  period.  Rent  expense was  $4,678,000,
$2,714,000,  and  $717,000  for the years ended March 31,  2002,  2001 and 2000,
respectively.

    Future minimum lease payments under non-cancelable operating leases at March
31, 2002 are as follows (in thousands):

                                                       Operating
            Years Ending March 31,                      Leases
           -----------------------                    ----------
                  2003............................     $   3,196
                  2004............................         3,105
                  2005............................         3,082
                  2006............................         2,940
                  2007............................         1,494
                                                      ----------
                     Total minimum payments.......     $  13,817
                                                      ==========

     During the years  ended  March 31,  2002 and 2001,  the Company was able to
sublease certain of its facilities.  Rental payments received that relate to the
subleases were  $2,344,000 and $1,185,000 for the years ended March 31, 2002 and
2001,  respectively  (none for the year  ended  March 31,  2000).  The  sublease
agreements  remaining  provide  for  payments  to be  received by the Company of
$88,000,  $66,000 and $66,000  during the years ended March 31,  2003,  2004 and
2005, respectively.


                                       55

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    The Company's  principal  administrative,  research and development,  sales,
services and marketing  activities are conducted on two leased properties in San
Mateo, California: the first property consists of 21,000 square feet and expires
in May 2002 and the second  property  consists of 48,000 square feet and expires
in September  2006. In addition,  the Company leases 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 June 2003 and a property near London,  England where the
Company performs sales,  services,  marketing and administrative  activities and
that expires in February  2004.  During the years ended March 31, 2002 and 2001,
the Company  was able to sublease  its excess  capacity  at its  facilities  and
received  rental  payments  from its  tenants  as  described  above.  Two of the
Company's  sublease  tenants who accounted for the  significant  majority of the
Company's  sublease  receipts  described  above  did not  renew  their  sublease
agreements  during the year  ended  March 31,  2002.  The  Company  has not been
successful  in finding  any new  sublease  tenants  and,  accordingly,  recorded
expense of  $396,000  in the fiscal  fourth  quarter of the year ended March 31,
2002 to account  for its excess  operating  capacity  at its 48,000  square foot
facility in San Mateo, California. The Company also recorded $215,000 of expense
for excess  facility  capacity at its 21,000  square foot facility in San Mateo,
California.  Should the Company continue to have excess operating lease capacity
and the  Company  is unable to find a sub  lessee  at a rate  equivalent  to its
operating  lease rate,  the Company would be required to record a charge for the
rental  payments  that the Company owes to its landlord  relating to this excess
facility capacity.  The Company's  management reviews its facility  requirements
and  assesses  whether  any  excess  capacity  exists  as part  of its  on-going
financial processes.

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
$705,000,  $723,000 and  $870,000  for the years ended March 31, 2002,  2001 and
2000, respectively.

    Future  minimum and fixed fee royalty  payments  under these  agreements  at
March 31, 2002 are as follows (in thousands):


                                                       Minimum
         Years Ending March 31,                      Commitments
        -----------------------                      -----------
             2003............................        $      290
             2004............................               340
             2005............................               300
             2006............................               300
             2007............................               350
                                                     -----------

                Total minimum payments.......        $    1,580
                                                     ===========

    It is the Company's best estimate as of March 31, 2002 that the Company will
recoup each period's  commitment  via future  revenue  streams  generated by its
products,  best  evidenced by the gross  profit  generated  historically  by the
Company's  license  revenues.  The  Company  believes  that it has no  loss-type
contracts related to its technology provider royalty commitments as of March 31,
2002.


                                       56

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    Currently,  the  Company  anticipates  that  it  will  continue  to  license
technology  from third parties in the future.  This software may not continue to
be available on commercially  reasonable  terms, if at all. Although the Company
does not believe that it is substantially  dependent on any licensed technology,
some of the software the Company  licenses from third parties could be difficult
for it to replace.  The loss of any of these technology licenses could result in
delays in the licensing of the Company's  products until equivalent  technology,
if available,  is developed or identified,  licensed and integrated.  The use of
additional  third-party  software would require the Company 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
the Company's  products  depends upon the  successful  operation of  third-party
licensed products in conjunction with the Company's products,  and therefore any
undetected errors in these licensed products could prevent the implementation or
impair  the  functionality  of  the  Company's   products,   delay  new  product
introductions and/or damage the Company's reputation.

Restructuring

    During the year ended March 31, 2002, the Company implemented  restructuring
programs to better align  operating  expenses  with  anticipated  revenues.  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  expects to pay these accrued amounts out over the course of
the next 12 months.

    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>


    During the fourth fiscal  quarter of the  Company's  fiscal year ended March
31, 2002,  the Company  completed  its  application  services  contract with its
largest  customer,  MLBAM.  The Company and MLBAM were unable to reach  mutually
agreeable terms for a renewal and MLBAM had no obligation to renew its contract.
In addition,  the Company's  historically  largest reseller announced that it is
divesting  its  business  segment  in  which  the  Company's  products  are most
complementary.  As a result,  the Company  encountered very little channel sales
activity from this reseller  during the fourth fiscal quarter of its fiscal year
ended March 31, 2002. The Company believes these two factors  contributed to its
quarterly  decline in total  revenues  during the fourth  fiscal  quarter of its
fiscal year ended March 31, 2002. As a result of this significant  customer loss
and channel partner loss, our future  operating  results could be  significantly
harmed. In addition,  if we were to lose one of our other large customers or any
of our large  customers  were to delay or default  on  obligations  under  their
contracts with us, our future operating  results could be significantly  harmed.
This could lead to the Company taking additional  restructuring actions in order
to reduce costs and bring staffing in line with anticipated requirements.


                                       57

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

   The Company's  application  services use  significant  capital  equipment and
other  infrastructure  resources that have been purchased and engaged to support
its current customer  requirements.  The Company's  application services are new
and  unproven  and  revenues  and related  expenses  are  difficult to forecast.
Customers typically engage in contracts for the Company's  application  services
for a period of six to twelve  months  and no  customer  has any  obligation  to
renew.  During the year ended March 31,  2002,  the Company  incurred  equipment
write-downs  of  $455,000  (included  in cost of service  revenues)  as a direct
result of a decline in demand for its application  services.  Should the Company
lose other customers for its application  services,  the Company may have excess
capacity  and be  required  to record  additional  charges  for  excess  capital
equipment and/or other  infrastructure  costs. The Company's  management reviews
its capacity  requirements  and assesses  whether any excess  capacity exists as
part of its on-going financial processes.

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

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;  two of the Company's  officers;  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.  Defendants'  time to respond to the  complaints has
been stayed pending a plan for further  coordination.  The Company believes that
the allegations against it and the individual  defendants are without merit, and
intends to contest them vigorously.


                                       58

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    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.

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.

Series E Preferred Stock Dividend

    In December 1999, the Company issued 684,343  additional  shares of Series E
redeemable convertible preferred stock at a price of $6.56 per share for a total
purchase  price of  $4,489,000.  The fair  value  of the  shares  at the time of
issuance was estimated to be $13.20 per share.  The difference  between the fair
value of $13.20 per share and issue price of $6.56 per share has been  accounted
for as a deemed dividend totaling $4,544,000.


                                       59

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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.

      In May 1997, in connection with a credit facility agreement, Virage issued
warrants to  purchase  8,654  shares of Series B preferred  stock at an exercise
price of $2.60 per share.  The  warrants  expire in May 2002 and as of March 31,
2002  remain  outstanding.  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  Series B
preferred stock of $2.60,  risk-free interest rate of 6.5%, volatility factor of
40%, and a life of 5 years.

    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
warrants 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 $35,000,  $35,000 and  $15,000  was  recorded  during the years ended
March 31, 2002, 2001 and 2000, 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 and  $195,000  was  recorded  during the years ended March 31, 2001 and
2000, respectively.


                                       60

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    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 $12,000 and $6,000 was recorded during the years ended March
31, 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.

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 allows  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
choose, provided that should an employee participate, any option granted to that
employee  within  the six months  preceding  February  6, 2002 is  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 accelerate the amortization
of the remaining  deferred  compensation  (see below) related to these cancelled
stock options.  This  acceleration of amortization is included in the $6,511,000
of  deferred  compensation  expense  recorded  in  the  Company's  statement  of
operations for the year ended March 31, 2002.

     On  approximately  August 7,  2002,  each  employee  participating  will be
granted new options  equivalent to the number  cancelled.  The exercise price of
the new options will be the fair market price of the  Company's  common stock as
listed on the Nasdaq National Market at the close of business six months and one
day after the cancellation of the existing options,  anticipated to be on August
7, 2002.  The vesting  period will remain  consistent  with the original  option
grants.  Members of the Company's  Board of  Directors,  including the Company's
Chairman and Chief Executive Officer, and the Company's Chief Financial Officer,
Senior Vice  President of Worldwide  Sales and  employees  who are  residents of
Germany are not eligible for this program. As of March 31, 2002, the Company had
an obligation to grant 2,653,250 shares pursuant to this program.


                                       61

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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.

    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 Virage 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.

    The Company has elected to follow  Accounting  Principles  Board Opinion No.
25,  "Accounting  for Stock Issued to  Employees"  ("APB  Opinion No. 25"),  and
related interpretations 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.


                                       62

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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

                                                       Options Outstanding
                                                     --------------------------
                                       Shares                       Weighted
                                      Available      Number of       Average
                                      For Grant       Shares     Exercise Price
                                     ----------     ----------   --------------
 Balance at March 31, 1999.........   1,201,974      1,981,704       $ 0.35
   Options authorized..............   5,000,000             --           --
   Options granted.................  (3,121,423)     3,121,423       $ 7.26
   Options exercised...............          --     (1,330,430)      $ 0.86
   Options canceled................     119,183       (119,183)      $ 0.74
                                     ----------     ----------
 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
                                     ==========     ==========

    As of March 31,  2002,  the Company  had an  obligation  to issue  2,653,250
shares to participants in its voluntary  cancellation  and re-grant program (see
above). In addition, there were 22,561 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.

    The following table summarizes  information about stock options  outstanding
and exercisable at March 31, 2002:
<TABLE>
<CAPTION>

                                   Options Outstanding                    Options Exercisable
                       --------------------------------------------- -----------------------------
                                         Weighted-
                                          Average         Weighted-
                                         Remaining         Average                     Weighted-
     Range of              Number       Contractual    Exercise Price    Number         Average
  Exercise Prices        Outstanding       Life           (in years)  Exercisable  Exercise Price
-----------------        ----------     -----------    -------------- -----------  --------------
<S>       <C>             <C>              <C>            <C>           <C>             <C>
$  0.15-- $  0.40           215,935        5.93           $ 0.31          211,976       $ 0.31
$  1.00-- $  2.50         1,553,900        9.07           $ 2.16          703,150       $ 1.86
$  2.58-- $  4.00         1,214,028        8.82           $ 3.33          725,816       $ 3.67
$  4.15-- $  6.00         1,262,083        8.59           $ 4.84        1,222,083       $ 4.84
$  8.00-- $ 12.00           522,443        8.11           $ 9.83          494,633       $ 9.74
                         ----------                                    ----------
$  0.15-- $ 12.00         4,768,389        8.63           $ 3.92        3,357,658       $ 4.40
                         ==========        ====           ======       ==========       ======
</TABLE>


                                            63

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    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
1,500,000  shares of common stock has been  reserved  for the ESPP,  and 319,217
shares have been issued through March 31, 2002. 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.

Fair Value Disclosures

    As described above, the Company has elected to follow APB Opinion No. 25 and
related  interpretations in accounting for its employee stock options.  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  weighted  average  assumptions for the years
ended March 31, 2002, 2001 and 2000:  risk-free interest rates of 3.0%, 6.5% and
5.8%,  respectively,  volatility factors of 113%, 90% 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 were estimated using the following  weighted average  assumptions:
risk-free interest rate of 4.4%, no dividend yield, a volatility factor of 113%,
and an  expected  life of the option of six  months.  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.   The
weighted-average grant date fair value of options granted during the years ended
March 31, 2002, 2001 and 2000 was $2.35, $5.78 and $4.28, respectively,  and the
weighted-average grant date fair value of ESPP shares was $1.04 and $2.07 during
the years ended March 31, 2002 and 2001, respectively. For purposes of pro forma
disclosures,  the  estimated  fair value of the options is  amortized to expense
over the options'  vesting  period.  The pro forma net loss applicable to common
stockholders  would  have  been  $35,782,000,  $35,043,000  and  $19,765,000  or
$(1.76),  $(2.28) and $(8.65) per share for the years ended March 31, 2002, 2001
and 2000, respectively.


                                       64

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

Deferred Compensation & Option Vesting Acceleration

    During  the years  ended  March  31,  2001 and 2000,  the  Company  recorded
aggregate  deferred  compensation  of  $71,000  and  $15,886,000,  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, 2002, 2001
and  2000,  the  Company  amortized   $6,511,000,   $4,165,000  and  $1,689,000,
respectively,  of  deferred  compensation  of which  $5,113,000,  3,294,000  and
$1,070,000,   respectively,   related  to  stock  options  issued  to  employees
(presented  separately in the Company's statement of operations) and $1,398,000,
$871,000  and  $619,000,  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 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.

Options Issued to Consultants

    As of 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
4.75% to 6.13%, 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 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." 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,  $871,000 and $619,000 for the years ended
March 31, 2002, 2001 and 2000,  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
<TABLE>
<CAPTION>
    At March 31, 2002, common stock reserved for future issuance was as follows:

                                                        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...................................         4,094,511          $     4.11     4,571,073
Equity compensation plans not approved
  by stockholders...................................           882,532          $     3.35       225,248
                                                       ---------------                       -----------
     Total..........................................         4,977,043          $     3.97     4,796,321
                                                       ===============          ==========   ===========
</TABLE>
                                                  65

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

      Included  in  the  4,571,073   shares   available  for  grant  for  equity
compensation  plans  approved by  stockholders  are  1,180,783  shares  reserved
pursuant to the  Company's  ESPP (see above) and 2,653,250  shares  reserved for
future issuance  pursuant to the Company's  voluntary  cancellation and re-grant
program (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, 2002.

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, 2002 or 2001.  Provisions for income taxes for the
year ended March 31, 2000 consisted primarily of current foreign taxes and state
income taxes.

         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,
                                                                    -------------------------------------
                                                                        2002          2001        2000
                                                                    -----------   -----------  ----------
<S>                                                                 <C>            <C>          <C>
Tax benefit at federal statutory rate (34%).....................    $   (9,435)    $  (9,817)   $  (4,705)
Loss for which no tax benefit is currently recognizable.........         6,985         8,664        4,066
Nondeductible stock compensation................................         2,450         1,153          603
State and foreign income taxes..................................            --            --           36
                                                                    -----------   -----------  ----------
  Total provision...............................................    $       --     $      --    $     --
                                                                    ===========   ===========  ==========
</TABLE>

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

                                                                 March 31,
                                                          ---------------------
                                                             2002        2001
                                                             ----        ----
Deferred tax assets:
  Net operating loss carryforwards....................    $  24,000   $  16,188
  Tax credit carryforwards............................          870         814
  Other individually immaterial items.................        2,170       2,166
                                                          ---------   ---------
     Total deferred tax assets........................       27,040      19,168
Valuation allowance...................................      (27,040)    (19,168)
                                                          ---------   ---------
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
$7,872,000  and  $8,642,000  during  the years  ended  March 31,  2002 and 2001,
respectively.


                                       66

<PAGE>


                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

    As of March 31, 2002,  the Company had federal and state net operating  loss
carryforwards of approximately $66,000,000 and $27,000,000,  respectively. As of
March 31, 2002, the Company also had federal and state research and  development
tax credit carryforwards of approximately  $577,000 and $300,000,  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.

7. Segment Reporting

   The Company has two  reportable  segments:  the sale of software  and related
software support services including other revenues from U.S. government agencies
("software")  and the sale of its  application and  professional  services which
includes set-up fees,  professional  services fees,  video  processing fees, and
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, 2002 and 2001 are as follows (in thousands):


                                                  Years Ended March 31,
                                      -----------------------------------------
                                           2002          2001           2000
                                      ------------- -------------   -----------
 Software:
   Total revenues................      $    10,301   $     8,018    $     5,123
   Total cost of revenues........            1,460         1,347          1,600
                                       -----------   -----------    -----------
   Gross profit..................      $     8,841   $     6,671    $     3,523
                                       ===========   ===========    ===========

 Application and Professional
 Services:
   Total revenues................      $     6,444   $     3,383    $       438
   Total cost of revenues........            8,005         6,906          1,930
                                       -----------   -----------    -----------
   Gross loss....................      $    (1,561)  $    (3,523)   $    (1,492)
                                       ============  ============   ===========


    Total  revenues  to  customers   located  outside  the  United  States  were
approximately  $3,997,000,  $3,341,000  and $1,241,000 for the years ended March
31, 2002, 2001 and 2000,  respectively.  Virage Europe Ltd. and Virage GmbH, the
Company's  European  subsidiaries,   accounted  for  approximately   $2,114,000,
$2,020,000  and  $1,137,000 of the Company's  total revenues for the years ended
March 31, 2002, 2001 and 2000, 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, 2002 and 2001.


                                       67

<PAGE>

                                  VIRAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)

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,
                            2002         2001          2001         2001       2001         2000          2000         2000
                            ----         ----          ----         ----       ----         ----          ----         ----
                                                                (in thousands)
<S>                       <C>          <C>           <C>          <C>        <C>          <C>           <C>           <C>
Total revenues......      $ 3,221      $ 4,788       $ 4,746      $ 3,990    $ 3,623      $ 3,268       $ 2,579       $ 1,931
Gross profit........        1,502        2,459         2,072        1,247      1,258        1,033           610           247
Net loss
  applicable
  to common
  stockholders......       (8,966)      (5,204)       (6,369)      (7,211)    (7,028)      (7,004)       (7,107)       (7,735)
Basic and diluted
  net loss per
  share applicable
  to common
  stockholders......      $ (0.44)     $ (0.26)      $ (0.31)     $ (0.36)   $ (0.35)     $ (0.35)      $ (0.38)      $ (2.41)
</TABLE>

9.  Subsequent Events (Unaudited)

    The  Company's  1997 stock option 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.  Accordingly,  1,000,000
shares were  authorized  as  additional  shares to be granted under this plan on
April 1, 2002. In addition,  400,000 shares were authorized as additional shares
to be  granted  under the  Company's  ESPP  pursuant  to the  plan's  provisions
effective April 1, 2002.

                                       68
<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 2002
         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  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 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.

                                       69
<PAGE>

                                     PART IV

Item 14. 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         Write-offs       Period
                -----------                       ---------       --------         ----------       ------
<S>                                                 <C>             <C>               <C>           <C>
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

Fiscal year ended March 31, 2000
     Allowance for doubtful accounts................$ 134           $ 457             $ --           $ 591
</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

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

23.1     Consent of Ernst & Young LLP, Independent Auditors

24.1     Power of Attorney (included on signature page)

+ 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 Report filed on Form
10-Q on February 6, 2001.

    (b) Reports on Form 8-K:

         No reports on Form 8-K were filed during the fourth quarter ended March
31, 2002.

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

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

                                       70
<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 14, 2002.


                                    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 Alfred J.  Castino,
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, Presdient & Chief                   June 14, 2002
-------------------------------------------    Executive Officer
               Paul G. Lego                    (Principal Executive Officer)


          /s/ Alfred J. Castino                Vice President and Chief                      June 14, 2002
-------------------------------------------    Financial Officer
            Alfred J. Castino                  (Principal Financial and Accounting
                                               Officer)


            /s/ Alar E. Arras                  Director                                      June 14, 2002
-------------------------------------------
              Alar E. Arras


           /s/ Ronald E.F. Codd                Director                                      June 14, 2002
-------------------------------------------
             Ronald E.F. Codd


          /s/ Philip W. Halperin               Director                                      June 14, 2002
-------------------------------------------
            Philip W. Halperin


        /s/ Randall S. Livingston              Director                                      June 14, 2002
-------------------------------------------
          Randall S. Livingston


         /s/ Standish H. O'Grady               Director                                      June 14, 2002
-------------------------------------------
           Standish H. O'Grady


           /s/ Lawrence K. Orr                 Director                                      June 14, 2002
-------------------------------------------
             Lawrence K. Orr


       /s/ William H. Younger, Jr.             Director                                      June 14, 2002
-------------------------------------------
         William H. Younger, Jr.
</TABLE>

                                       71
<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

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

23.1     Consent of Ernst & Young LLP, Independent Auditors

24.1     Power of Attorney (included on signature page)

                                       72