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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D. C. 20549


FORM 10-Q

(Mark One)

|    |  |                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|[X] |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ending December 31, 2003

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission file number 000-31089

VIRAGE LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


|                                |  |                                  
|------------------------------- |  | ---------------------------------
|Delaware                        |  | 77-0416232                       
|(State or other jurisdiction of |  | (IRS Employer Identification No.)
|incorporation or organization)  |  |                                  

47100 Bayside Parkway
Fremont, California 94538
(Address of principal executive offices)

(510) 360-8000
(Registrants telephone number, including area code)

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.

|    |     |  |  |    |       | 
|--- | --- |  |  | -- | ----- | 
|Yes | [X] |  |  | No | [   ] | 

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

As of January 31, 2004 there were 21,317,418 shares of the Registrants Common
Stock outstanding.





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|                            |                                                                                               |                                                           |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|                            |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS          
|                            |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                            |                                                                                               | UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS             
|                            |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                            | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                            | Item 4. Controls and Procedures                                                              
|PART II - OTHER INFORMATION
|                            | ITEM 1. Legal Proceedings                                                                    
|                            | ITEM 2. Changes in Securities and Use of Proceeds                                            
|                            | ITEM 3. Defaults upon Senior Securities                                                      
|                            | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                            | ITEM 5. Other Information                                                                    
|                            | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 
|Exhibit Index              
|EXHIBIT 31.1               
|EXHIBIT 31.2               
|EXHIBIT 32.1               
|EXHIBIT 32.2               



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VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX

|           |                                                                                                                 |  |      |    | 
|---------- | --------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |                                                                                                                 |  | Page
|           |                                                                                                                 |  |     
|PART I -   | Financial Information                                                                                           |  |      |    | 
|ITEM 1 -   | Financial Statements                                                                                            |  |      |    | 
|           | Unaudited Condensed Consolidated Balance Sheets as of
December 31, 2003 and September 30, 2003                  |  |      | 3  | 
|           | Unaudited Condensed Consolidated Statements of Operations for the
three months ended December 31, 2003 and 2002 |  |      | 4  | 
|           | Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2003 and 2002 |  |      | 5  | 
|           | Notes to Unaudited Condensed Consolidated Financial Statement                                                   |  |      | 6  | 
|ITEM 2 -   | Managements Discussion and Analysis of Financial Condition
and Results of Operations                           |  |      | 12 | 
|ITEM 3    | Quantitative and Qualitative Disclosures about Market Risk                                                      |  |      | 33 | 
|ITEM 4    | Controls and Procedures                                                                                         |  |      | 33 | 
|PART II  - | Other Information                                                                                               |  |      |    | 
|ITEM 1    | Legal Proceedings                                                                                               |  |      | 35 | 
|ITEM 2    | Changes in Securities and Use of Proceeds                                                                       |  |      | 35 | 
|ITEM 3    | Defaults upon Senior Securities                                                                                 |  |      | 35 | 
|ITEM 4    | Submission of Matters to a Vote of Security Holders                                                             |  |      | 35 | 
|ITEM 5    | Other Information                                                                                               |  |      | 35 | 
|ITEM 6    | Exhibits and Reports on Form 8-K                                                                                |  |      | 35 | 
|Signatures |                                                                                                                 |  | 36   |   

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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |         |    |        | 
|------------------------------------ | ---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------ | ------------- | ------- | -- | ------ | 
|                                     |                                                                        |                                                                                                             |                                            |         | December 31, |        | September 30,
|                                     |                                                                        |                                                                                                             |                                            |         | 2003         |        | 2003         
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |              
|ASSETS                               |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|Current assets:                      |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     | Cash and cash equivalents                                              |                                                                                                             | $                                          | 49,043  |              |        | $             | 38,930  |   
|                                     | Short-term investments                                                 |                                                                                                             |                                            | 9,087   |              |        |               | 16,085  |   
|                                     | Accounts receivable, net of allowance of $648 in 2003
and $738 in 2002 |                                                                                                             |                                            | 13,324  |              |        |               | 10,499  |   
|                                     | Costs in excess of related billings on uncompleted
contracts           |                                                                                                             |                                            | 715     |              |        |               | 619     |   
|                                     | Prepaid expenses and other                                             |                                                                                                             |                                            | 3,697   |              |        |               | 3,820   |   
|                                     | Taxes receivable                                                       |                                                                                                             |                                            | 120     |              |        |               |        |   
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total current assets                       |         |              | 75,986 |               |         |    | 69,953 | 
|                                     | Long-term investments                                                  |                                                                                                             |                                            | 2,029   |              |        |               | 4,095   |   
|                                     | Property, leasehold improvements and equipment, net                    |                                                                                                             |                                            | 5,519   |              |        |               | 6,250   |   
|                                     | Goodwill, net                                                          |                                                                                                             |                                            | 9,782   |              |        |               | 9,782   |   
|                                     | Other intangible assets, net                                           |                                                                                                             |                                            | 3,051   |              |        |               | 3,148   |   
|                                     | Deferred tax assets                                                    |                                                                                                             |                                            | 2,942   |              |        |               | 2,942   |   
|                                     | Other long-term assets                                                 |                                                                                                             |                                            | 395     |              |        |               | 392     |   
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total assets                               |         | $            | 99,704 |               |         | $  | 96,562 | 
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|Current liabilities:                 |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     | Accounts payable                                                       |                                                                                                             | $                                          | 643     |              |        | $             | 807     |   
|                                     | Accrued expenses                                                       |                                                                                                             |                                            | 4,261   |              |        |               | 3,771   |   
|                                     | Deferred revenue                                                       |                                                                                                             |                                            | 5,717   |              |        |               | 2,613   |   
|                                     | Income taxes payable                                                   |                                                                                                             |                                            |        |              |        |               | 309     |   
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total current liabilities                  |         |              | 10,621 |               |         |    | 7,500  | 
|Deferred tax liabilities             |                                                                        |                                                                                                             | 1,189                                      |         |              |        | 1,189         |        
|Other                                |                                                                        |                                                                                                             | 500                                        |         |              |        | 500           |        
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total liabilities                          |         |              | 12,310 |               |         |    | 9,189  | 
|Stockholders equity:                |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     | Common stock, $.001 par value:                                         |                                                                                                             |                                            |         |              |        |               |         |   
|                                     |                                                                        | Authorized shares  150,000 at December 31, 2003
and September 30, 2003,                                    |                                            |         |              |        |               |         |    |       
|                                     |                                                                        | Issued and outstanding shares  21,286 and 21,200 at
December 31, 2003 and September 30, 2003, respectively |                                            |         | 21           |        |               |         | 21 |       
|                                     | Additional paid-in capital                                             |                                                                                                             |                                            | 110,664 |              |        |               | 110,330 |   
|                                     | Accumulated other comprehensive income                                 |                                                                                                             |                                            | (1      | )            |        |               | 2       |   
|                                     | Deferred stock-based compensation                                      |                                                                                                             |                                            | (81     | )            |        |               | (130    | ) 
|                                     | Accumulated deficit                                                    |                                                                                                             |                                            | (23,209 | )            |        |               | (22,850 | ) 
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total stockholders equity                 |         |              | 87,394 |               |         |    | 87,373 | 
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                                        |                                                                                                             | Total liabilities and stockholders equity |         | $            | 99,704 |               |         | $  | 96,562 | 
|                                     |                                                                        |                                                                                                             |                                            |         |              |        |               |         |   

See accompanying notes to unaudited condensed consolidated financial statements.

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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

|                                            |                                                                                                                   |                         |        |                    |        |      |        |        |        | 
|------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ----------------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | 
|                                            |                                                                                                                   |                         |        | Three Months Ended
|                                            |                                                                                                                   |                         |        | December 31,      
|                                            |                                                                                                                   |                         |        |                   
|                                            |                                                                                                                   |                         |        | 2003               |        | 2002
|                                            |                                                                                                                   |                         |        |                    |        |     
|Revenue:                                    |                                                                                                                   |                         |        |                    |        |      |        |       
|                                            | License                                                                                                           |                         |        | 9,474              |        |      |        | 11,050 |       
|                                            | Royalties                                                                                                         |                         |        | 1,386              |        |      |        | 515    |       
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Revenues                                    |                                                                                                                   | $                       | 10,860 |                    |        | $    | 11,565 |       
|Cost and expenses:                          |                                                                                                                   |                         |        |                    |        |      |        |       
|                                            | Cost of revenues (exclusive of amortization of deferred
stock compensation of $11 and $132, respectively)         |                         |        | 2,436              |        |      |        | 2,651  |       
|                                            | Research and development (exclusive of amortization of
deferred stock compensation of $19 and $230,
respectively) |                         |        | 4,413              |        |      |        | 4,629  |       
|                                            | Sales and marketing (exclusive of amortization of deferred
stock compensation of $14 and $154, respectively)      |                         |        | 3,248              |        |      |        | 3,083  |       
|                                            | General and administrative (exclusive of amortization of
deferred stock compensation of $6 and $59 respectively)  |                         |        | 1,445              |        |      |        | 1,185  |       
|                                            | Stock-based compensation                                                                                          |                         |        | 50                 |        |      |        | 575    |       
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|                                            |                                                                                                                   | Total cost and expenses |        |                    | 11,592 |      |        |        | 12,123 | 
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Operating loss                              |                                                                                                                   |                         | (732   | )                  |        |      | (558   | )     
|Interest income and other expense, net      |                                                                                                                   |                         | 168    |                    |        |      | 249    |       
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Loss before taxes                           |                                                                                                                   |                         | (564   | )                  |        |      | (309   | )     
|Income tax provision (benefit)              |                                                                                                                   |                         | (205   | )                  |        |      | 76     |       
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Net loss                                    |                                                                                                                   | $                       | (359   | )                  |        | $    | (385   | )     
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Basic and diluted net loss per share        |                                                                                                                   | $                       | (0.02  | )                  |        | $    | (0.02  | )     
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       
|Shares used in computing per share amounts: |                                                                                                                   |                         |        |                    |        |      |        |       
|                                            | Basic and diluted                                                                                                 |                         |        | 21,181             |        |      |        | 20,453 |       
|                                            |                                                                                                                   |                         |        |                    |        |      |        |       

See accompanying notes to unaudited condensed consolidated financial statements.

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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)




|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |        |      |   |        |  
|------------------------------------------------ | --------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------ | ---- | ------------------ | ------ | ------ | ---- | - | ------ | -
|                                                 |                                                     |                                                                                           |                                              |                                                              |      | Three Months Ended
|                                                 |                                                     |                                                                                           |                                              |                                                              |      | December 31,      
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                   
|                                                 |                                                     |                                                                                           |                                              |                                                              |      | 2003               |        | 2002  
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|Operating activities                             |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 |                                                     | Net loss                                                                                  |                                              | $                                                            | (359 | )                  |        | $      | (385 | )
|                                                 |                                                     | Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                              |                                                              |      |                    |        |        |      |  
|                                                 |                                                     |                                                                                           |                                              | Provision for doubtful accounts                              |      |                    | (90    | )      |      |   |       |  
|                                                 |                                                     |                                                                                           |                                              | Depreciation and amortization                                |      |                    | 888    |        |      |   | 703    |  
|                                                 |                                                     |                                                                                           |                                              | Amortization of intangible assets                            |      |                    | 97     |        |      |   | 97     |  
|                                                 |                                                     |                                                                                           |                                              | Amortization of stock-based compensation                     |      |                    | 50     |        |      |   | 575    |  
|                                                 |                                                     |                                                                                           | Changes in operating assets and liabilities: |                                                              |      |                    |        |        |      |   |       
|                                                 |                                                     |                                                                                           |                                              | Accounts receivable                                          |      |                    | (2,735 | )      |      |   | 129    |  
|                                                 |                                                     |                                                                                           |                                              | Costs in excess of related billings on uncompleted contracts |      |                    | (96    | )      |      |   | 200    |  
|                                                 |                                                     |                                                                                           |                                              | Prepaid expenses and other                                   |      |                    | 120    |        |      |   | (377   | )
|                                                 |                                                     |                                                                                           |                                              | Taxes receivable                                             |      |                    | (120   | )      |      |   |       |  
|                                                 |                                                     |                                                                                           |                                              | Accounts payable                                             |      |                    | (164   | )      |      |   | (20    | )
|                                                 |                                                     |                                                                                           |                                              | Accrued expenses                                             |      |                    | 490    |        |      |   | (67    | )
|                                                 |                                                     |                                                                                           |                                              | Deferred revenue                                             |      |                    | 3,104  |        |      |   | 112    |  
|                                                 |                                                     |                                                                                           |                                              | Income taxes payable                                         |      |                    | (309   | )      |      |   | (1,204 | )
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by (used in) operating activities |                                                                                           |                                              | 876                                                          |      |                    |        | (237   | )   
|Investing activities                             |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 | Purchase of property and equipment                  |                                                                                           |                                              | (157                                                         | )    |                    |        | (1,876 | )   
|                                                 | Purchase of investments                             |                                                                                           |                                              | (939                                                         | )    |                    |        | (3,989 | )   
|                                                 | Proceeds from maturities of investments             |                                                                                           |                                              | 10,000                                                       |      |                    |        | 19,998 |     
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by investing activities           |                                                                                           |                                              | 8,904                                                        |      |                    |        | 14,133 |     
|Financing activities                             |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 | Net proceeds from issuance of stock                 |                                                                                           |                                              | 333                                                          |      |                    |        | 204    |     
|                                                 | Payments on capital lease obligations               |                                                                                           |                                              |                                                             |      |                    |        | (25    | )   
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by financing activities           |                                                                                           |                                              | 333                                                          |      |                    |        | 179    |     
|Net increase in cash and cash equivalents        |                                                     |                                                                                           | 10,113                                       |                                                              |      |                    | 14,075 |       
|Cash and cash equivalents at beginning of period |                                                     |                                                                                           | 38,930                                       |                                                              |      |                    | 35,422 |       
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       
|Cash and cash equivalents at end of the period   |                                                     | $                                                                                         | 49,043                                       |                                                              |      | $                  | 49,497 |       
|                                                 |                                                     |                                                                                           |                                              |                                                              |      |                    |        |       

See accompanying notes to unaudited condensed consolidated financial statements.

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VIRAGE LOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Organization and Summary of Significant Policies

Description of Business

Virage Logic Corporation (the Company) was incorporated in California in
November 1995 and subsequently reincorporated in Delaware in July 2000. The
Company provides semiconductor intellectual property (IP) platforms based on
memory, logic, and I/Os (input/output interface components) that are
silicon-proven and production ready. These various forms of IP are utilized by
the Companys customers to design and manufacture System-on-Chip (SoC)
integrated circuits that are used in a variety of electronic products including
high-speed communications, computer and consumer products, such as cellular and
digital phones, pagers, PDAs, digital cameras, DVD players, switches and
modems.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the
accounts of Virage Logic Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates

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

Unaudited Interim Financial Statements

The accompanying condensed consolidated financial statements as of
December 31, 2003, and for the three months ended December 31, 2003 and 2002,
are unaudited. The unaudited condensed consolidated financial statements have
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly our financial
position, as of December 31, 2003, our results of operations for the three
months ended December 31, 2003 and 2002, and cash flows for the three months
ended December 31, 2003 and 2002, respectively. These condensed consolidated
financial statements and related notes should be read in conjunction with our
audited consolidated financial statements and related notes included in our
2003 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. Our balance sheet as of September 30, 2003, was derived from
audited financial statements but does not include all disclosures required by
Regulation S-X for annual reporting. Our results for the three months ended
December 31, 2003 are not necessarily indicative of the expected results for
any other interim period or the year ending September 30, 2004.

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Revenue Recognition

Our revenue recognition policy uses specific and detailed guidelines and
is based on the American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition as amended by Statement of
Position 98-4, Statement of Position 98-9 and Statement of Position 81-1.

Revenues from perpetual licenses for our semiconductor IP products are
generally recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, there are no significant remaining obligations on
our part, the fee is fixed or determinable, and collectability is reasonably
assured. If any of these criteria are not met, we defer recognizing the revenue
until such time as all criteria are met. Revenues from term-based licenses,
which are generally twelve months in duration, in which no maintenance is
purchased, are recognized ratably over the term of the license, provided the
criteria mentioned above are met.

License of custom memory compilers, logic libraries and I/Os may involve
customization to the functionality of the software, therefore revenues from
such licenses are recognized over the period that we perform the services. Our
contracts are established as fixed fee arrangements. Revenue derived from
custom products are recognized using a percentage-of-completion method or as
services are performed. For all license and service agreements accounted for
using the percentage-of-completion method, we determine progress-to-completion
based on labor hours incurred and estimates of efforts required to complete
each project. These estimates are based on the amount of work we require for
comparable projects, and we believe we are able to reasonably and reliably
estimate the costs to complete projects accounted for using the
percentage-of-completion method. However, use of different assumptions related
percentage-of-completion method could affect our revenues and the timing of
recognizing certain revenues. Alternatively, for customers transactions for
which we can not reasonably and reliably estimate the costs to complete a
project, the completed contract method of accounting is used, such that costs
are deferred until the project is completed at which time revenues are
recognized. A provision for estimated losses on engagements is made in the
period in which the loss becomes probable and can be reasonably estimated.
Costs incurred in advance of billings are recorded as costs in excess of
related billings on in-process contracts. If customer acceptance is required
for completion of specified milestones, the related revenue is deferred until
the acceptance criteria is met.

For agreements that include multiple elements, we recognize revenues
attributable to delivered or completed elements covered by such agreements when
such elements are completed or delivered. The amount of such revenues is
determined by deducting the aggregate value of the undelivered or uncompleted
elements, which we determine by each such elements vendor-specific objective
evidence of fair value, from the total revenues recognizable under such
agreement. Vendor specific objective evidence of fair value of each element of
an arrangement is based upon the normal pricing for such licensed product and
service when sold separately, and for maintenance, it is determined based on
the stated renewal rate in each contract. Maintenance revenues are recognized
ratably over the contractual term of the maintenance period, which is generally
one year.

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Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have
a significant impact on deferred revenues in any given period.

Royalty revenues are generally determined and recognized one quarter in
arrears, when a production volume report is received from the customer or
foundry, and are calculated based on production volumes of wafers containing
chips utilizing our semiconductor IP technologies based on a rate per-chip or
rate per-wafer depending on the terms of the respective license agreement.
From
time to time, we may exercise our audit rights under our contracts
with customers to audit our licensees royalty records. The
results of such royalty audits could result in an increase, as a
result of a licensees underpayment, or decrease, as a result of
a licensees overpayment, to royalty revenues. Such adjustments
are recorded in the period they are determined.

Stock-based compensation

The Company accounts for stock-based compensation arrangements in
accordance with the provision of 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 and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123). Under APB Opinion
No. 25, when the exercise price of the Companys employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-based Compensation Transition and Disclosure, an Amendment of FASB 123.
Had compensation expense for the Companys stock option plan and stock purchase
plan been determined on the fair value at the grant dates for awards under the
plan consistent with the method of SFAS 123, the Companys net loss would have
been increased to the following approximate proforma amounts (in thousands,
except per share data):

|                                                                                                                   |  |                    |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                                                                                   |  | Three Months Ended
|                                                                                                                   |  | December 31,      
|                                                                                                                   |  |                   
|                                                                                                                   |  | 2003               |        | 2002
|                                                                                                                   |  |                    |        |     
|Net loss  as reported                                                                                             |  | $                  | (359   | )    |  | $ | (385   | )
|Add: Stock-based compensation expense included in
reported net loss, net of tax                                    |  |                    | 33     |      |  |   | 380    |  
|Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of tax |  |                    | (694   | )    |  |   | (1,609 | )
|                                                                                                                   |  |                    |        |      |  |   |        |  
|Proforma net loss                                                                                                  |  | $                  | (1,020 | )    |  | $ | (1,614 | )
|                                                                                                                   |  |                    |        |      |  |   |        |  
|Net loss per share  as reported                                                                                   |  |                    |        |      |  |   |        |  
|Basic and diluted                                                                                                  |  | $                  | (0.02  | )    |  | $ | (0.02  | )
|Net loss per share  Proforma                                                                                      |  |                    |        |      |  |   |        |  
|Basic and diluted                                                                                                  |  | $                  | (0.05  | )    |  | $ | (0.08  | )
|Shares used in computing basic and diluted net loss                                                                |  |                    | 21,181 |      |  |   | 20,453 |  

The SFAS 123 adjusted impact of options on the net loss for the three
months ended December 31, 2003 and 2002 is not representative of the effects on
net income (loss) for future periods.

Note 2. Net Income (Loss) Per Share

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Basic and diluted net loss per share is presented in conformity with
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128). Accordingly, basic and diluted net loss per share have been computed
using the weighted average number of shares of common stock outstanding during
the period, less weighted average shares outstanding that are subject to
repurchase by the Company.

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

|                                                    |                                                    |   |                    |        |      |   |        |        |  
|--------------------------------------------------- | -------------------------------------------------- | - | ------------------ | ------ | ---- | - | ------ | ------ | -
|                                                    |                                                    |   | Three Months Ended
|                                                    |                                                    |   | December 31,      
|                                                    |                                                    |   |                   
|                                                    |                                                    |   | 2003               |        | 2002
|                                                    |                                                    |   |                    |        |     
|Net loss                                            |                                                    | $ | (359               | )      |      | $ | (385   | )     
|                                                    |                                                    |   |                    |        |      |   |        |       
|Weighted average shares of common stock outstanding |                                                    |   | 21,257             |        |      |   | 20,971 |       
|                                                    | Less weighted average shares subject to repurchase |   |                    | (76    | )    |   |        | (518   | )
|                                                    |                                                    |   |                    |        |      |   |        |       
|                                                    | Shares used in computing basic net loss per share  |   |                    | 21,181 |      |   |        | 20,453 |  
|                                                    |                                                    |   |                    |        |      |   |        |       
|Items net of treasury stock buyback:                |                                                    |   |                    |        |      |   |        |       
|                                                    | Employee stock options                             |   |                    |       |      |   |        |       |  
|                                                    | Weighted average shares subject to repurchase      |   |                    |       |      |   |        |       |  
|                                                    | Warrants                                           |   |                    |       |      |   |        |       |  
|                                                    |                                                    |   |                    |        |      |   |        |       
|Shares used in computing diluted net loss per share |                                                    |   | 21,181             |        |      |   | 20,453 |       
|                                                    |                                                    |   |                    |        |      |   |        |       
|Net loss per share:                                 |                                                    |   |                    |        |      |   |        |       
|                                                    | Basic and diluted                                  |   | $                  | (0.02  | )    |   | $      | (0.02  | )
|                                                    |                                                    |   |                    |        |      |   |        |       

The Company has excluded all outstanding warrants, stock options and
shares subject to repurchase by the Company from the calculation of diluted net
loss per share because these securities are antidilutive for the periods ended
December 31, 2003 and 2002. Options and warrants to purchase approximately
753,000 and 829,000 shares of common stock have been excluded for the three
months ended December 31, 2003 and 2002, respectively. Shares subject to
repurchase total approximately 61,000 and 275,000 for the three months ended
December 31, 2003 and 2002, respectively.

Note 3. Comprehensive Income (Loss)

In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 established standards for the reporting and display of
comprehensive income (loss). Comprehensive income includes unrealized gains and
losses on investments and accumulated other comprehensive income is included as
a component of stockholders equity.

Total comprehensive loss is as follows (in thousands):

|                                            |                          |   |                    |      |      |   |      |      |  
|------------------------------------------- | ------------------------ | - | ------------------ | ---- | ---- | - | ---- | ---- | -
|                                            |                          |   | Three Months ended
|                                            |                          |   | December 31,      
|                                            |                          |   |                   
|                                            |                          |   | 2003               |      | 2002
|                                            |                          |   |                    |      |     
|Net loss                                    |                          | $ | (359               | )    |      | $ | (385 | )   
|Change in net unrealized gain on investment |                          |   | (3                 | )    |      |   | 11   |     
|                                            |                          |   |                    |      |      |   |      |     
|                                            | Total comprehensive loss |   | $                  | (362 | )    |   | $    | (374 | )
|                                            |                          |   |                    |      |      |   |      |     

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Note 4. Segment Information

The Company operates only in one segment, the sale of technology-optimized
semiconductor IP platforms based on memory, logic, I/Os and IP development
tools.

The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.

Revenues by geographic region are based on the region the customers are
located.

Revenues by geography and geometry are as follows (in thousands):

|              |                                    |       |   |                    |        |      |   |       |        | 
|------------- | ---------------------------------- | ----- | - | ------------------ | ------ | ---- | - | ----- | ------ | 
|              |                                    |       |   | Three Months Ended
|              |                                    |       |   | December 31,      
|              |                                    |       |   |                   
|              |                                    |       |   | 2003               |        | 2002
|              |                                    |       |   |                    |        |     
|By geography: |                                    |       |   |                    |        |      |   |      
|              | United States                      |       | $ | 3,493              |        |      | $ | 4,690 |       
|              | Canada                             |       |   | 629                |        |      |   | 695   |       
|              | Japan                              |       |   | 1,269              |        |      |   | 1,650 |       
|              | Taiwan                             |       |   | 1,472              |        |      |   | 2,196 |       
|              | Europe, Middle East, Africa (EMEA) |       |   | 1,926              |        |      |   | 2,252 |       
|              | Other Asia                         |       |   | 2,071              |        |      |   | 82    |       
|              |                                    |       |   |                    |        |      |   |      
|              |                                    | Total |   | $                  | 10,860 |      |   | $     | 11,565 | 
|              |                                    |       |   |                    |        |      |   |      
|By geometry:  |                                    |       |   |                    |        |      |   |      
|              | 0.18 micron technology             |       |   | 10                 | %      |      |   | 19    | %     
|              | 0.13 micron technology             |       |   | 57                 |        |      |   | 53    |       
|              | 90 nanometer technology            |       |   | 22                 |        |      |   | 20    |       
|              | Other                              |       |   | 11                 |        |      |   | 8     |       

Sales to Korea, which are included under the caption Other Asia above, were
$1.0 million and $33,000 for the three months ended December 31, 2003 and 2002,
respectively.

Long-lived assets are located primarily in the United States, with the
exception of a building in Armenia, which is owned by the Company. The Armenian
building and leasehold improvements are valued at a cost of approximately $1.7
million.

Note 6. Recently Issued Accounting Pronouncements

In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 revises
or rescinds portions of the interpretative guidance related to revenue
recognition included in Topic 13 of the codification of the staff
accounting bulletins. The Company has assessed the impact of SAB 104 and concluded that
the adoption of SAB 104 by the Company did not have a material impact on its financial
statements.

In December 2003, the FASB issued additional guidance clarifying the
provisions of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation

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of ARB No. 51 (FIN 46-R). FIN 46-R provides a
deferral of FIN 46 for certain entities. FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Company
believes that the adoption of this standard will have no material impact on its
financial statements.

Note 7. Commitments and Contingencies

Indemnifications. The Company enters into standard license agreements in its
ordinary course of business. Pursuant to these agreements, the Company agrees
to indemnify its customers for losses suffered or incurred by them as a result
of any patent, copyright, or other intellectual property infringement claim by
any third party with respect to the Companys products. These agreements
generally have perpetual terms. The maximum amount of indemnification the
Company could be required to make under these agreements is generally limited
to the license fees received by the Company. The Company estimates the fair
value of its indemnification obligation as insignificant, based upon its
history of litigation concerning product and patent infringement claims.
Accordingly, the Company has no liabilities recorded for indemnification under
these agreements as of December 31, 2003.

Warranties. The Company offers its customers a warranty that its software
products will substantially conform to their functional specifications. To
date, there have been no payments or material costs incurred related to
fulfilling these warranty obligations. Accordingly, the Company has no
liabilities recorded for these warranties as of December 31, 2003. The Company
assesses the need for a warranty reserve on a quarterly basis and there can be
no guarantee that a warranty reserve will not become necessary in the future.

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ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Statements made in this section, Managements Discussion and Analysis of
Financial Condition and Results of Operations, other than statements of
historical fact, are forward-looking statements that involve risks and
uncertainties. These statements relate to products, customers, business
prospects, technologies, trends and effects of acquisitions. In some cases, forward-looking
statements can be identified by terminology such as may, will, should,
expect, anticipate, intend, plan, believe, estimate, potential,
or continue, the negative of these terms or other comparable terminology.
Forward-looking statements are subject to a number of known and unknown risks
and uncertainties which might cause actual results to differ materially from
those expressed or implied by such statements. These risks include our ability
to execute on our strategy of being a provider of semiconductor IP platforms,
our ability to continue to develop new products and maintain and develop new
relationships with third-party foundries and integrated device manufacturers,
our ability to overcome the challenges associated with establishing licensing
relationships with semiconductor companies, our ability to obtain royalty
revenues from customers in addition to license fees, our ability to receive
accurate information necessary for calculation of royalty revenues and to
collect royalty revenues from customers, business and economic conditions
generally and in the semiconductor industry in particular, pace of adoption of
new technologies by our customers, competition in the market for semiconductor
IP platforms, the ability to integrate In-Chip and its products into the
Company and to maintain and develop relationships with existing In-Chip
customers, and other risks and uncertainties including those set forth below
under Risk Factors. These forward-looking statements speak only as of the
date hereof, we expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein. The following information should be read in conjunction with the
Managements Discussion and Analysis of Financial Condition and Results of
Operations section of the Companys Form 10-K for the fiscal year ended
September 30, 2003 filed with the Securities and Exchange Commission.

Overview

Virage Logic provides semiconductor intellectual property (IP) platforms
that are based on memory, logic, and I/Os (input/output interface components)
that are silicon-proven and production ready. Virage Logic helps its customers
meet their market demands for cost reduction, while improving performance and
reliability for integrated device manufacturers (IDMs), fabless and foundry
companies focused on the consumer, communications and networking, handheld and
portable, and computer and graphics markets.

We are
seeing signs of improved business activity in the semiconductor
industry, and we believe that our semiconductor IP platform strategy
positions us well to capitalized on these signs by helping us to participate in certain sales
opportunities, such as the additions of an emerging Asia-based foundry customer in Asia in the
first fiscal quarter of 2004 and Silicon Manufacturing International
Corporation (SMIC) in the fourth quarter of fiscal 2003.

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Our revenues are derived principally from licenses of our semiconductor IP
platforms which are based on the following products:



| |  |  | embedded memories, including memory compilers for static RAM,
register files, CAMs and non-volatile memory, as well as memory test
processor and fuse box components for embedded test and repair of
defective memory cells;                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | logic elements, including Metal Programmable Cell Libraries that
save configuration costs by reprogramming only a few masks and
Standard Cell Libraries that deliver up to a 30 percent utilization
increase over conventional standard cells;
|
| |  |  | I/O libraries, providing a rich set of I/O cells including
SSTL-2, HSTL-2, PCI and PCI-X, and USB1.1.; and                                                                                                                                    
|
| |  |  | software development tools.                                                                                                                                                                                                                   

We also derive revenues from royalties, custom design services,
maintenance services and library development and consulting services related to
the license of logic components.

Our revenues are reported in two separate categories: license revenues and
royalty revenues. License revenues are derived from license fees, maintenance
fees, fees for custom design services, library design services and consulting
services. Royalty revenues are derived from fees paid by a customer or a
third-party foundry based on production volumes of wafers containing chips
utilizing our semiconductor IP technologies.

The license of our semiconductor IP typically covers a range of embedded
memory, logic and I/O products. Licenses of our semiconductor IP products can
be either perpetual or term-based. In addition, maintenance can be purchased
for both types of licenses. All revenues to date have been denominated in U.S.
dollars.

We derive our royalty revenues from third-party foundries, fabless
customers and integrated device manufacturers that manufacture chips
incorporating our Area, Speed and Power (ASAP) Memory products, ASAP Logic
products, Self-Test and Repair (STAR) Memory System, NetCAM, NOVeA®, and Base
I/O Library technologies. Royalty payments are in addition to the license fees
we collect from our customers, and are calculated based on production volumes
of wafers containing chips utilizing our semiconductor IP technologies based on
a rate per-chip or rate per-wafer depending on the terms of the respective
license agreement. Royalty revenues are generally determined and recognized one
quarter in arrears, when a production volume report is received from the
customer or foundry. Time delays for receiving royalty revenues are due to the
typical length of time required for the customer to implement our semiconductor
IP into their design, and then to manufacture and bring to market a product
incorporating our products.

Currently, license fees represent a significant portion of our revenues.
Royalty revenues for the three months ended December 31, 2003 and 2002 were
$1.4 million and $515,000, respectively.

We have been dependent on a limited number of customers for a substantial
portion of our annual revenues, although that dependence continues to decrease.
Our customers

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comprising the top 10 customer group have changed from time to time. In
the three months ended December 31, 2003 and 2002, no single customer generated
more than 10% of our revenues.

Critical Accounting Policies

The preparation of financial statements in accordance with generally
accepted accounting principles in the United States requires that we make
estimates and judgments, which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. We continually evaluate our estimates, including those
related to percentage-of-completion, allowance for doubtful accounts, investments, intangible assets,
income taxes, and contingencies such as litigation. We base our estimates on
historical experience and other assumptions that we believe are reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.

We have identified the following as critical accounting policies to our
company:



| |  | revenue recognition                                   
|- |  | ------------------------------------------------------
| 
| |  | valuation of accounts receivable                      
| 
| |  | valuation of long-lived assets and investments        
| 
| |  | valuation of purchased intangibles, including goodwill
| 
| |  | accounting for stock options                          
| 
| |  | income taxes.                                         

Revenue Recognition

Our revenue recognition policy uses specific and detailed guidelines and
is based on the American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition as amended by Statement of
Position 98-4, Statement of Position 98-9 and Statement of Position 81-1.

Revenues from perpetual licenses for our semiconductor IP products are
generally recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, there are no significant remaining obligations on
our part, the fee is fixed or determinable, and collectability is reasonably
assured. If any of these criteria are not met, we defer recognizing the revenue
until such time as all criteria are met. Revenues from term-based licenses,
which are generally twelve months in duration, in which no maintenance is
purchased, are recognized ratably over the term of the license, provided the
criteria mentioned above are met.

License of custom memory compilers, logic libraries and I/Os may involve
customization to the functionality of the software, therefore revenues from
such licenses are recognized over the period that we perform the services. Our
contracts are established as fixed fee arrangements. Revenue derived from
custom products are recognized using a

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percentage-of-completion method or as services are performed. For all
license and service agreements accounted for using the percentage-of-completion
method, we determine progress-to-completion based on labor hours incurred and
estimates of efforts required to complete each project. These estimates are
based on the amount of work we require for comparable projects, and we believe
we are able to reasonably and reliably estimate the costs to complete projects
accounted for using the percentage-of-completion method. However, use of
different assumptions related percentage-of-completion method could affect our
revenues and the timing of recognizing certain revenues. Alternatively, for
customers transactions for which we can not reasonably and reliably estimate
the costs to complete a project, the completed contract method of accounting is
used, such that costs are deferred until the project is completed at which time
revenues are recognized. A provision for estimated losses on engagements is
made in the period in which the loss becomes probable and can be reasonably
estimated. Costs incurred in advance of billings are recorded as costs in
excess of related billings on in-process contracts. If customer acceptance is
required for completion of specified milestones, the related revenue is
deferred until the acceptance criteria is met.

For agreements which include multiple elements, we recognize revenues
attributable to delivered or completed elements covered by such agreements when
such elements are completed or delivered. The amount of such revenues is
determined by deducting the aggregate fair value of the undelivered or
uncompleted elements, which we determine by each such elements vendor-specific
objective evidence of fair value, from the total revenues recognizable under
such agreement. Vendor specific objective evidence of fair value of each
element of an arrangement is based upon the normal pricing for such licensed
product and service when sold separately, and for maintenance, it is determined
based on the stated renewal rate in each contract. Maintenance revenues are
recognized ratably over the contractual term of the maintenance period, which
is generally one year.

Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have
a significant impact on deferred revenues in any given period.

Royalty revenues are generally determined and recognized one quarter in
arrears, when a production volume report is received from the customer or
foundry, and are calculated based on actual production volumes of wafers
containing chips utilizing our semiconductor IP technologies based on a rate
per-chip or rate per-wafer depending on the terms of the respective license
agreement. From
time to time, we may exercise our audit rights under our contracts
with customers to audit our licensees royalty records. The
results of such royalty audits could result in an increase, as a
result of a licensees underpayment, or decrease, as a result of
a licensees overpayment, to royalty revenues. Such adjustments
are recorded in the period they are determined.

Valuation of Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust
customers credit limits based upon payment history and the customers current
credit worthiness, as determined by our review of their then-current credit
information. We continuously monitor collections and payments from our
customers and maintain an allowance for estimated credit losses based upon our
historical experience and any specific customer collection risks that we have
identified. While such credit losses have historically been within our
expectations and the allowance we have established, we cannot guarantee that we
will continue to experience the same credit loss rates that we have in the
past. Since our accounts receivable are concentrated in a relatively small
number of customers, a

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significant change in the liquidity or financial position of any one of
these customers could have a material adverse impact on the quality of our
accounts receivables and our future operating results.

Valuation of Long-Lived Assets and Investments

We periodically review the carrying value of our long-lived assets and
investments for continued realizability. This review is based upon our
projections of anticipated future cash flows from such assets and investments.
While we believe that our estimates of future cash flows are reasonable,
different assumptions regarding the amount and timing of such cash flows
resulting from different outlooks on the general economic condition and the
state of the semiconductor industry could materially affect our evaluations.
This could result in an impairment charge and have a materially adverse impact
on our future operating results.

Valuation of Purchased Intangibles, Including Goodwill

We periodically evaluate purchased intangibles, including goodwill, for
impairment. An assessment of goodwill is subjective by nature, and significant
management judgment is required to forecast future operating results, projected
cash flows and current period market capitalization levels. If our estimates or
related assumptions change in the future, these changes in conditions could
require material write-downs of net intangible assets, including impairment
charges for goodwill. In connection with the acquisition of In-Chip Systems
Inc., the valuation of intangible assets was based on managements estimates.
Such estimates included cash flow projections, discount rates and estimated
life of technology, which management believes are reasonable under the
circumstances. Use of other estimates or assumptions may have resulted in a
different valuation for such intangible assets acquired leading to changes in
recorded asset values. Intangible assets with finite useful lives are amortized
over the estimated life of each asset. As of December 31, 2003, management
believes no impairment of intangible assets has occurred. The carrying value
of purchased intangibles, including goodwill, is $12.8 million at December 31,
2003. If the asset is deemed impaired, the maximum amount of impairment would
be the full carrying value of the asset.

Accounting for Stock Options

We account for outstanding stock options under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
Financial Accounting Standards Board Interpretation No. 44 (FIN 44), and comply
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). In accordance with APB 25, we do not recognize
compensation expense for options granted to employees as all employee options
are granted with an exercise price equal to the fair market value of the
underlying stock.

The Company accounts for stock options or warrants granted to
non-employees, excluding non-employee directors, under SFAS 123 and EITF Issue
No. 96-18, Accounting for Equity Instruments with Variable Terms that are
Issued for Consideration Other Than Employee Services under SFAS 123. We
record the expense of such services based upon the estimated fair value of the
equity instrument using the Black-Scholes pricing model. Assumptions used to
value the equity instruments are consistent with equity instruments issued to
employees. We charge the value of the equity instrument to earnings

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over the term of the service agreement. At the time all non-employee
options and warrants were valued, the instruments were immediately exercisable
and there were no ongoing obligations from the holders. Expenses recorded for
stock options granted to non-employees for the three months ended December 31,
2003 and 2002 were $0 and $719,000, respectively.

We make estimates and assumptions for the inputs, such as interest rate,
weighted average expected option life and volatility, used in the fair value
calculation. Current regulatory activity indicates that stock options granted
to both employees and non-employees will need to be valued at their fair value
and included in operating expenses. As such time the regulation is passed,
material differences in amounts of expense may result if different estimates
and assumptions are required or if a different valuation model were to be
implemented.

Income taxes

We record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets. These differences resulted in
deferred tax assets of $2.9 million and deferred tax liabilities of $1.2
million at December 31, 2003. The carrying value of the companys net deferred
tax assets assumes that we will be able to generate sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions.
Management periodically evaluates the recoverability of the deferred
tax assets and recognizes the tax benefit only as reassessment
demonstrates they are realizable. At such time it is determined that
it is more likely than not that the deferred tax assets are not
realizable, the valuation allowance is adjusted. This assessment is
based on projections of future taxable income, which is impacted in
future periods by income before taxes and stock option exercises. The
actual taxable income realized in the future and other factors
determine how much benefit the Company ultimately realizes from the
deferred tax assets. These estimates may vary materially.

In the
event that actual results differ from the estimates or adjustments
are made to the estimates used in determining the valuation
allowance, an additional valuation allowance may be required, which
could materially impact the Company's financial position and results
of operations.

Results of
Operations  Three Months Ended December 31, 2003 and 2002

The following table lists the percentage of revenues for certain items in
our consolidated statements of operations for the periods indicated:

|                               |  |                            |       |      |                    |      |       |      |      |      |  
|------------------------------ |  | -------------------------- | ----- | ---- | ------------------ | ---- | ----- | ---- | ---- | ---- | -
|                               |  |                            |       |      | Three Months Ended
|                               |  |                            |       |      | December 31,      
|                               |  |                            |       |      |                   
|                               |  |                            |       |      | 2003               |      | 2002 
|                               |  |                            |       |      |                    |      |      
|Revenue:                       |  |                            |       |      |                    |      |       |     
|                               |  | License                    |       |      |                    | 87.2 | %     |      |      | 95.5 | %
|                               |  | Royalties                  |       |      |                    | 12.8 |       |      |      | 4.5  |  
|                               |  |                            |       |      |                    |      |       |     
|Revenues                       |  |                            | 100.0 |      |                    |      | 100.0 |     
|Cost and expenses:             |  |                            |       |      |                    |      |       |     
|                               |  | Cost of revenues           |       |      | 22.4               |      |       |      | 22.9 |     
|                               |  | Research and development   |       |      | 40.6               |      |       |      | 40.0 |     
|                               |  | Sales and marketing        |       |      | 29.9               |      |       |      | 26.7 |     
|                               |  | General and administrative |       |      | 13.3               |      |       |      | 10.2 |     
|                               |  | Stock-based compensation   |       |      | 0.5                |      |       |      | 5.0  |     
|                               |  |                            |       |      |                    |      |       |     
|Total cost and expenses        |  |                            | 106.7 |      |                    |      | 104.8 |     
|                               |  |                            |       |      |                    |      |       |     
|                               |  | Operating loss             |       | (6.7 | )                  |      |       | (4.8 | )   
|Interest and other expenses    |  |                            | 1.5   |      |                    |      | 2.2   |     
|Income tax provision (benefit) |  |                            | (1.9  | )    |                    |      | 0.7   |     
|                               |  |                            |       |      |                    |      |       |     
|Net loss                       |  |                            | (3.3  | )%   |                    |      | (3.3  | )%  
|                               |  |                            |       |      |                    |      |       |     

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Revenues.Revenues declined by 6% to $10.9 million from $11.6 million for
the three months ended December 31, 2003 and 2002, respectively. The decrease
in revenues for the three months ended December 31, 2003 is primarily due to
lower license revenues from sales to U.S.-based customers, partially offset by
an increase in royalties.

License revenues declined by 14% to $9.5 million from $11.1 million for
the three months ended December 31, 2003 and 2002, respectively. The decrease
in license revenue was primarily due to the slow-down in the U.S. semiconductor
industry. Although revenues show improvement for the last two quarters leading
up to the first quarter of fiscal 2004 as the industry shows signs of
improvement, current revenues levels are lower than the comparable period last
year.

Royalties increased 169% to $1.4 million from $515,000 for the three
months ended December 31, 2003 and 2002, respectively. The increase was due to
the increased royalties from foundries as a result of higher manufacturing
volumes of products incorporating our semiconductor IP products and increased
royalties from our customers using our STAR Memory System product family as
they increase production.

For the three months ended December 31, 2003 and 2002, sales by geography
and by geometry are as follows (in thousands):

|              |                                       |       |   |                    |        |      |   |       |        | 
|------------- | ------------------------------------- | ----- | - | ------------------ | ------ | ---- | - | ----- | ------ | 
|              |                                       |       |   | Three Months Ended
|              |                                       |       |   | December 31,      
|              |                                       |       |   |                   
|              |                                       |       |   | 2003               |        | 2002
|              |                                       |       |   |                    |        |     
|By geography: |                                       |       |   |                    |        |      |   |      
|              | United States                         |       | $ | 3,493              |        |      | $ | 4,690 |       
|              | Canada                                |       |   | 629                |        |      |   | 695   |       
|              | Japan                                 |       |   | 1,269              |        |      |   | 1,650 |       
|              | Taiwan                                |       |   | 1,472              |        |      |   | 2,196 |       
|              | Europe, Middle East and Africa (EMEA) |       |   | 1,926              |        |      |   | 2,252 |       
|              | Other                                 |       |   | 2,071              |        |      |   | 82    |       
|              |                                       |       |   |                    |        |      |   |      
|              |                                       | Total |   | $                  | 10,860 |      |   | $     | 11,565 | 
|              |                                       |       |   |                    |        |      |   |      
|By geometry:  |                                       |       |   |                    |        |      |   |      
|              | 0.18 micron technology                |       |   | 10                 | %      |      |   | 19    | %     
|              | 0.13 micron technology                |       |   | 57                 |        |      |   | 53    |       
|              | 90-nanometer technology               |       |   | 22                 |        |      |   | 20    |       
|              | Other                                 |       |   | 11                 |        |      |   | 8     |       

Sales to
customers in the United States were lower in the first quarter of fiscal 2004
as compared to fiscal 2003 due to the extended poor economic environment in the
U.S. semiconductor industry. Although revenues in Japan and Taiwan decreased
in the first quarter of fiscal 2004 as compared to fiscal 2003, sales in other
regions of Asia increased as we added an emerging Asia-based foundry to our
customer base.

License revenues of 0.18 micron technology decreased to 10% of total
license revenues for the first quarter of fiscal 2004 from 19% in the same
period in fiscal 2003, while sales for 0.13 micron and 90-nanometer technology
products increased to 57% and 22%, respectively, of total license revenues for
the first quarter of fiscal 2004 as compared to

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53% and 20%, respectively, for the same period in fiscal 2003. We believe
this is the result of an increased number of design starts on the 0.13 micron and
90-nanometer technology nodes, and we believe that sales for advanced
technology nodes, mainly the 90-nanometer technology will continue to increase.

Cost of Revenues.Cost of revenues consists primarily of personnel
expenses and the allocation of facilities and equipment expenses. Cost of
revenues decreased 8% from the first quarter of fiscal 2003 to 2004 as a result
of lower revenues and the lower levels of engineering resources required in connection with the sale of 0.13 micron technology products, which require less customization. The Company believes cost of revenues will continue to fluctuate in
the future, both in absolute dollars and as a percentage of revenues, as
license revenues continue to fluctuate relative to the engineering capacity and
changes in product mix. Cost of revenues excludes $11,000 and $132,000 of
amortization of stock-based compensation for the three months ended December
31, 2003 and 2002, respectively.

Research and Development Expense.Research and development expense
primarily includes personnel expense, software license and maintenance fees,
and depreciation related to capital spending. Research and development expense
decreased 5% to $4.4 million for the three months ended December 31, 2003 from
$4.6 million for the same period last fiscal year. Research and development
expense as a percentage of revenues remained fairly flat at approximately 40%
of revenues. The decrease in research and development expense was primarily
due to the reduction in the number of employees involved in research and
development activities in our efforts to reduce costs resulting in
lower costs of $275,000, offset by increased rent and insurance costs of
$71,000. Headcount directly reporting to the research and development group
decreased in 2004 to 135 at period end from 138 the prior year period. We
anticipate that research and development expense will increase as we expand our
product offerings and invest in technologies for future delivery. Research and
development expense excludes $19,000 and $230,000 of amortization of
stock-based compensation for the three months ended December 31, 2003 and 2002,
respectively.

Sales and Marketing Expense.Sales and marketing expense consists
primarily of personnel expenses, commissions, advertising and promotion related
costs. Sales and marketing expense increased 5% to $3.2 million for the three
months ended December 31, 2003 from $3.1 million for the same period last
fiscal year. Sales and marketing expense as a percentage of revenues increased
to 30% for the three months ended December 31, 2003, as compared to 27% for the
same period last fiscal year. The increase in sales and marketing expense was
due to increased headcount resulting in an additional expense of $212,000,
increased rent and insurance costs of $131,000, offset by lower commission
costs of $178,000. Headcount increased in 2004 to 53 at period end from 49 the
prior year period. We anticipate that sales and marketing expense will continue
to increase as we expand our product lines and target new customers and markets
for our technologies. Sales and marketing expense excludes $14,000 and
$154,000 of amortization of stock-

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based compensation for the three months ended December 31, 2003 and 2002,
respectively.

General and Administrative Expense.General and administrative expense
consists primarily of personnel and other costs associated with the management
of our business. General and administrative expense increased by 22% to $1.4
million for the three months ended December 31, 2003 from $1.2 million for the
same period last fiscal year. General and administrative expense as a
percentage of revenues increased to 13% for the three months ended December 31,
2003 as compared to 10% for the three months ended December 31, 2002. The
increase in general and administrative expense was primarily due to increased
headcount resulting in additional expense of $40,000, increased professional
service costs associated with corporate governance of $45,000 and increased
rent and insurance costs of $123,000. Headcount increased in 2004 to 15 at
period end from 13 the prior year period. General and administrative expense
excludes $6,000 and $59,000 of amortization of stock-based compensation for the
three months ended December 31, 2003 and 2002, respectively.

Stock-Based Compensation.With respect to the grant of stock options and
restricted stock to employees, our balance sheet reflects an aggregated
deferred stock-based compensation of approximately $81,000 at December 31, 2003
and $130,000 at December 31, 2002. The Company amortized, net of cancellations,
$50,000 and $575,000 during the three months ended December 31, 2003 and 2002,
respectively. The remaining deferred stock-based compensation as of December
31, 2003 is expected to be fully amortized in fiscal year 2004.

Interest Income and Other Expenses.Interest income decreased to $168,000
for the three months ended December 31, 2003 from $249,000 for the same period
last fiscal year. This decrease was due to declining interest rates
and a shortening of the maturity periods within the investment
portfolio.

Income Tax Provision.For the three months ended December 31, 2003, we
recorded an income tax benefit of $205,000 on a pre-tax loss of $564,000,
yielding an effective tax rate of 36%. For the three months ended December 31,
2002, we recorded a provision for income taxes of $76,000 on a pre-tax loss of
$309,000, yielding an effective tax rate of (25%). The rates differ from the
U.S. statutory rates primarily due to the impact of stock-based compensation
related charges that are non-deductible for tax purposes. The change in the
effective tax rate from the three months ended December 31, 2002 to 2003 is
primarily due to the smaller amount of stock-based compensation recorded in the
three months ended December 31, 2003.

Liquidity and Capital Resources

At December 31, 2003, the Company had $49.0 million in cash and cash
equivalents, as compared with $38.9 million at September 30, 2003. The
increase in the cash balance at December 31, 2003 was due primarily to the
maturity of short-term government securities. We also held $11.1 million in
short-term and long-term investments at December 31, 2003 as compared to $20.2
million at September 30, 2003. For the three months ended December 31, 2003
and 2002, operations were funded primarily from revenues received.

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Net cash provided by operating activities was $876,000 for the first three
months of fiscal 2004 and net cash used in operating activities was $237,000
for the first three months of fiscal 2003. Net cash provided by operating
activities resulted from a net loss of $359,000, adjusted for non-cash charges
associated with depreciation and amortization of $888,000. Accounts receivable
increased $2.7 million due to a large customer order in which the
percentage-of-completion method of accounting was used, offset by an increase
in accrued expenses due to test chip fabrication costs and rent
related
costs, and an increase in deferred revenues principally resulting from a large
multi-year contract for which the percentage-of-completion method of accounting
is being used.

Net cash provided by investing activities was $8.9 and $14.1 million for
the first three months of fiscal 2004 and 2003, respectively. Net cash
provided by investing activities was lower due to the maturing of $10.0 million
in government security investments, offset by the purchase of short-term
government investments of $939,000 and acquisitions of property and equipment
of $157,000.

Net cash provided by financing activities was $333,000 and $179,000 for
the first three months of fiscal 2004 and 2003, respectively. Net cash provided
by financing activities was primarily due to proceeds from the issuance of
common stock upon the exercise of options by employees.

Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our existing and new technologies,
the amount and timing of research and development expenditures, the timing of
the introduction of new technologies, expansion of sales and marketing efforts,
potential acquisitions, levels of working capital, primarily accounts
receivable. There can be no assurance that additional equity or debt financing,
if required, will be available on satisfactory terms. We believe that our
current capital resources and cash generated from operations will be sufficient
to meet our needs for at least the next twelve months, although we may seek to
raise additional capital during that period and there can be no assurance that
we will not require additional financing beyond this time frame.

The following table summarizes our contractual obligations:

|                              |  |                                       |       |        |  |           |       |       |  |       |       |         |  |   |     |  |  |   |     | 
|----------------------------- |  | ------------------------------------- | ----- | ------ |  | --------- | ----- | ----- |  | ----- | ----- | ------- |  | - | --- |  |  | - | --- | 
|                              |  | Payments Due by Period (in thousands)
|                              |  |                                      
|                              |  |                                       |       |        |  | Less than |       | 1-3   |  | 4-5   |       | After 5
|Contractual obligations       |  | Total                                 |       | 1 Year |  | Years     |       | Years |  | Years
|                              |  |                                       |       |        |  |           |       |       |  |      
|Operating lease obligations   |  | $                                     | 4,641 | (1)    |  | $         | 1,267 | (1)   |  | $     | 2,889 | (1)     |  | $ | 359 |  |  | $ | 126 | 
|Merger-related obligations    |  |                                       | 1,000 |        |  |           | 500   |       |  |       | 500   |         |  |   |    |  |  |   |    | 
|Purchase obligations          |  |                                       | 1,500 | (2)    |  |           | 700   | (2)   |  |       | 800   | (2)     |  |   |    |  |  |   |    | 
|                              |  |                                       |       |        |  |           |       |       |  |       |       |         |  |   |     |  |  |   |     | 
|Total contractual obligations |  | $                                     | 7,141 |        |  | $         | 2,467 |       |  | $     | 4,189 |         |  | $ | 359 |  |  | $ | 126 | 



|(1) |  | Includes $320,000, $996,000
and $1.1 million, respectively, payable under the lease
agreement for our corporate office in Fremont, California, which was extended
through fiscal year 2006 during the first quarter of fiscal 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Reflects amounts payable under an agreement
with a third party for the right to market certain semiconductor I/O technology
developed by such third party and create, modify and market derivatives of this
technology.            

Risk Factors

Inability or delayed execution on our strategy to be a leading provider of
semiconductor IP platforms could adversely affect our revenues and
profitability.

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Historically, we have derived all of our revenues from licenses to our
embedded memory products. After our acquisition of In-Chip Systems, Inc. in May
2002, we were able to expand our product offering to also include logic. In
2003 we added I/Os to our product offering to enable us to offer what we define
as a semiconductor IP platform. Since the introduction of our first
semiconductor IP platform in 2003, we have seen increasing customer interest
and adoption. However, if our strategy to be a provider of semiconductor IP
platforms is not broadly accepted by potential customers or acceptance is
delayed for whatever reason, our revenues and profitability could be adversely
affected. In addition, our profitability could also be adversely affected due
to investment of resources towards the development of logic and I/O products
and lower than anticipated revenues from the sale of such products. Factors
that could cause failure to gain market acceptance to our semiconductor IP
platform include:



| |  | Difficulty convincing customers of our memory products to purchase other products from us;     
|- |  | -----------------------------------------------------------------------------------------------
| 
| |  | Competition resulting in minority market share;                                                
| 
| |  | Inability to migrate technologies to new foundries due to less design experience; and          
| 
| |  | Limited experience in sales and marketing of the platform strategy and knowledge of the market.

The technology used in the semiconductor industry is rapidly changing and if we
are unable to develop new technologies and adapt our existing IP to new
processes, we will be unable to attract or retain customers.

The semiconductor industry has been characterized by an increasingly rapid
rate of development of new technologies and manufacturing processes, rapid
changes in customer requirements, frequent product introductions and ongoing
demands for greater speed and functionality. Our future success depends on our
ability to develop new technologies and introduce new products to the
marketplace in a timely manner, and to adapt our existing IP to satisfy the
requirements of new processes and our customers. If our development efforts are
not successful or are significantly delayed, or if the enhancements or new
generations of our products do not achieve market acceptance, we may be unable
to attract or retain customers and our operating results could be harmed.

Our ability to continue developing technical innovations involves several
risks, including:



| |  | our ability to anticipate and respond in a timely manner to changes in
the requirements of semiconductor companies;                                                                                                                               
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the emergence of new semiconductor manufacturing processes and our
ability to enter into strategic relationships with third-party
semiconductor foundries to develop and test technologies for these new
processes and provide customer referrals;
| 
| |  | the significant research and development investment that we may be
required to make before market acceptance, if any, of a particular
technology;                                                                                                 

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| |  | the possibility that the industry may not accept a new technology or
may delay use of a new technology after we have invested a significant
amount of resources to develop it; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | new technologies introduced by our competitors.                                                                                                                                   

If we are unable to adequately address these risks, our IP will become
obsolete and we will be unable to sell our products. Further, as new
technologies or manufacturing processes are announced, customers may defer
licensing our IP until those new technologies become available or our IP has
been adopted for that manufacturing process.

In addition, research and development requires a significant expense and
resource commitment. Since we have a limited operating history, we are unable
to predict our future resources. As a result, we may not have the financial and
other resources necessary to develop the technologies demanded in the future
and may be unable to attract or retain customers.

Our quarterly operating results may fluctuate significantly and any failure to
meet financial expectations for any fiscal quarter may cause our stock price to
decline.

Our quarterly operating results were lower than expected in the first and
second quarters of fiscal 2003 and are likely to fluctuate in the future due to
a variety of factors, many of which are outside of Virage Logics control.
Factors that could cause our revenues and operating results to vary from
quarter to quarter include:



| |  | large orders unevenly spaced over time;                                                                                                                                                                                                         
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | establishment or loss of strategic relationships with third-party semiconductor foundries;                                                                                                                                                      
| 
| |  | pace of adoption of new technologies by customers;                                                                                                                                                                                              
| 
| |  | timing of new technologies and technology enhancements by us and our competitors;                                                                                                                                                               
| 
| |  | shifts in demand for products that incorporate our IP;                                                                                                                                                                                          
| 
| |  | constrained or deferred spending decisions by customers;                                                                                                                                                                                        
| 
| |  | the timing and completion of milestones under customer agreements;                                                                                                                                                                              
| 
| |  | the impact of competition on license revenues or royalty rates;                                                                                                                                                                                 
| 
| |  | the cyclical nature of the semiconductor industry and the general economic environment;                                                                                                                                                         
| 
| |  | difficulties in forecasting royalty revenues because of factors out of our control, such as the timing of manufacturing of
semiconductors subject to royalty obligations and the number of such semiconductors actually produced (manufactured);

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| |  | changes in development schedules, research and development expenditure levels and product support by us and our customers;                                                                                                                                                                                                                                                                                      
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | recording a significant portion of our quarterly revenues in the last month of a quarter. This is the result of closing
more product orders, and therefore, a higher percentage of product shipments, in the last month of a quarter than in the
first months of a quarter. Some customers believe they can enhance their bargaining power by waiting until the end of the
quarter to finalize negotiations; and
| 
| |  | costs associated with merger and acquisition plans that are not pursued.                                                                                                                                                                                                                                                                                                                                        

As a result, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and you should not rely on these
comparisons as indications of future performance. These factors, together with
the fact that our expenses are primarily fixed and independent of revenues in
any particular period, make it difficult for us to accurately predict our
revenues and operating results and may cause them to be below market analysts
expectations in some future quarters, which could cause the market price of our
stock to decline significantly, as happened in connection with our operating
results for the first quarter of fiscal 2003.

Our international operations may be adversely affected by instability in the
countries in which we operate.

We currently have subsidiaries in Israel, Germany and Japan. In addition,
a growing portion of our IP is being developed in development centers located
in the Republic of Armenia and India. Israel continues to face an increased
level of violence and terror and Armenia, only independent since 1991, has
suffered significant political and economic instability. Accordingly, continued
and heightened unrest in areas of the world in which we operate may adversely
affect our business in a number of ways, including the following:



| |  | changes in the political or economic conditions in Armenia and India
and the surrounding region, such as fluctuations in exchange rates,
changes in laws protecting IP, the imposition of currency transfer
restrictions or limitations, or the adoption of burdensome trade or
tax policies, procedures, rules, regulations or tariffs, could
adversely affect our ability to develop new products, to take
advantage of the cost savings associated with operations in Armenia
and India, and to otherwise conduct business effectively in Armenia
and India;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | our ability to continue conducting business in Israel and other
countries in the normal course may be adversely affected by increased
risk of social and political instability and our employees working and
visiting in Israel may be affected by terrorist attacks;                                                                                                                                                                                                                                                                                          
| 
| |  | our Israeli customers demand for our products may be adversely
affected because of negative economic consequences associated with
reduced levels of safety and security in Israel.                                                                                                                                                                                                                                                                                                                                                                            

General economic conditions and future terrorist attacks may reduce our
revenues and harm our business.

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As our business has grown, we have become increasingly subject to the
risks arising from adverse changes in domestic and global economic conditions.
Because of the continued economic slowdown in the United States and in other
parts of the world, many industries are delaying or reducing technology
purchases and investments and similarly, our customers may delay payment for
Virage Logic products causing our accounts receivable to increase. In addition,
continued unrest in Israel and the Middle East may negatively impact the
investments our worldwide customers make in these geographic regions. The
impact of this slowdown on us is difficult to predict, but if businesses or
consumers defer or cancel purchases of new products that contain complex
semiconductors, purchases by fabless semiconductor companies and integrated
device manufacturers and production levels by semiconductor manufacturers could
decline causing our revenues to be adversely affected, which would have an
adverse effect on our results of operations and could have an adverse effect on
our financial condition.

If we are unable to maintain existing relationships and develop new
relationships with third-party semiconductor manufacturers, or foundries, we
will be unable to verify our technologies on their processes and license our IP
to them or their customers.

Our ability to verify our technologies for new manufacturing processes
depends on entering into development agreements with third-party foundries to
provide us with access to these processes. In addition, we rely on third-party
foundries to manufacture our silicon test chips, to provide referrals to their
customer base and to define the focus of our research and development
activities. We currently have agreements with Taiwan Semiconductor
Manufacturing Company (TSMC), United Microelectronics Corporation (UMC),
Chartered Semiconductor Manufacturing (Chartered), Tower Semiconductor (Tower),
Silterra Malaysia (Silterra), Semiconductor Manufacturing International
Corporation (SMIC) and a foundry in Korea. If we are unable to maintain our
existing relationships with these foundries or enter into new agreements with
other foundries, we will be unable to verify our technologies for their
manufacturing processes and our ability to develop products for emerging
technologies will be hampered. We would then be unable to license our IP to
fabless semiconductor companies that use these foundries to manufacture their
silicon chips, which is a significant source of our revenues.

If demand for products incorporating complex semiconductors and semiconductor
IP platforms does not rise, our business may be harmed.

Our business and the adoption and continued use of our IP by semiconductor
companies depends on the demand for products requiring complex semiconductors,
embedded memories and logic elements, such as cellular and digital phones,
pagers, PDAs, digital cameras, DVD players, switches and modems. The demand for
such products is uncertain and difficult to predict. A reduction in the demand
for products incorporating complex semiconductors and semiconductor IP or in
the general economic environment which results in the cutback of research and
development budgets or capital expenditures would likely result in a reduction
in demand for our products and could harm our business.

In addition, the semiconductor industry is highly cyclical and has
fluctuated between significant economic downturns characterized by diminished
demand, accelerated erosion of average selling prices and production
overcapacity, as well as periods of increased demand and production capacity
constraints. The semiconductor industry has been

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experiencing a downturn during a significant economic slowdown resulting
in lower levels of technology expenditures by businesses and individuals. As a
result of such fluctuations in the semiconductor industry and the general
economic slowdown, we may face a reduced number of design starts, tightening of
customers operating budgets, extensions of the approval process for new orders
and projects and consolidation among our customers, all of which may harm the
demand for our products and may cause us to experience substantial
period-to-period fluctuations in our operating results. Further, the markets
for third-party semiconductor IP have emerged only in recent years. Because of
the recent emergence of these markets, it is difficult to forecast whether
these markets will continue to develop or grow at a rate sufficient to support
our business.

Problems associated with international business operations could affect our
ability to license our IP.

Sales to customers located outside North America accounted for 52%, 44%
and 42% of our revenues for fiscal years 2003, 2002, and 2001, respectively.
For the three months ended December 31, 2003, sales to customers located
outside North America accounted for 68% of our revenues. We anticipate that
sales to customers located outside North America will increase and will
continue to represent a significant portion of our total revenues in future
periods. In addition, most of our customers that do not own their own
fabrication plants rely on third-party foundries located outside of North
America. Accordingly, our operations and revenues are subject to a number of
risks associated with doing business in international markets, including the
following:



| |  | managing foreign distributors and sales partners and sharing revenues
with such third parties;                                        
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | staffing and managing foreign branch offices and subsidiaries;                                                                        
| 
| |  | political and economic instability;                                                                                                   
| 
| |  | greater difficulty in collecting account receivables resulting in
longer collection periods;                                          
| 
| |  | foreign currency exchange fluctuations;                                                                                               
| 
| |  | changes in tax laws and tariffs;                                                                                                      
| 
| |  | compliance with, and unexpected changes in, a wide variety of foreign
laws and regulatory environments with which we are not familiar;
| 
| |  | timing and availability of export licenses;                                                                                           
| 
| |  | inadequate protection of IP rights in some countries; and                                                                             
| 
| |  | obtaining governmental approvals for certain technologies.                                                                            

If these risks actually materialize, our international operations may be
adversely affected and sales to international customers, as well as those
domestic customers that use foreign fabrication plants, may decrease.

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If we are unable to continue establishing relationships with semiconductor
companies to license our IP, our business will be harmed.

We currently rely on license fees from the sale of perpetual and term
licenses to generate a large portion of our revenues. These licenses produce
large amounts of revenue in the periods in which the license fees are
recognized, but are not necessarily indicative of a commensurate level of
revenue from the same customers in future periods. In addition, our agreements
with our customers do not obligate them to license new or future generations of
our IP. As a result, the growth of our business depends significantly on our
ability to expand our business with existing customers and attract new
customers.

We face numerous challenges in entering into license agreements with
semiconductor companies on terms beneficial to our business, including:



| |  | the lengthy and expensive process of building a relationship with a potential licensee;
|- |  | ---------------------------------------------------------------------------------------
| 
| |  | competition with the internal design teams of semiconductor companies; and             
| 
| |  | the need to persuade semiconductor companies to rely on us for critical technology.    

These factors may make it difficult for us to maintain our current
relationships or establish new relationships with additional licensees.
Further, there are a finite number of fabless semiconductor companies and
integrated device manufacturers to which we can license our IP. If we are
unable to establish and maintain these relationships, we will be unable to
generate license fees, and our revenues will decrease.

If we are unsuccessful in increasing our royalty based and project based
revenues, our revenues and profitability may not be as large as we anticipate.

We have historically generated revenues almost entirely from license fees.
We have agreements with certain third-party semiconductor foundries to pay us
royalties on their sales of silicon chips they manufacture for our fabless
customers. Beginning with our STAR Memory System, CAM technologies and more
recently with the introduction of our NOVeA technology, in addition to
collecting royalties from third-party semiconductor foundries, we intend to
increase our royalty base by collecting royalties directly from our integrated
device manufacturer and fabless customers. For the three months ended December
31, 2003 and 2002, we recorded royalty revenues of approximately $1.4 million
and $515,000, respectively. The continued growth of our revenues depends in
part on increasing our royalty revenues, but we may not be successful in
convincing all customers to agree to pay us royalties. Recently we have
completed agreements whereby significant upfront license fees are reduced or
limited in exchange for higher royalty rates, which should result in future
royalty revenues. Additionally, these royalty arrangements may not provide us
with the anticipated benefits as sales of products incorporating our IP may not
offset lower license fees. Many factors beyond
our control, such as fluctuating sales volumes of products that incorporate our
IP, potential slow down for manufacturing of certain newer process technology,
foundry rate adjustments, the cyclical nature of the semiconductor industry

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that effects the number of designs, commercial acceptance of these
products, accuracy of revenue reports and difficulties in the royalty
collection process, all impact our ability to forecast our royalty revenues.

It is difficult for us to verify
royalty amounts owed to us under our licensing arrangements, and this
may cause us to lose revenues.

The
standard terms of our license agreements require our licensees to
document the manufacture and sale of products that incorporate our
technology and report this data to us on a quarterly basis. While
standard license terms give us the right to audit the books and
records of our licensees to verify this information, audits can be
expensive, time consuming and potentially detrimental to our ongoing
business relationship with our licensees. Our failure to audit our
licensees books and records may result in us receiving more or
less royalty revenue than we are entitled to under the terms of our
license agreements. The results of such audits could also result in
an increase, as a result of a licensees underpayment, or
decrease, as a result of a licensees overpayment, to royalty
revenues. Such adjustments are recorded in the period they are
determined. Any adverse material adjustments resulting from royalty
audits may cause our revenues and operating results to be below market expectations, which could cause our
stock price to decline. The royalty audit may also trigger
disagreements over contract terms with our licensees and such
disagreements could hamper customer relations, divert the efforts and
attention of our management from normal operations and impact our
business operations.

We have a long and variable sales cycle, which can result in uncertainty and
delays in generating additional revenues.

Historically, because of the complexity of our products, it can take a
significant amount of time and effort to explain the benefits of our products
and to negotiate a sale. For example, it generally takes at least three to nine
months after our first contact with a prospective customer before we start
licensing our IP to that customer. In addition, purchase of our products is
usually made in connection with new design starts, which are out of our
control. Accordingly, we may be unable to predict accurately the timing of any
significant future sales of our products. We may also spend substantial time
and management attention on potential license agreements that are not
consummated, thereby foregoing other opportunities.

We rely on a small number of customers for a substantial portion of our
revenues and our accounts receivables are concentrated among a small number of
customers.

We have been dependent on a limited number of customers for a substantial
portion of our annual revenues in each fiscal year, although the customers
comprising this group have changed from time to time. For the first three
months of fiscal 2004 and in fiscal 2003 and 2002, no single customer generated
more than 10% of our revenues. We expect a small number of companies in the
aggregate to represent between 20% to 40% of our revenues for the foreseeable
future. The license agreements we enter into with our customers do not obligate
them to license future generations of our IP and, as a result, we cannot
predict if and when they will purchase additional products from us. As a result
of this customer concentration, we could experience a dramatic reduction in our
revenues if we lose one or more of our significant customers and are unable to
replace them. In addition, since our accounts receivable are concentrated in a
relatively small number of customers, a significant change in the liquidity or
financial position of any one of these customers could have a material adverse
impact on the collectability of our accounts receivables and our future
operating results.

The market for semiconductor IP platforms is highly competitive, and we may
lose market share to larger competitors with greater resources and to companies
that develop their semiconductor IP platforms using internal design teams.

We face competition from both existing suppliers of third-party
semiconductor IP as well as new suppliers that may enter the market. We also
compete with the internal design teams of large, integrated device
manufacturers. Many of these internal design teams have substantial programming
and design resources and are part of larger organizations with substantial
financial and marketing resources. These internal teams may develop
technologies that compete directly with our technologies or may actively seek
to license their own technologies to third parties, which could negatively
affect our revenue and operating results.

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Many of our existing competitors have longer operating histories, greater
brand recognition and larger customer bases, as well as greater financial and
marketing resources, than we do. This may allow them to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. It may also allow them to devote greater resources than we can to
the development and promotion of their products. In addition, the intense
competition in the market for semiconductor IP could result in pricing
pressures, reduced license revenues, reduced margins or lost market share, any
of which could harm our operating results and cause our stock price to decline.

Our stock price may be volatile and could decline substantially.

The market price of our common stock has fluctuated significantly in the
past, will likely continue to fluctuate in the future and may decline.
Fluctuations or a decline in our stock price may occur regardless of our
performance. Among the factors that could affect our stock price, in addition
to our performance, are: variations between our operating results and the
published expectations of securities analysts;



| |  | changes in financial estimates or investment recommendations by
securities analysts following our business;                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | announcements by us or our competitors of significant contracts, new
products or services, acquisitions, or other significant transactions;                                
| 
| |  | sale of our common stock or other securities in the future;                                                                                                                
| 
| |  | the inclusion or exclusion of our stock in various indices or
investment categories, especially as compared to the investment
profiles of our stockholders at a given time;
| 
| |  | changes in economic and capital market conditions;                                                                                                                         
| 
| |  | changes in business regulatory conditions; and                                                                                                                             
| 
| |  | the trading volume of our common stock.                                                                                                                                    

We may be unable to attract and retain key personnel who are critical to the
success of our business.

We believe that one of our significant competitive advantages is the size
and quality of our engineering team. Our future success also depends on our
ability to attract and retain engineers and other highly skilled personnel and
senior managers. In addition, in order to meet our planned growth we must
increase our sales force, both domestic and international, with qualified
employees. Hiring qualified technical, sales and management personnel is
difficult due to a limited number of qualified professionals and competition in
our industry for these types of employees. We have in the past experienced
delays and difficulties in recruiting and retaining qualified technical and
sales personnel and believe that at times our employees are recruited
aggressively by our competitors and start-up companies. Our employees are at
will and may leave our employment at any time, and under certain
circumstances, start-up companies can offer more attractive stock option
packages than we offer. As a result, we may experience significant employee
turnover.

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Failure to attract and retain personnel, particularly sales and technical
personnel, would make it difficult for us to develop and market our
technologies.

In addition, our business and operations are substantially dependent on
the performance of our key personnel, including Adam A. Kablanian, our
President and Chief Executive Officer, and Alexander Shubat, our Vice President
of Research and Development and Chief Technical Officer. We do not have formal
employment agreements with Mr. Kablanian or Dr. Shubat and do not maintain key
man life insurance policies on their lives. If Mr. Kablanian or Dr. Shubat
were to leave or become unable to perform services for our company, our
business would be severely harmed.

We may be unable to deliver our customized memory, logic and I/O products in
the time-frame demanded by our customers, which could damage our reputation and
future sales.

A portion of our contracts require us to provide customized products to
our customers within a specified delivery timetable. While we have experienced
delays in delivering product to our customers, the duration of these delays was
sufficiently short in length so as to not materially damage our relationship
with our customers. Furthermore, these delays did not result in a material
impact on our operations. However, any failure to meet significant customer
milestones could damage our reputation in our industry and harm our ability to
attract new customers.

We may need additional capital that may not be available to us and, if raised,
may dilute our stockholders ownership interest in us.

We may need to raise additional funds to develop or enhance our
technologies, to fund expansion, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. Additional
financing may not be available on terms that are acceptable to us. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders would be reduced and these
securities might have rights, preferences and privileges senior to those of our
current stockholders. If adequate funds are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance our products or services, or otherwise
respond to competitive pressures would be significantly limited.

We may have difficulty achieving and sustaining profitability and may
experience additional losses in the future.

For the three months ended December 31, 2003, we recorded a net loss of
$359,000. In fiscal year 2002, we recorded our first profitable year of
operations. The loss recorded in fiscal 2003 was due principally to fewer
project design starts by fabless semiconductor customers on the 0.13 micron
technology and the slow-down in industry adoption of the 90-nanometer process
technology. Continued losses would prevent us from being able to fully utilize
our deferred tax asset therefore resulting in the need for a valuation
allowance to be recorded. In order to achieve profitability again, we will need
to continue to generate new sales while controlling our costs. As we plan on
continuing the growth of our business while implementing cost control measures,
we may not be able to successfully generate enough revenues to remain
profitable with this growth. Any failure to increase our

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revenues and control costs as we pursue our planned growth would harm our
profitability and would likely negatively affect the market price of our stock.

If we are unable to effectively manage our growth, our business may be harmed.

Our future success depends on our ability to successfully manage our
growth. Our ability to manage our business successfully in a rapidly evolving
market requires an effective planning and management process. Our customers
rely heavily on our technological expertise in designing and testing our
products. Relationships with new customers may require significant engineering
resources. As a result, any increase in the demand for our products will
increase the strain on our personnel, particularly our engineers.

Our
historical growth, international expansion, and the acquisition of In-Chip
Systems, Inc. in May 2002, have placed, and are expected to continue to place,
a significant strain on our managerial and financial resources as well as our
limited financial and management controls, reporting systems and procedures.
Although some new controls, systems and procedures have been implemented, our
future growth, if any, will depend on our ability to continue to implement and
improve operational, finance and management information and control systems on
a timely basis, together with maintaining effect cost controls. Our inability
to manage any future growth effectively would be harmful to our revenues and
profitability.

Any acquisitions we make may not provide us the expected benefits and could
disrupt our business and harm our financial condition.

We acquired In-Chip Systems, Inc. in May 2002, and we may continue to
acquire businesses or technologies that we believe are a strategic fit with our
business. The In-Chip acquisition as well as other future acquisitions may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. In addition, the integration of the business of
In-Chip and of other acquisition targets may prove to be more difficult than
expected, and we may be unsuccessful in maintaining and developing relations
with the employees, customers and business partners of In-Chip and other
acquisition targets. Since we will not be able to accurately predict these
difficulties and expenditures, it is possible that these costs may outweigh the
value we realize from a future acquisition. Future acquisitions could result in
issuances of equity securities that would reduce our stockholders ownership
interest, the incurrence of debt, contingent liabilities, deferred stock based
compensation or expenses related to the valuation of goodwill or other
intangible assets and the incurrence of large, immediate write-offs.

If we are not able to protect our IP adequately, we will have less proprietary
technology to license, which will reduce our revenues and profits.

Our patents, copyrights, trademarks, trade secrets and other IP are
critical to our success. We rely on a combination of patent, trademark,
copyright, mask work and trade secret laws to protect our proprietary rights.
We cannot be sure that the U.S. Patent and Trademark Office will issue patents
or trademark registrations for any of our pending applications. Further, any
patents or trademark rights that we hold or may hold in the future may be
challenged, invalidated or circumvented or may not be of sufficient scope or

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strength to provide meaningful protection or any commercial advantage to
us. We have not attempted to secure patent protection in foreign countries, and
the laws of some foreign countries may not adequately protect our IP as well as
the laws of the United States. Also, the portion of our IP developed outside of
the United States may not receive the same copyright protection that it would
receive if it was developed in the United States. As we increase our
international presence, we expect that it will become more difficult to monitor
the development of competing technologies that may infringe on our rights as
well as unauthorized use of our technologies.

We use licensing agreements, confidentiality agreements and employee
nondisclosure and assignment agreements to limit access to and distribution of
our proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. Even though we have taken all customary industry
precautions, we cannot be sure that we have taken adequate steps to protect our
IP rights and deter misappropriation of these rights or that we will be able to
detect unauthorized uses and take immediate or effective steps to enforce our
rights. Since we also rely on unpatented trade secrets to protect some of our
proprietary technology, we cannot be certain that others will not independently
develop or otherwise acquire the same or substantially equivalent technologies
or otherwise gain access to our proprietary technology or disclose that
technology. We also cannot be sure that we can ultimately protect our rights to
our unpatented proprietary technology. In addition, third parties might obtain
patent rights to such unpatented trade secrets, which they could use to assert
infringement claims against us.

Third parties may claim we are infringing or assisting others to infringe their
IP rights, and we could suffer significant litigation or licensing expenses or
be prevented from licensing our technology.

While we do not believe that any of our technology infringes the valid IP
rights of third parties, we may be unaware of IP rights of others that may
cover some of our technology. As a result, third parties may claim we or our
customers are infringing their IP rights. Our license agreements typically
require us to indemnify our customers for infringement actions related to our
technology.

Any litigation regarding patents or other IP could be costly and
time-consuming, and divert our management and key personnel from our business
operations. The complexity of the technology involved makes any outcome
uncertain. If we do not prevail in any infringement action, we may be required
to pay significant damages and may be prevented from developing some of our
technology or from licensing some of our IP for certain manufacturing processes
unless we enter into a royalty or license agreement. In addition, if
challenging a claim is not feasible, we might be required to enter into royalty
or license agreements in order to settle a claim and continue to license or
develop our IP, which may result in significant expenditures. We may not be
able to obtain such agreements on terms acceptable to us or at all, and thus,
may be prevented from licensing or developing our technology.

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Changes to accounting standards and rules could either delay our recognition of
revenues or reduce the amount of revenues that we may recognize at a specific
time, and thus defer or reduce our profitability. These effects on our reported
results could cause our stock price to be lower than it otherwise might have
been.

We adopted the American Institute of Certified Public Accountants
Statement of Position, or SOP, 97-2, Software Revenue Recognition, as of
October 1, 1998. In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. We implemented these
provisions as of October 1, 1999. In December 1999, the Securities and Exchange
Commission issued SEC Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements which summarizes certain of the SECs views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Additional accounting guidance or pronouncements in the
future could affect the timing of our revenue recognition in the future, which
could cause our operating results to fail to meet the expectations of investors
and securities analysts. In addition, changes to accounting policies that
affect other aspects of our business, such as employee stock option grants may
adversely affect our reported financial results.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our core business, the sale of semiconductor IP for the design and
manufacture of system-on-a-chip integrated circuits, has limited exposure to
financial market risks, including changes in foreign currency exchange rates
and interest rates. A significant portion of our customers are located in Asia,
Canada and Europe. However, to date, our exposure to foreign currency exchange
fluctuations has been minimal because all of our license agreements provide for
payment in U.S. dollars.

Our foreign subsidiaries incur most of their expenses in the local
currency. Our international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions and foreign exchange rate volatility.
International operations have not been material, therefore, we do not
anticipate our future results to be materially adversely impacted by changes in
these factors.

We maintain an investment portfolio of various issuers, types and
maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders
equity. Our investments primarily consist of short-term money market mutual
funds, United States government obligations and mortgage-backed securities and
commercial paper. Our investments balance of $9.1 million at December 31, 2003
consists of instruments with original maturities of less than one year. Due to
the short-term nature of these investments, we do not believe our investment
balance is materially exposed to interest rate risk. We also hold $2.0 million
in U.S. government obligations with maturities up to two years.




Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the
participation of our management, including the President and Chief Executive
Officer along with the Chief

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Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on that evaluation, the Companys management, including
the President and Chief Executive Officer along with the Chief Financial
Officer, concluded that the Companys disclosure controls and procedures were
effective. There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect internal controls
subsequent to their evaluation. We intend to review and evaluate the design and
effectiveness of our disclosure controls and procedures on an ongoing basis and
to improve our controls and procedures over time and to correct any
deficiencies that we may discover in the future. Our goal is to ensure that our
senior management has timely access to all material financial and non-financial
information concerning our business. While we believe the present design of our
disclosure controls and procedures is effective to achieve our goal, future
events affecting our business may cause us to significantly modify our
disclosure controls and procedures.

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PART II - OTHER INFORMATION




ITEM 1. Legal Proceedings

None




ITEM 2. Changes in Securities and Use of Proceeds

None




ITEM 3. Defaults upon Senior Securities

None




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

None




ITEM 5. Other Information

None




ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 31.1          Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| | 31.2          Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| | 32.1          Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002                           
|
| | 32.2          Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002                           

(b) Reports on Form 8-K



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | The registrant furnished a Current Report on Form 8-K on January 20, 2004
to provide its earnings release for the first fiscal quarter of fiscal
2004.

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SIGNATURES

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

|                        |                          |                                                    
|----------------------- | ------------------------ | ---------------------------------------------------
|Date: February 13, 2004 | VIRAGE LOGIC CORPORATION
|                        |                          |                                                    
|                        |                          | /s/  Adam A. Kablanian                             
|                        |                          |                                                    
|                        |                          | ADAM A. KABLANIAN                                  
|                        |                          | President, Chief Executive
Officer                 
|                        |                          | and Chairman of the
Board                          
|                        |                          |                                                    
|                        |                          | /s/  Michael E. Seifert                            
|                        |                          |                                                    
|                        |                          | MICHAEL E. SEIFERT                                 
|                        |                          | Vice President, Finance and
Chief Financial Officer
|                        |                          | (Principal Financial and
Accounting Officer)       

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Exhibit Index



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1     Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| | 31.2     Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| | 32.1     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002                           
|
| | 32.2     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002