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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 June 30, 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 July 31, 2003 there were 21,035,627 shares of the Registrants Common
Stock outstanding.





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TABLE OF CONTENTS



|                               |                                                                                              |                                                           |  |  |  |  |  | 
|------------------------------ | -------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I - Financial Information
|                               | ITEM 1. Financial Statements                                                                
|                               |                                                                                              | 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
June 30, 2003 and September 30, 2002                           |  | 3    | 
|                                                                                               |  | Unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 2003 and 2002 |  | 4    | 
|                                                                                               |  | Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2003 and 2002           |  | 5    | 
|                                                                                               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                       |  | 6    | 
|ITEM 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations |  | 14                                                                                                                   | 
|ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk                            |  | 35                                                                                                                   | 
|ITEM 4 - Controls and Procedures                                                               |  | 36                                                                                                                   | 
|PART II - Other Information                                                                    |  |                                                                                                                      | 
|ITEM 1 - Legal Proceedings                                                                     |  | 37                                                                                                                   | 
|ITEM 2 - Changes in Securities and Use of Proceeds                                             |  | 37                                                                                                                   | 
|ITEM 3 - Defaults upon Senior Securities                                                       |  | 37                                                                                                                   | 
|ITEM 4 - Submission of Matters to a Vote of Security Holders                                   |  | 37                                                                                                                   | 
|ITEM 5 - Other Information                                                                     |  | 37                                                                                                                   | 
|ITEM 6 - Exhibits and Reports on Form 8-K                                                      |  | 37                                                                                                                   | 
|Signatures                                                                                     |  | 39                                                                                                                   | 

2



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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |         |    |         | 
|------------------------------------ | ---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------ | ------------- | ------- | -- | ------- | 
|                                     |                                                                        |                                                                                                         |                                            |         | June 30, |        | September 30,
|                                     |                                                                        |                                                                                                         |                                            |         | 2003     |        | 2002         
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |              
|ASSETS                               |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|Current assets:                      |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     | Cash and cash equivalents                                              |                                                                                                         | $                                          | 41,399  |          |        | $             | 35,422  |   
|                                     | Short-term investments                                                 |                                                                                                         |                                            | 15,092  |          |        |               | 5,008   |   
|                                     | Accounts receivable, net of allowance of $733 in 2003 and
$703 in 2002 |                                                                                                         |                                            | 12,381  |          |        |               | 15,688  |   
|                                     | Costs in excess of related billings on in process
contracts            |                                                                                                         |                                            | 611     |          |        |               | 820     |   
|                                     | Prepaid expenses and other current assets                              |                                                                                                         |                                            | 3,104   |          |        |               | 2,512   |   
|                                     | Taxes receivable                                                       |                                                                                                         |                                            | 925     |          |        |               |        |   
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |         |   
|                                     |                                                                        |                                                                                                         | Total current assets                       |         |          | 73,512 |               |         |    | 59,450  | 
|                                     | Long-term investments                                                  |                                                                                                         |                                            |        |          |        |               | 19,029  |   
|                                     | Property and equipment, net                                            |                                                                                                         |                                            | 6,420   |          |        |               | 5,708   |   
|                                     | Goodwill                                                               |                                                                                                         |                                            | 9,782   |          |        |               | 9,782   |   
|                                     | Intangible assets, net                                                 |                                                                                                         |                                            | 3,244   |          |        |               | 3,533   |   
|                                     | Deferred tax assets                                                    |                                                                                                         |                                            | 2,442   |          |        |               | 2,442   |   
|                                     | Other assets                                                           |                                                                                                         |                                            | 387     |          |        |               | 410     |   
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     |                                                                        |                                                                                                         | Total assets                               |         | $        | 95,787 |               |         | $  | 100,354 | 
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |         |   
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|Current liabilities:                 |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     | Accounts payable                                                       |                                                                                                         | $                                          | 208     |          |        | $             | 438     |   
|                                     | Accrued expenses                                                       |                                                                                                         |                                            | 4,099   |          |        |               | 4,240   |   
|                                     | Deferred revenue                                                       |                                                                                                         |                                            | 2,550   |          |        |               | 2,936   |   
|                                     | Capital lease obligations, current                                     |                                                                                                         |                                            | 15      |          |        |               | 96      |   
|                                     | Income taxes payable                                                   |                                                                                                         |                                            |        |          |        |               | 2,049   |   
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |         |   
|                                     |                                                                        |                                                                                                         | Total current liabilities                  |         |          | 6,872  |               |         |    | 9,759   | 
|Deferred tax liabilities             |                                                                        |                                                                                                         | 1,343                                      |         |          |        | 1,343         |        
|Other                                |                                                                        |                                                                                                         | 500                                        |         |          |        | 1,000         |        
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     |                                                                        |                                                                                                         | Total liabilities                          |         |          | 8,715  |               |         |    | 12,102  | 
|Stockholders equity:                |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     | Common stock, $.001 par value:                                         |                                                                                                         |                                            |         |          |        |               |         |   
|                                     |                                                                        | Authorized shares  150,000 at June 30, 2003
and September 30, 2002,                                    |                                            |         |          |        |               |         |    |        
|                                     |                                                                        | Issued and outstanding shares  21,028 and 20,928 at
June 30, 2003 and September 30, 2002, respectively |                                            |         | 21       |        |               |         | 20 |        
|                                     | Additional paid-in capital                                             |                                                                                                         |                                            | 109,383 |          |        |               | 110,530 |   
|                                     | Accumulated other comprehensive income                                 |                                                                                                         |                                            | 12      |          |        |               | 28      |   
|                                     | Deferred stock-based compensation                                      |                                                                                                         |                                            | (181    | )        |        |               | (3,326  | ) 
|                                     | Accumulated deficit                                                    |                                                                                                         |                                            | (22,163 | )        |        |               | (19,000 | ) 
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     |                                                                        |                                                                                                         | Total stockholders equity                 |         |          | 87,072 |               |         |    | 88,252  | 
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |        
|                                     |                                                                        |                                                                                                         | Total liabilities and stockholders equity |         | $        | 95,787 |               |         | $  | 100,354 | 
|                                     |                                                                        |                                                                                                         |                                            |         |          |        |               |         |   

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 |        | Nine Months Ended
|                                            |           |                                                                                                                                 |                                      |                         |       | June 30,           |        | June 30,         
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                  
|                                            |           |                                                                                                                                 |                                      |                         |       | 2003               |        | 2002              |       | 2003   |        | 2002  
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |       
|Revenues:                                   |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|                                            | License   |                                                                                                                                 | $                                    | 8,467                   |       |                    | $      | 11,798            |       |        | $      | 28,563 |        |        | $      | 31,331 |      
|                                            | Royalties |                                                                                                                                 |                                      | 1,097                   |       |                    |        | 435               |       |        |        | 2,191  |        |        |        | 1,196  |      
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Revenues                                    |           |                                                                                                                                 | 9,564                                |                         |       |                    | 12,233 |                   |       |        | 30,754 |        |        |        | 32,527 |       
|Cost and expenses:                          |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|                                            |           | Cost of revenues (exclusive of amortization
of
deferred stock compensation of $27, $287,
$245 and $654, respectively)           |                                      |                         | 2,224 |                    |        |                   | 2,463 |        |        |        | 7,114  |        |        |        | 6,562 |       
|                                            |           | Research and development (exclusive of
amortization of deferred stock
compensation
of $56, $416, $479 and $942, respectively)   |                                      |                         | 4,678 |                    |        |                   | 3,575 |        |        |        | 14,328 |        |        |        | 9,443 |       
|                                            |           | Sales and marketing (exclusive of
amortization of deferred stock
compensation
of $40, $363, $306 and $831, respectively)        |                                      |                         | 3,344 |                    |        |                   | 3,115 |        |        |        | 9,357  |        |        |        | 8,340 |       
|                                            |           | General and administrative (exclusive of
amortization of deferred stock
compensation
of $14, $141, $123 and $332, respectively) |                                      |                         | 1,135 |                    |        |                   | 1,206 |        |        |        | 3,629  |        |        |        | 3,336 |       
|                                            |           | Stock-based compensation                                                                                                        |                                      |                         | 137   |                    |        |                   | 1,207 |        |        |        | 1,153  |        |        |        | 2,759 |       
|                                            |           | In-process research and development                                                                                             |                                      |                         |      |                    |        |                   | 1,100 |        |        |        |       |        |        |        | 1,100 |       
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|                                            |           |                                                                                                                                 |                                      | Total cost and expenses |       |                    | 11,518 |                   |       |        | 12,666 |        |        |        | 35,581 |        |       |        | 31,540 | 
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Operating income (loss)                     |           |                                                                                                                                 | (1,954                               | )                       |       |                    | (433   | )                 |       |        | (4,827 | )      |        |        | 987    |       
|Interest income and other expenses, net     |           |                                                                                                                                 | 145                                  |                         |       |                    | 250    |                   |       |        | 533    |        |        |        | 948    |       
|Impairment of investment                    |           |                                                                                                                                 |                                     |                         |       |                    | (5,284 | )                 |       |        |       |        |        |        | (5,284 | )     
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Loss before taxes                           |           |                                                                                                                                 | (1,809                               | )                       |       |                    | (5,467 | )                 |       |        | (4,294 | )      |        |        | (3,349 | )     
|Income tax provision (benefit)              |           |                                                                                                                                 | (596                                 | )                       |       |                    | 537    |                   |       |        | (1,131 | )      |        |        | 1,811  |       
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Net loss                                    |           | $                                                                                                                               | (1,213                               | )                       |       | $                  | (6,004 | )                 |       | $      | (3,163 | )      |        | $      | (5,160 | )     
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Basic and diluted net loss per share        |           | $                                                                                                                               | (0.06                                | )                       |       | $                  | (0.30  | )                 |       | $      | (0.15  | )      |        | $      | (0.27  | )     
|                                            |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|Shares used in computing per share amounts: |           |                                                                                                                                 |                                      |                         |       |                    |        |                   |       |        |        |        |        |        |        |       
|                                            |           |                                                                                                                                 | Basic and diluted net loss per share |                         |       | 20,822             |        |                   |       | 20,039 |        |        |        | 20,742 |        |        |       | 19,355 |       

See accompanying notes to unaudited condensed consolidated financial statements.

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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |         |   |       |        |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------- | - | ----------------- | ------ | ------- | - | ----- | ------ | -
|                                                 |                                                                                 |                                              |                                               |                                                             |   | Nine Months Ended
|                                                 |                                                                                 |                                              |                                               |                                                             |   | June 30,         
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                  
|                                                 |                                                                                 |                                              |                                               |                                                             |   | 2003              |        | 2002   
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|Operating activities                             |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Net loss                                                                        |                                              | $                                             | (3,163                                                      | ) |                   | $      | (5,160  | )
|                                                 | Adjustments to reconcile net loss to net cash
provided by operating activities: |                                              |                                               |                                                             |   |                   |        |         |  
|                                                 |                                                                                 |                                              | Provision for doubtful accounts               |                                                             |   | 29                |        |         |   | 130   |       
|                                                 |                                                                                 |                                              | Depreciation and amortization                 |                                                             |   | 2,607             |        |         |   | 2,896 |       
|                                                 |                                                                                 |                                              | Amortization of intangible assets             |                                                             |   | 289               |        |         |   | 140   |       
|                                                 |                                                                                 |                                              | Consulting expense related to options granted |                                                             |   |                  |        |         |   | 136   |       
|                                                 |                                                                                 |                                              | Impairment of investment                      |                                                             |   |                  |        |         |   | 5,284 |       
|                                                 |                                                                                 |                                              | Amortization of stock-based compensation      |                                                             |   | 1,153             |        |         |   | 2,759 |       
|                                                 |                                                                                 | Changes in operating assets and liabilities: |                                               |                                                             |   |                   |        |         |   |      
|                                                 |                                                                                 |                                              |                                               | Accounts receivable                                         |   |                   | 3,278  |         |   |       | (3,547 | )
|                                                 |                                                                                 |                                              |                                               | Costs in excess of related billings on in process contracts |   |                   | 209    |         |   |       | 26     |  
|                                                 |                                                                                 |                                              |                                               | Prepaid expenses and other current assets                   |   |                   | (592   | )       |   |       | 132    |  
|                                                 |                                                                                 |                                              |                                               | Taxes receivable                                            |   |                   | (925   | )       |   |       | 872    |  
|                                                 |                                                                                 |                                              |                                               | Deferred tax assets                                         |   |                   |       |         |   |       | (41    | )
|                                                 |                                                                                 |                                              |                                               | Other assets                                                |   |                   | 23     |         |   |       | (42    | )
|                                                 |                                                                                 |                                              |                                               | Accounts payable                                            |   |                   | (230   | )       |   |       | 7      |  
|                                                 |                                                                                 |                                              |                                               | Accrued expenses                                            |   |                   | (141   | )       |   |       | 1,036  |  
|                                                 |                                                                                 |                                              |                                               | Deferred revenue                                            |   |                   | (386   | )       |   |       | 1,998  |  
|                                                 |                                                                                 |                                              |                                               | Income taxes payable                                        |   |                   | (2,049 | )       |   |       | 234    |  
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Net cash provided by operating activities                                       |                                              |                                               | 102                                                         |   |                   |        | 6,860   |  
|Investing activities                             |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Purchase of property and equipment                                              |                                              |                                               | (3,319                                                      | ) |                   |        | (3,483  | )
|                                                 | Purchase of investments                                                         |                                              |                                               | (24,016                                                     | ) |                   |        | (20,268 | )
|                                                 | Proceeds from maturities of investments                                         |                                              |                                               | 32,945                                                      |   |                   |        | 41,950  |  
|                                                 | Acquisition of business, net of cash received                                   |                                              |                                               |                                                            |   |                   |        | (2,919  | )
|                                                 | Payment of In-Chip merger-related obligation                                    |                                              |                                               | (500                                                        | ) |                   |        |        |  
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Net cash provided by investing activities                                       |                                              |                                               | 5,110                                                       |   |                   |        | 15,280  |  
|Financing activities                             |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Net proceeds from issuance of common stock                                      |                                              |                                               | 846                                                         |   |                   |        | 1,066   |  
|                                                 | Repayment of stockholder notes                                                  |                                              |                                               |                                                            |   |                   |        | 950     |  
|                                                 | Principal payments on capital lease obligations                                 |                                              |                                               | (81                                                         | ) |                   |        | (114    | )
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|                                                 | Net cash provided by financing activities                                       |                                              |                                               | 765                                                         |   |                   |        | 1,902   |  
|Net increase in cash and cash equivalents        |                                                                                 |                                              | 5,977                                         |                                                             |   |                   | 24,042 |        
|Cash and cash equivalents at beginning of period |                                                                                 |                                              | 35,422                                        |                                                             |   |                   | 27,868 |        
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        
|Cash and cash equivalents at end of the period   |                                                                                 | $                                            | 41,399                                        |                                                             |   | $                 | 51,910 |        
|                                                 |                                                                                 |                                              |                                               |                                                             |   |                   |        |        

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 application-optimized semiconductor intellectual property
(semiconductor IP) platforms based on memory, logic, I/Os (input/output
interface components) and IP development tools that are silicon proven and
production ready. These various forms of intellectual property are utilized by
the Companys customers to design and manufacture system-on-a-chip (SOC)
integrated circuits for high-speed communications, computer and consumer
products, such as cellular and digital phones, pagers, digital cameras, DVD
players, switches and modems.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States 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 June 30,
2003, and for the three and nine months ended June 30, 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 June 30, 2003, our results of operations for the three and nine
months ended June 30, 2003 and 2002, and cash flows for the nine months ended
June 30, 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 2002 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission. Our
balance sheet as of September 30, 2002, was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. Our results for the three and nine months ended June 30,
2003 are not necessarily indicative of the expected results for any other
interim period or the year ending September 30, 2003. Certain
reclassifications have been made to conform with current period presentation.

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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.

Note 2. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and potential common shares
outstanding during the period. Potential common shares, comprised of unvested,
restricted common stock and incremental common shares issuable upon the
exercise of stock options and warrants, are included in diluted net loss per
share to the extent such shares are dilutive.

The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders for the periods indicated (in
thousands, except per share amounts):

|                                                              |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |        |   | 
|------------------------------------------------------------- | --------------------------------------------------- | - | ------ | ------------------ | - | ----------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - | 
|                                                              |                                                     |   |        | Three Months Ended |   | Nine Months Ended
|                                                              |                                                     |   |        | June 30,           |   | June,            
|                                                              |                                                     |   |        |                    |   |                  
|                                                              |                                                     |   |        | 2003               |   | 2002              |        | 2003   |   | 2002
|                                                              |                                                     |   |        |                    |   |                   |        |        |   |     
|Net loss                                                      |                                                     | $ | (1,213 | )                  |   | $                 | (6,004 | )      |   | $    | (3,163 | )      |   | $ | (5,160 | )     
|                                                              |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       
|Basic:                                                        |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       
|                                                              | Weighted average shares of common stock
outstanding |   |        | 20,992             |   |                   |        | 20,524 |   |      |        | 20,976 |   |   |        | 20,281 |  
|                                                              | Less weighted average shares subject to
repurchase  |   |        | (170               | ) |                   |        | (485   | ) |      |        | (234   | ) |   |        | (926   | )
|                                                              |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       
|Shares used in computing basic and
diluted net loss per share |                                                     |   | 20,822 |                    |   |                   | 20,039 |        |   |      | 20,742 |        |   |   | 19,355 |       
|                                                              |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       
|Net loss per share:                                           |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       
|                                                              | Basic and diluted                                   |   | $      | (0.06              | ) |                   | $      | (0.30  | ) |      | $      | (0.15  | ) |   | $      | (0.27  | )
|                                                              |                                                     |   |        |                    |   |                   |        |        |   |      |        |        |   |   |        |       

The weighted average diluted potential shares that were anti-dilutive and
excluded from the calculation of diluted net loss per share are approximately
145,000 and 370,000 shares for the three and nine months ended June 30, 2003,
respectively, and 1,249,000 and 1,727,000 for the three and nine months ended
June 30, 2002.

Note 3. Comprehensive Income (Loss)

The Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130)
established standards for the reporting and display of comprehensive income
(loss) and its related components. Total comprehensive income (loss) related
primarily to the change in unrealized gains and losses on investments made by
the Company. Total comprehensive income (loss) did not differ materially from
net income (loss) reported for the three and nine months ended June 30, 2003
and 2002.

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Note 4. Segment Information

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or group, in deciding how to allocate resources
and in assessing performance.

The Companys chief operating decision maker, the chief executive officer,
reviews financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues by geographic region for purposes of
making operating decisions and assessing financial performance. Accordingly,
the Company considers itself to be in a single industry segment, specifically
the sale of application-optimized semiconductor intellectual property platforms
based on memory, logic, I/Os and IP development tools.

Information regarding revenues for the three and nine months ended June 30,
2003 and 2002 is as follows (in thousands):

|          |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |        |        | 
|--------- | ------------------------------------- | ----- | - | ------------------ | ----- | ----------------- | - | ----- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |                                       |       |   | Three Months Ended |       | Nine Months Ended
|          |                                       |       |   | June 30,           |       | June 30,         
|          |                                       |       |   |                    |       |                  
|          |                                       |       |   | 2003               |       | 2002              |   | 2003  |        | 2002
|          |                                       |       |   |                    |       |                   |   |       |        |     
|Revenues: |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|          | United States                         |       | $ | 4,341              |       |                   | $ | 5,948 |        |      | $ | 13,414 |        |  | $ | 15,750 |       
|          | Canada                                |       |   | 232                |       |                   |   | 1,171 |        |      |   | 1,122  |        |  |   | 3,888  |       
|          | Japan                                 |       |   | 921                |       |                   |   | 1,126 |        |      |   | 3,614  |        |  |   | 1,718  |       
|          | Taiwan                                |       |   | 1,130              |       |                   |   | 1,554 |        |      |   | 4,548  |        |  |   | 3,924  |       
|          | Europe, Middle
East and Africa
(EMEA) |       |   | 1,636              |       |                   |   | 2,278 |        |      |   | 5,512  |        |  |   | 6,957  |       
|          | Other                                 |       |   | 1,304              |       |                   |   | 156   |        |      |   | 2,544  |        |  |   | 290    |       
|          |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|          |                                       | Total |   | $                  | 9,564 |                   |   | $     | 12,233 |      |   | $      | 30,754 |  |   | $      | 32,527 | 
|          |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       

The allocation of revenues by geographic region in the table above is based on
the location of our customers operations. Sales to a customer located in
Malaysia were $1.1 million for the three and nine months ended June 30, 2003.
There were no sales to customers located in Malaysia for the three and nine
months ended June 30, 2002. As the majority of the Companys long-lived assets
are located primarily in the United States no separate disclosure of the
long-lived assets by geographic location is considered meaningful.

Note 5. 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. If the Company had recognized

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compensation expense
based upon the fair value of stock options awards at the grant date
consistent with the guidelines set forth under SFAS 123, the proforma amounts
for net loss and net loss per share would be presented as indicated below (in
thousands):

|                                                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------------------------------------------------ | ----------------- | - | --------------------------- | ------ | -------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                                   |                   |   | Three Months Ended June 30, |        | Nine Months Ended June 30,
|                                                                                                                   |                   |   |                             |        |                           
|                                                                                                                   |                   |   | 2003                        |        | 2002                       |   | 2003   |        | 2002
|                                                                                                                   |                   |   |                             |        |                            |   |        |        |     
|Net loss, as reported                                                                                              |                   | $ | (1,213                      | )      |                            | $ | (6,004 | )      |      | $ | (3,163 | )      |   | $ | (5,160 | )     
|Add: Stock-based compensation
expense included in
reported net loss, net of tax                                    |                   |   | 90                          |        |                            |   | 772    |        |      |   | 761    |        |   |   | 1,766  |       
|Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of tax |                   |   | (1,582                      | )      |                            |   | (2,271 | )      |      |   | (5,024 | )      |   |   | (5,849 | )     
|                                                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|Proforma net loss                                                                                                  |                   | $ | (2,705                      | )      |                            | $ | (7,503 | )      |      | $ | (7,426 | )      |   | $ | (9,243 | )     
|                                                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|Shares used in computing per
share amounts:                                                                        |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                                   | Basic and diluted |   |                             | 20,822 |                            |   |        | 20,039 |      |   |        | 20,742 |   |   |        | 19,355 |  
|Net loss per share - as reported                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                                   | Basic and diluted |   | $                           | (0.06  | )                          |   | $      | (0.30  | )    |   | $      | (0.15  | ) |   | $      | (0.27  | )
|                                                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|Net loss per share - proforma                                                                                      |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                                   | Basic and diluted |   | $                           | (0.13  | )                          |   | $      | (0.37  | )    |   | $      | (0.36  | ) |   | $      | (0.48  | )
|                                                                                                                   |                   |   |                             |        |                            |   |        |        |      |   |        |        |   |   |        |       

Note 6. 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 June 30, 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 June 30, 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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Note 7. Acquisition

On May 24, 2002, the Company acquired In-Chip Systems, Inc. (In-Chip), a
privately-held corporation based in Sunnyvale, California. Under the terms of
the agreement, all outstanding shares of In-Chip common stock were exchanged
for an aggregate of 528,547 shares of the Companys common stock. All
outstanding options of In-Chip were exchanged for options to purchase an
aggregate of 150,991 shares of the Companys common stock under terms that are
consistent with the original grant terms. The In-Chip options which were
initially granted by In-Chip on June 30, 2001, vest annually on the anniversary
of the grant date with full vesting by June 30, 2004 and expire on June 30,
2011. As of the date of acquisition, 50,679 shares were vested. The
acquisition has strengthened the Companys position in the semiconductor
intellectual property market by providing customers logic platforms along with
embedded memory technology. In addition, the acquisition has brought to the
Company complementary technology and a skilled workforce. The transaction was
accounted for under the purchase method of accounting and accordingly the
results of operations of In-Chip have been included in the Companys financial
statements since the date of acquisition.

The purchase price of approximately $17.0 million, measured using the average
fair market value of Virage Logics common stock from May 3, 2002 to May 9,
2002, the five trading days surrounding the date the acquisition agreement with
In-Chip was announced, plus the fair value of the options to be issued by
Virage Logic in the acquisition, and other costs directly related to the
acquisition is as follows (in thousands):

|                                  |  |   |        | 
|--------------------------------- |  | - | ------ | 
|Cash payment                      |  | $ | 5,500  | 
|Fair market value of common stock |  |   | 8,940  | 
|Fair market value of options      |  |   | 1,769  | 
|Estimated acquisition costs       |  |   | 825    | 
|                                  |  |   |        | 
|                                  |  | $ | 17,034 | 
|                                  |  |   |        | 

The purchase price allocation is as follows (in thousands):

|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Tangible assets acquired            |  | $ | 2,067  |  
|Liabilities assumed                 |  |   | (1,923 | )
|Deferred compensation               |  |   | 3,873  |  
|In process research and development |  |   | 1,100  |  
|Intangible assets                   |  |   | 3,500  |  
|Goodwill                            |  |   | 9,782  |  
|Deferred tax liability              |  |   | (1,365 | )
|                                    |  |   |        |  
|Total consideration                 |  | $ | 17,034 |  
|                                    |  |   |        |  

The purchase price includes $5.5 million of cash to be paid out, of which $4.0
million, net of acquisition costs of $151,000 paid by the Company on behalf of
the In-Chip shareholders, was paid out to the In-Chip shareholders as of
September 30, 2002, with the remaining $1.5 million to be paid out over 3 years
in accordance with the acquisition agreement. During the quarter ended June 30,
2003, the Company paid $0.5 million of the purchase price as a result. Deferred
compensation recorded in connection with the acquisition is being amortized
over the original vesting period of the options assumed.

Tangible assets were valued at their respective carrying amounts as the Company
believes that these amounts approximate their current fair values. The acquired
intangible assets which included patented technology that supports all of the
logic semiconductor IP products allows semiconductor manufacturers to enhance
integrated circuit design

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productivity by reducing the space required on the physical architecture of the
chip. While products in the semiconductor industry are typically subject to
rapid technological evolution, the nature of this patented technology is
estimated to have a significant life because the patent forms a basis for
process improvements of each successive generation. This technology is
valuable for currently available products and will continue to be the basis for
products under development at smaller dimensions. The valuation of the acquired
intangible assets was based on managements estimates. These assets are being
amortized over their useful life estimated to be five to ten years.

Approximately $1.1 million of the purchase price represents the estimated fair
value of acquired in-process research and development project that at the time
of the acquisition had not yet reached technological feasibility. The project
involved the development of a standardized version of In-Chips custom logic
semiconductor IP product. The value assigned to purchased in-process technology
represents primarily the engineering costs incurred to the date of the
acquisition in the development of this product, which was approximately 30%
complete as of the date of acquisition. The remaining 70% of the development
work was completed by Virage Logic prior to September 30, 2002 at an
incremental cost to Virage Logic of approximately $420,000. A commercially
viable product was made available to Virage Logics customers in October 2002.

The value of the purchased in-process research and development was determined
by estimating the projected net cash flows related to the products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were then
discounted back to their net present value. The projected net cash flows from
the projects were based on managements estimates of revenues and operating
profits related to the projects.

The following pro forma summary is provided for illustrative purposes only and
is not necessarily indicative of the consolidated results of operations for
future periods or that actually would have been realized had the Company and
In-Chip been a consolidated entity during the periods presented. The following
unaudited proforma information presents a summary of the results of operations
of the Company assuming the acquisition of In-Chip had occurred at the
beginning of the earliest period presented (unaudited, in thousands, except per
share amounts):

|                      |  |                             |        |                            |  |      |        |      |  |   |        |   |  |   |        |  
|--------------------- |  | --------------------------- | ------ | -------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                      |  | Three months ended June 30, |        | Nine months ended June 30,
|                      |  |                             |        |                           
|                      |  | 2003                        |        | 2002                       |  | 2003 |        | 2002
|                      |  |                             |        |                            |  |      |        |     
|Revenues              |  | $                           | 9,564  |                            |  | $    | 13,703 |      |  | $ | 30,754 |   |  | $ | 35,270 |  
|Net loss              |  |                             | (1,213 | )                          |  |      | (5,312 | )    |  |   | (3,163 | ) |  |   | (7,110 | )
|Basic and diluted EPS |  | $                           | (0.06  | )                          |  | $    | (0.26  | )    |  | $ | (0.15  | ) |  | $ | (0.36  | )

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Note 8. Recently Issued Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Exit or Disposal Activities (SFAS 146). SFAS 146
addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated
with exit and disposal activities, including restructuring activities that are
currently accounted for under EITF No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also
includes costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred-compensation contract.
SFAS 146 is effective for exit or disposal activities initiated after December
31, 2002. SFAS 146 is applied prospectively on adoption and, as a result, does
not have any impact on the Companys current financial position or results of
operations.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. EITF Issue
No. 00-21 provides guidance on how to determine when an arrangement that
involves multiple revenue-generating activities or deliverables should be
divided into separate units of accounting for revenue recognition purposes, and
if this division is required, how the arrangement consideration should be
allocated among the separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company has assessed the impact of EITF
00-21 and believes its current accounting policies are in compliance.
Therefore, the Company does not expect the adoption of EITF 00-21 to have a
material impact on its financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
impact of the adoption of this standard is not considered to be material to the financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure (SFAS 148). SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The Company has adopted the
interim disclosure requirements. The Company believes that the adoption of
this standard has had no material impact on its financial statements.

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In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
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. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company believes that the adoption of this
standard will have no material impact on its financial statements.

In May 2003, the FASB issued Statement of Accounting Standards No. 150 (SFAS
150), Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. The Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity and further requires that an
issuer classify as a liability (or an asset in some circumstances) financial
instruments that fall within its scope because that financial instrument
embodies an obligation of the issuer. Many of such instruments were previously
classified as equity. The statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatory redeemable financial instruments of nonpublic entities. The Statement
is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance of
the date of the Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The Company does not believe
that the adoption of this Statement will have a material impact on our
financial position, cash flows or results of operations.

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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 future events or our future
financial performance and include statements relating to products, customers,
business prospects, 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 to become 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, 2002 filed with the Securities and Exchange
Commission.

Overview

Virage Logic Corporation provides application-optimized semiconductor
intellectual property (semiconductor IP) platforms based on memory, logic, I/Os
(input/output interface components) and IP development tools that are silicon
proven and production ready. These various forms of intellectual property are
utilized by our customers to design and manufacture system-on-a-chip (SOC)
integrated circuits that power todays Internet and high-speed communications,
computer and consumer products, such as cellular and digital phones, pagers,
digital cameras, DVD players, switches and modems.

Our revenues are derived principally from licenses of our semiconductor IP
products, which include:



| |  |  | embedded memories, logic elements and I/Os;
| | - |  | -------------------------------------------

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| |  |  | standard and custom memory compilers;                                                                
| | - |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | memory test processor and fuse box components for embedded test
and repair of defective memory cells;
|
| |  |  | software development tools.                                                                          

We also derive revenues from royalties, custom design services,
maintenance services and library development and consulting services related to
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.

Revenues from the sale of 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 of us, the fee is fixed or determinable, and
collectability is probable. If any of these criteria are not met, we defer
recognizing the revenues until such time as all criteria are met. Revenues
from term-based licenses, in which no maintenance is purchased, are recognized
ratably over the term of the license, provided the criteria mentioned above are
met.

In addition, licenses of custom memory compilers or logic libraries
require that we customize the functionality of the software for the customers
specific applications or develop libraries. In that case, we recognize revenues
over the period that we perform the customization services using the
percentage-of-completion method using input measures based on labor hours
incurred.

Maintenance revenues are recognized ratably over the contractual term of
the maintenance period, which is generally one year.

In connection with the license of logic components we may also offer
library development services or technical consulting services. Revenues derived
from library development services are recognized using a percentage of
completion method using input measures based on labor hours incurred. Revenues
from technical consulting services are recognized as the services are
completed.

We derive our royalty revenues from third-party foundries that manufacture
chips incorporating our Area, Speed and Power (ASAP) memory products for our
fabless customers, and from integrated device manufacturers and fabless
customers that utilize our CUSTOM-TOUCH® STAR Memory System, NetCAM and
NOVeA technologies. Royalty payments are in addition to the license fees we
collect from our customers, and are

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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 June 30, 2003 and 2002 were $1.1
million and $435,000, respectively. Royalty revenues for the nine months ended
June 30, 2003 and 2002 were $2.2 million and $1.2 million, respectively.

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.

We have been dependent on a limited number of customers for a substantial
portion of our annual revenues, although that dependence continues to decrease.
The composition of our top ten customers has changed from time to time. For the
three months ended June 30, 2003, Silterra Malaysia accounted for 12% of our
revenues. For the three months ended June 30, 2002, Agere Systems generated
14% of revenues. For the nine months ended June 30, 2003 and 2002, no single
customer accounted for 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 bad debts, 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                           
| | - |  | ----------------------------------------------
|
| |  |  | accounts receivable                           
|
| |  |  | valuation of long-lived assets and investments
|
| |  |  | 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

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Revenue Recognition as amended by Statement of Position 98-4 and
Statement of Position 98-9.

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, in
which no maintenance is purchased, are recognized ratably over the term of the
license, provided the criteria mentioned above are met.

Revenues from custom memory compilers and logic libraries involve
customization to the functionality of the software and are therefore recognized
over the period that we perform services. Revenues derived from library
development services are recognized using a percentage-of-completion method,
and revenues from technical consulting services are recognized as the services
are being completed. For all license and service agreements accounted for using
the percentage-of-completion method, we determine progress-to-completion using
input measures based on labor hours incurred. 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 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. Revenues are recognized once we
deliver that element or once we complete the provision of the services.
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 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.

Accounts Receivable

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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 issues 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 few 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.

Valuation of Long-Lived Assets and Investments

We periodically review the carrying value of our long-lived assets and
investments for continued appropriateness. 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 such cash flows could materially affect our
evaluations.

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 include 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. Intangible assets
with finite useful lives are amortized over the estimated life of each 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

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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 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 for the three months ended June 30,
2003 and 2002 were $35,000 and $344,000, respectively and $790,000 and $550,000
for the nine months ended June 30, 2003 and 2002, respectively.

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 $2.4 million at June 30, 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 evaluates the recoverability of the
deferred tax assets and assesses the need, if any, for additional valuation
allowances. Taxes receivable, reflecting the recovery of prior taxes paid due
to loss carrybacks, was $925,000 at June 30, 2003.

Results of Operations

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

|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |      |  
|------------------------------ | -------------------------- |  | ------------------ | ---- | ----------------- |  | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                               |                            |  | Three Months Ended |      | Nine Months Ended
|                               |                            |  | June 30,           |      | June 30,         
|                               |                            |  |                    |      |                  
|                               |                            |  | 2003               |      | 2002              |  | 2003  |      | 2002
|                               |                            |  |                    |      |                   |  |       |      |     
|Revenue:                       |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                               | License                    |  |                    | 89.0 | %                 |  |       | 96.4 | %    |  |       | 92.9 | % |  |       | 96.3 | %
|                               | Royalties                  |  |                    | 11.0 |                   |  |       | 3.6  |      |  |       | 7.1  |   |  |       | 3.7  |  
|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|Revenues                       |                            |  | 100.0              |      |                   |  | 100.0 |      |      |  | 100.0 |      |   |  | 100.0 |     
|Cost and expenses:             |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                               | Cost of revenues           |  |                    | 23.2 |                   |  |       | 20.1 |      |  |       | 23.1 |   |  |       | 20.2 |  
|                               | Research and development   |  |                    | 48.9 |                   |  |       | 29.2 |      |  |       | 46.6 |   |  |       | 29.0 |  
|                               | Sales and marketing        |  |                    | 35.0 |                   |  |       | 25.4 |      |  |       | 30.4 |   |  |       | 25.6 |  
|                               | General and administrative |  |                    | 11.9 |                   |  |       | 9.9  |      |  |       | 11.8 |   |  |       | 10.3 |  
|                               | Stock-based compensation   |  |                    | 1.4  |                   |  |       | 9.9  |      |  |       | 3.8  |   |  |       | 8.5  |  
|                               | In-process R&D             |  |                    |     |                   |  |       | 9.0  |      |  |       |     |   |  |       | 3.4  |  
|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|Total cost and expenses        |                            |  | 120.4              |      |                   |  | 103.5 |      |      |  | 115.7 |      |   |  | 97.0  |     
|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|Operating income (loss)        |                            |  | (20.4              | )    |                   |  | (3.5  | )    |      |  | (15.7 | )    |   |  | 3.0   |     
|Interest and other expenses    |                            |  | 1.5                |      |                   |  | 2.0   |      |      |  | 1.7   |      |   |  | 2.9   |     
|Impairment of investment       |                            |  |                   |      |                   |  | (43.2 | )    |      |  |      |      |   |  | (16.2 | )    |  
|Income tax provision (benefit) |                            |  | (6.2               | )    |                   |  | 4.4   |      |      |  | (3.7  | )    |   |  | 5.6   |     
|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|Net loss                       |                            |  | (12.7              | )%   |                   |  | (49.1 | )%   |      |  | (10.3 | )%   |   |  | (15.9 | )%  
|                               |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     

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Three and Nine Months Ended June 30, 2003 and 2002

Revenues.Revenues decreased by 22% to $9.6 million from $12.2 million for
the three months ended June 30, 2003 and 2002, respectively. Revenues decreased
by 5% to $30.8 million from $32.5 million for the nine months ended June 30,
2003 and 2002, respectively. The decrease in revenues for the three months
ended June 30, 2003 compared to the same period last fiscal year was primarily
due to certain fabless semiconductor and IDM customers delaying purchases on
advanced technology processes, as well as engaging in agreements with select
IDM customers, who purchased a full suite of products, which include higher
future royalties in exchange for lower upfront license fees. The decrease in
revenues for the nine months ended June 30, 2003 compared to the same period
last fiscal year was due 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 technology.

For the three and nine months ended June 30, 2003 and 2002, sales by
geography and geometry are as follows:

|              |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |        |        | 
|------------- | ------------------------------------- | ----- | - | ------------------ | ----- | ----------------- | - | ----- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|              |                                       |       |   | Three Months Ended |       | Nine Months Ended
|              |                                       |       |   | June 30,           |       | June 30,         
|              |                                       |       |   |                    |       |                  
|              |                                       |       |   | 2003               |       | 2002              |   | 2003  |        | 2002
|              |                                       |       |   |                    |       |                   |   |       |        |     
|By geography: |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|              | United States                         |       | $ | 4,341              |       |                   | $ | 5,948 |        |      | $ | 13,414 |        |  | $ | 15,750 |       
|              | Canada                                |       |   | 232                |       |                   |   | 1,171 |        |      |   | 1,122  |        |  |   | 3,888  |       
|              | Japan                                 |       |   | 921                |       |                   |   | 1,126 |        |      |   | 3,614  |        |  |   | 1,718  |       
|              | Taiwan                                |       |   | 1,130              |       |                   |   | 1,554 |        |      |   | 4,548  |        |  |   | 3,924  |       
|              | Europe, Middle East
and Africa (EMEA) |       |   | 1,636              |       |                   |   | 2,278 |        |      |   | 5,512  |        |  |   | 6,957  |       
|              | Other                                 |       |   | 1,304              |       |                   |   | 156   |        |      |   | 2,544  |        |  |   | 290    |       
|              |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|              |                                       | Total |   | $                  | 9,564 |                   |   | $     | 12,233 |      |   | $      | 30,754 |  |   | $      | 32,527 | 
|              |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|By geometry:  |                                       |       |   |                    |       |                   |   |       |        |      |   |        |        |  |   |       
|              | 0.18 micron technology                |       |   | 18                 | %     |                   |   | 20    | %      |      |   | 18     | %      |  |   | 11     | %     
|              | 0.13 micron technology                |       |   | 48                 |       |                   |   | 45    |        |      |   | 55     |        |  |   | 53     |       
|              | 90 nanometer technology               |       |   | 18                 |       |                   |   | 24    |        |      |   | 8      |        |  |   | 25     |       
|              | Other                                 |       |   | 16                 |       |                   |   | 11    |        |      |   | 19     |        |  |   | 11     |       

We have experienced increased revenues from Asia, for the three and nine
months ended June 30, 2003 over the same period last fiscal year as we
continued to build customer relationships and engaged with two additional
foundries in that region. Sales to Canada and EMEA were lower as compared to
the same period last year due to the timing of certain customer orders and the
limited number of customers in those regions. Sales to the United States were
lower as compared to the same period last year due to the extended poor
economic environment in the U.S. semiconductor industry.

As a percentage of total revenues, sales for our 0.13 micron and
90-nanometer technologies were down slightly quarter over quarter due to higher
product sales on older

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technology processes. For the quarter ended June 30, 2003, revenue was
comprised of sales to 29 existing and six new customers.

Royalty revenues totaled $1.1 million for the three months ended June 30,
2003, up from $435,000 for the same period last fiscal year. Royalty revenues
totaled $2.2 million for the nine months ended June 30, 2003, up from $1.2
million the same period last fiscal year. Royalties increased due to the
improved tracking data by our customers on semiconductor IP used in older
process nodes and improved processes for obtaining this data. We also collected
back royalties for products ramping to volume production on 0.25 micron and
0.18 micron process nodes. During the quarter, we entered into two
royalty-bearing contracts with foundries, entered into a royalty-bearing
agreement with a large U.S.-based IDM on the 90-nanometer technology for our
entire line of memory products, expanded a prior relationship with a Japanese
IDM to include a royalty-bearing agreement on the 0.15 micron, 0.13 micron and
90-nanometer ASAP Logic products and 90-nanometer ASAP Memory products, and
signed seven new direct royalty agreements for the STAR Memory System, bringing
the total number of STAR Memory System licenses to over 50. We believe that
these and other arrangements will allow us to strengthen our royalty
base over the next few years.

Cost of Revenues.Cost of revenues consists primarily of personnel
expenses and the allocation of facilities and equipment expenses. Cost of
revenues decreased 10% to $2.2 million from $2.5 million for the three months
ended June 30, 2003 and 2002, respectively. This decrease was due to the
redeployment of engineering capacity to certain research and development
activities as a result of lower than expected sales. Cost of revenues
increased 8% to $7.1 million for the nine months ended June 30, 2003 from $6.6
million for the same period last fiscal year. This increase was primarily due
to the year over year increase in engineering capacity and the inability to
make timely redeployments of engineering resources between engineering
operations and research and development projects. The Company believes cost of
revenues will continue to fluctuate in the future, both in absolute dollars and
as a percentage of revenues, as sales volume levels continue to fluctuate
relative to the engineering capacity. Cost of revenues excludes $27,000 and
$287,000 of amortization of stock-based compensation for the three months ended
June 30, 2003 and 2002, respectively, and $245,000 and $654,000 for the nine
months ended June 30, 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
increased 31% to $4.7 million for the three months ended June 30, 2003 from
$3.6 million for the same period last fiscal year. Research and development
expense increased 52% to $14.3 million for the nine months ended June 30, 2003
from $9.4 million for the same period last fiscal year. Research and
development expense as a percentage of revenues increased to 49% for the three
months ended June 30, 2003, as compared to 29% for the same period last fiscal
year. Research and development expense as a percentage of revenues increased
to 47% for the nine months ended June 30, 2003, as compared to 29% for the same
period last fiscal year. The increase in research and development expense was
primarily due to the redeployment of engineering capacity from cost of revenue
activities to research and development projects involving our 90-nanometer
technology and our continued efforts to add product variations for the 0.13
micron technology, the NOVeA embedded memory technologies,

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and the ASAP Logic product offerings. For the three months ended June 30,
2003 as compared to the same period last year, the redeployment of engineering
capacity reduced headcount and related expenses by $608,000, while software
license and maintenance fees increased by $244,000. Research and development
expense excludes $56,000 and $416,000 of amortization of stock-based
compensation for the three months ended June 30, 2003 and 2002, respectively,
and $479,000 and $942,000 for the nine months ended June 30, 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 7% to $3.3 million for the three
months ended June 30, 2003 from $3.1 million for the same period last fiscal
year. Sales and marketing expense increased 12% to $9.4 million for the nine
months ended June 30, 2003 from $8.3 million for the same period last fiscal
year. Sales and marketing expense as a percentage of revenues increased to 35%
for the three months ended June 30, 2003, as compared to 25% for the same
period last fiscal year. Sales and marketing expense as a percentage of
revenues increased to 30% for the nine months ended June 30, 2003, as compared
to 26% for the same period last fiscal year. For the three month ended June
30, 2003 as compared to the same period last year, the increase in sales and
marketing expense was primarily due to the increase in headcount and related costs of
$140,000. For the nine months ended June 30, 2003, the increase is related to
headcount and related costs of $644,000 and consulting expense of $205,000. 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 $40,000 and $363,000 of
amortization of stock-based compensation for the three months ended June 30,
2003 and 2002, respectively, and $306,000 and $831,000 for the nine months
ended June 30, 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 decreased by 6% to $1.1
million for the three months ended June 30, 2003 from $1.2 million for the same
period last fiscal year. General and administrative expense increased by 9% to
$3.6 million for the nine months ended June 30, 2003 from $3.3 million for the
same period last fiscal year. General and administrative expense as a
percentage of revenues increased to 12% for the three months ended June 30,
2003, as compared to 10% for the same period last fiscal year. General and
administrative expense as a percentage of revenues increased to 12% for the
nine months ended June 30, 2003, as compared to 10% for the same period last
fiscal year. The decrease in general and administrative expense for the three
months ended June 30, 2003 as compared to the same period last year was
primarily due to decreased professional service costs of $45,000, principally
for legal advisory and accounting services. The increase in general and
administrative expense for the nine months ended June 30, 2003 compared to the
nine months ended June 30, 2002 is due to higher legal fees of $284,000 and
amortization expense of $149,000. General and administrative expense excludes
$14,000 and $141,000 of amortization of stock-based compensation for the three
months ended June 30, 2003 and 2002, respectively, and $123,000 and $332,000
for the nine months ended June 30, 2003 and 2002.

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Stock-Based Compensation.With respect to the grant of stock options and
restricted stock to employees, the Company has aggregated deferred stock-based
compensation of approximately $181,000 at June 30, 2003 and $3.3 million at
September 30, 2002. The amount of deferred stock-based compensation is
presented as a reduction of stockholders equity and is being amortized over
the vesting period of the applicable options or stock, generally four years.
The deferred stock-based compensation balance decreased $3.1 million primarily
due to the cancellation of unvested shares associated with the resignation of
Tushar Gheewala and amortization of other stock based awards. The Company
amortized, net of cancellations, $137,000 and $1.2 million for the three months
ended June 30, 2003 and 2002, respectively, and $1.2 million and $2.8 million
during the nine months ended June 30, 2003 and 2002, respectively.

Interest Income and Other Expenses.Interest income and other expenses,
net decreased $105,000 or 42%, to $145,000 for the three months ended June
30, 2003 as compared to $250,000 for three months ended June 30, 2002. For the
nine months ended June 30, 2003, interest income and other, net decreased
$415,000, or 44%, to $533,000 as compared to $948,000 for the nine months
ended June 30, 2002. This decrease was due to a continuing decline in interest
rates.

Income
Tax Provision.An income tax benefit of $596,000 was recorded on a
pre-tax loss of $1.8 million, yielding an effective tax rate of (33%) for the
three months ended June 30, 2003. An income tax provision of $537,000 was
recorded on a pre-tax loss of $5.5 million, yielding an effective tax rate of
10% for the three months ended June 30, 2002. An income tax
benefit of $1.1
million was recorded on a pre-tax loss of $4.3 million, yielding an effective
tax rate of (26%) for the nine months ended June 30, 2003. An income tax
provision of $1.8 million was recorded on a pre-tax loss of $3.3 million,
yielding an effective income tax rate of 54% for the nine months ended June 30,
2002. The effective tax rates differed from U.S. statutory rates due primarily
to stock-based compensation related charges that are non-deductible for tax
purposes. The change in effective tax rates from a tax provision of 54% for
the nine month period ended June 30, 2002 to a tax benefit of (26%) for the
nine month ended June 30, 2003 is due primarily to the application of loss
carrybacks to prior taxes paid during tax paying years and also to the reduced
amount of stock-based compensation recorded in the 2003 period consistent with
the graded vesting method of amortization.

Liquidity and Capital Resources

As of June 30, 2003, the Company had $56.5 million in cash, cash
equivalents and government security investments, as compared with $59.5 million
at September 30, 2002. We believe that our cash, cash equivalents and
investments will be sufficient to meet our operating and capital needs for at
least the next 12 months.

Net cash provided by operating activities was $102,000 for the first nine
months of fiscal 2003. Net cash provided by operating activities resulted from
a decrease in accounts receivable of $3.3 million resulting from lower
revenues, non-cash charges associated with the amortization of stock-based
compensation of $1.2 million, depreciation and amortization of $2.9 million, offset by a net loss of

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$3.2 million and net effect of the increase in taxes receivable and
decrease in income taxes payable of $3.0 million due to the current taxable net
loss position.

Net cash provided by investing activities was $5.1 million for the first
nine months of fiscal 2003. Net cash provided by investing activities was due
to the maturity of government security investments of $32.9 million, offset by
the purchase of government security investments of $24.0 million, acquisitions
of property and equipment of $3.3 million and payout of merger related
obligations of $500,000, which is the first of three equal annual installments
as set forth in the In-Chip Systems acquisition agreement dated May 4, 2002.

Net cash provided by financing activities was $765,000 for the first nine
months of fiscal 2003. Net cash provided by financing activities was due to
proceeds from the issuance of common stock of $846,000 offset by principal
payments on capital lease obligations of $81,000.

Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our existing and new technologies,
amount and timing of research and development expenditures, timing of the
introduction of new technologies, expansion of sales and marketing efforts,
potential acquisitions and changes to our working capital structure primarily
related to accounts receivable.

The Company has outstanding obligations under capital lease lines, with
payments due through July 2003. At June 30, 2003, $15,000 was outstanding under
these lines. There is no remaining availability under these capital lease
lines.

The following table summarizes our contractual obligations as of June 30,
2003 (Less than 1 year amounts are for July 1, 2003 to September 30, 2003):

|                              |  |                                       |       |        |  |           |     |       |  |       |       |         |  |   |       |  |  |   |     | 
|----------------------------- |  | ------------------------------------- | ----- | ------ |  | --------- | --- | ----- |  | ----- | ----- | ------- |  | - | ----- |  |  | - | --- | 
|                              |  | Payments Due by Period (in thousands) |       |        |  |          
|                              |  |                                       |       |        |  |          
|                              |  |                                       |       |        |  | Less than |     | 2-3   |  | 4-5   |       | After 5
|Contractual obligations       |  | Total                                 |       | 1 Year |  | Years     |     | Years |  | Years
|                              |  |                                       |       |        |  |           |     |       |  |      
|Operating lease obligations   |  | $                                     | 4,251 |        |  | $         | 203 |       |  | $     | 1,765 |         |  | $ | 1,756 |  |  | $ | 527 | 
|Capital lease obligations     |  |                                       | 15    |        |  |           | 15  |       |  |       |      |         |  |   |      |  |  |   |    | 
|Building purchase             |  |                                       | 260   |        |  |           | 260 |       |  |       |      |         |  |   |      |  |  |   |    | 
|Other contractual obligations |  |                                       | 1,000 |        |  |           | 500 |       |  |       | 500   |         |  |   |      |  |  |   |    | 
|                              |  |                                       |       |        |  |           |     |       |  |       |       |         |  |   |       |  |  |   |     | 
|Total contractual obligations |  | $                                     | 5,526 |        |  | $         | 978 |       |  | $     | 2,265 |         |  | $ | 1,756 |  |  | $ | 527 | 

In July 2002, the Company signed an initial contract to purchase a
building in the Republic of Armenia. The total cost of the building and
certain renovations is approximately $2.0 million of which the Company has paid
approximately $1.7 million to date. The Company plans to use the building as
office space for its engineering and design center based in Yerevan.

Risk Factors

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

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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 intellectual property
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;                                                                                                 
|
| |  |  | the possibility that the industry may not accept 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 intellectual
property 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 intellectual property until those new
technologies become available or our intellectual property 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:

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| |  |  | 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 intellectual
property;                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | 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, like timing of manufacturing of semiconductors subject
to royalty obligations and the number of such semiconductors actually
produced (manufactured);                                                                                                                                                                       
|
| |  |  | 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.

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We currently have subsidiaries in Israel, Germany and Japan. In addition,
a growing portion of our intellectual property 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 intellectual property, 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.

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
intellectual property 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

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test chips and to provide referrals to their customer base. We currently
have agreements with Taiwan Semiconductor Manufacturing Company (TSMC), United
Microelectronics Corporation (UMC), Chartered Semiconductor Manufacturing
(Chartered), Tower Semiconductor (Tower), Silterra Malaysia (Silterra) and
Semiconductor Manufacturing International Corporation (SMIC). 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. We would then be unable to license our
intellectual property 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 intellectual
property by semiconductor companies depends on the demand for products
requiring complex semiconductors, embedded memories and logic elements, such as
cellular and digital phones, pagers, 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 is currently experiencing a downturn
and a continued 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 intellectual property 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 intellectual property.

Sales to customers located outside North America accounted for 56% of our
revenues for the nine month period ended June 30, 2003, and 44%, 42%, and 35%
of our revenues in fiscal 2002, 2001, and 2000, respectively. 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:

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| |  |  | 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 intellectual property 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.

If we are unable to continue establishing relationships with semiconductor
companies to license our intellectual property, 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 intellectual property. 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.    

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These factors may make it difficult for us to maintain our current
relationships or establish new relationships with additional licensees.
Further, there is a finite number of fabless semiconductor companies and
integrated device manufacturers to which we can license our intellectual
property. 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 CUSTOM-TOUCH 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 quarters ended June 30,
2003 and 2002, we recorded royalty revenues of approximately $1.1 million and
$435,000, respectively. For the nine months ended June 30, 2003 and 2002, we
recorded royalty revenues of approximately $2.2 million and $1.2 million,
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 foregone 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 intellectual property may not offset lower
license fees. Although we have the right to audit the records of semiconductor
manufacturers and fabless semiconductor companies, we face risks relating to
the accuracy and completeness of the royalty collection process, due to our
limited experience and systems in place to conduct reviews of the accuracy of
royalty reports we receive from our customers. In addition, many factors beyond
our control, such as fluctuating sales volumes of products that incorporate our
intellectual property, potential slow down for manufacturing of certain newer
process technology, foundry rate adjustments, the cyclical nature of the
semiconductor industry that affect the number of designs, commercial
acceptance of these products, accuracy of revenue reports and difficulties in
the royalty collection process, limit our ability to forecast our royalty
revenues.

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 intellectual property 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.

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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 three months
ended June 30, 2003, Silterra Malaysia accounted for 12% of our revenues. For
the nine months ended June 30, 2003, no single customer generated more than 10%
of our revenues. In fiscal 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 intellectual property 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 few 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 intellectual property 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.

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.

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,

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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. 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 Mr. Shubat and do not maintain key
man life insurance policies on their lives. If Mr. Kablanian or Mr. 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 and logic 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.

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During
the quarter ended June 30, 2003, we recorded a net loss of $1.2
million. For the nine months ended June 30, 2003, we recorded a net loss of
$3.2 million. In fiscal year 2002, we recorded our first profitable year of
operations. The losses recorded in the first three quarters of fiscal 2003 were
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 90-nanometer process technology. 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 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.

We have continued to grow our headcount from 284 full-time employees at
September 30, 2002 to 298 full-time employees at June 30, 2003. We have
continued to increase our international presence, have increased substantially
the number of our customers and acquired In-Chip Systems, Inc. in May 2002.
This growth has placed, and is expected to continue to place, 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, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls. Since our
growth has occurred over such a limited time period, we do not have sufficient
experience managing the current size of our business to be able to fully assess
our ability to continue to manage its growth in the future. 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

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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 intellectual property adequately, we will
have less proprietary technology to license, which will reduce our revenues and
profits.

Our patents, copyrights, trademarks, trade secrets and other intellectual
property 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 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 intellectual property as well as the laws of the United States. Also, the
portion of our intellectual property 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
intellectual property 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
intellectual property 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
intellectual property rights of third parties, we may be unaware of
intellectual property rights of others that may cover some of our technology.
As a result, third parties may claim we or our customers are infringing their
intellectual property rights. Our license agreements typically require us to
indemnify our customers for infringement actions related to our technology.

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Any litigation regarding patents or other intellectual property 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 intellectual property 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 intellectual property, 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.

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 intellectual property for the
memory and logic elements of systems-on-a-chip, 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 our license agreements provide for
payment in U.S. dollars.

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. At June 30, 2003, we maintained $41.4 million in cash or
short-term money market mutual funds and held $15.1 million of United States
agency securities with maturities of less than one year. Due to the short-term
nature of our

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investment portfolio and our intent to hold these investments to
maturity, we do not believe our investment balance is materially exposed to
interest rate risk.




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 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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##### Table of Contents






PART II - OTHER INFORMATION




ITEM 1. Legal Proceedings

| |     
| | ----
| | None




ITEM 2. Changes in Securities and Use of Proceeds

Use of Proceeds From Registered Securities

Our registration statement (No. 333-36108) under the Securities and
Exchange Act of 1933 for our initial public offering of common stock became
effective on July 31, 2000. We sold a total of 4,312,500 shares of common stock
to an underwriting syndicate for an aggregate offering price to the public of
$51,750,000. The managing underwriters were Lehman Brothers Inc., FleetBoston
Robertson Stephens Inc. and SG Cowen Securities Corporation. 3,750,000 of these
shares were sold in an offering that commenced on July 31, 2000 and was
completed on August 4, 2000. An additional 562,500 shares of common stock were
sold upon the underwriters exercise of their over-allotment option on August
28, 2000. In connection with this offering, we incurred total expenses of
approximately $5.4 million, consisting of $3.6 million for underwriting
discounts and commissions and approximately $1.8 million of other expenses.
None of these expenses were paid directly or indirectly to any of our
directors, officers, or their associates, persons owning 10% or more of any
class of our securities, or affiliates of Virage Logic. Offering proceeds, net
of aggregate expenses were approximately $46.3 million. We used $13.1 million
and $9.6 million, in fiscal 2002 and 2001, respectively, for research and
development primarily related to the hiring of additional personnel, and $11.5
million and $8.3 million, in fiscal 2002 and 2001, respectively, of the
offering proceeds for sales and marketing primarily related to additional
personnel and increased expenditures on advertising and promotions. We have
applied the remaining proceeds to temporary investments in a commercial money
market investment account, short-term government and mortgage-backed
securities.




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 Exchange
Act of 1934, as Amended as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|     |  |                                                                                                                                                              
|31.2 |  | Certification Pursuant to Rule 15d-14 of the Securities Exchange
Act of 1934, as Amended as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

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|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|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 April 3, 2003 to
report its revised outlook for the second fiscal quarter of fiscal 2003.  
|   
|    |  | The registrant furnished a Current Report on Form 8-K on April 16, 2003 to
provide its earning release for the second fiscal quarter of fiscal 2003.
|   

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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: August 14, 2003 | VIRAGE LOGIC CORPORATION
|                      |                          |                                      
|                      |                          | /s/ Adam A. Kablanian                
|                      |                          |                                      
|                      |                          | ADAM A. KABLANIAN                    
|                      |                          | President and Chief Executive Officer
|                      |                          |                                      
|                      |                          | /s/ James R. Pekarsky                
|                      |                          |                                      
|                      |                          | JAMES R. PEKARSKY                    
|                      |                          | Vice President, Finance and Chief    
|                      |                          | Financial Officer                    
|                      |                          | (Principal Financial and Accounting  
|                      |                          | Officer)                             

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EXHIBIT INDEX

|         |  |                                                                                                                                                              
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                  
|        
|31.1     |  | Certification Pursuant to Rule 15d-14 of the Securities Exchange
Act of 1934, as Amended as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|         |  |                                                                                                                                                              
|31.2     |  | Certification Pursuant to Rule 15d-14 of the Securities Exchange
Act of 1934, as Amended as Adopted 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