##### Table of Contents



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 March 31, 2003

OR

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

Commission file number   000-31089

VIRAGE LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]    No [   ]


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

As of April 30, 2003 there were 20,968,079 shares of the Registrants Common
Stock outstanding.

1





---

TABLE OF CONTENTS



|                               |                                                                                               |                                                           |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               |                                                                                               | 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 99.1                  
|EXHIBIT 99.2                  



---



##### Table of Contents



VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX

|                                                                                               |                                                                                                                      |  |      |   | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                               |                                                                                                                      |  | Page
|                                                                                               |                                                                                                                      |  |     
|PART
I -  Financial Information                                                                |                                                                                                                      |  |      |  
|ITEM 1 - Financial Statements                                                                  |                                                                                                                      |  |      |  
|                                                                                               | Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2003 and September 30, 2002                          |  |      | 3 | 
|                                                                                               | Unaudited Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 2003 and 2002 |  |      | 4 | 
|                                                                                               | Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 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 |                                                                                                                      |  | 12   |  
|ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                      |  | 32   |  
|ITEM 4 - Controls and Procedures                                                               |                                                                                                                      |  | 32   |  
|PART II - Other Information                                                                    |                                                                                                                      |  |      |  
|ITEM 1 - Legal Proceedings                                                                     |                                                                                                                      |  | 34   |  
|ITEM 2 - Changes in Securities and Use of Proceeds                                             |                                                                                                                      |  | 34   |  
|ITEM 3 - Defaults upon Senior Securities                                                       |                                                                                                                      |  | 34   |  
|ITEM 4 - Submission of Matters to a Vote of Security Holders                                   |                                                                                                                      |  | 34   |  
|ITEM 5 - Other Information                                                                     |                                                                                                                      |  | 35   |  
|ITEM 6 - Exhibits and Reports on Form 8-K                                                      |                                                                                                                      |  | 35   |  
|Signatures                                                                                     |                                                                                                                      |  | 36   |  
|Exhibit Index                                                                                  |                                                                                                                      |  | 41   |  

2



---



##### Table of Contents






PART I - FINANCIAL INFORMATION

VIRAGE LOGIC CORPORATION




UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |         |    |         | 
|------------------------------------ | ----------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------- | ------ | ------------- | ------- | -- | ------- | 
|                                     |                                                             |                                                                                                          |                                            |         | March 31, |        | September 30,
|                                     |                                                             |                                                                                                          |                                            |         | 2003      |        | 2002         
|                                     |                                                             |                                                                                                          |                                            |         |           |        |              
|ASSETS                               |                                                             |                                                                                                          |                                            |         |           |        |               |        
|Current assets:                      |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     | Cash and cash equivalents                                   |                                                                                                          | $                                          | 38,854  |           |        | $             | 35,422  |   
|                                     | Short-term investments                                      |                                                                                                          |                                            | 20,090  |           |        |               | 5,008   |   
|                                     | Accounts receivable, net                                    |                                                                                                          |                                            | 11,596  |           |        |               | 15,688  |   
|                                     | Costs in excess of related billings on in process
contracts |                                                                                                          |                                            | 608     |           |        |               | 820     |   
|                                     | Prepaid expenses and other current assets                   |                                                                                                          |                                            | 2,515   |           |        |               | 2,512   |   
|                                     | Taxes receivable                                            |                                                                                                          |                                            | 148     |           |        |               |        |   
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total current assets                       |         |           | 73,811 |               |         |    | 59,450  | 
|                                     | Long-term investments                                       |                                                                                                          |                                            |        |           |        |               | 19,029  |   
|                                     | Property and equipment, net                                 |                                                                                                          |                                            | 7,185   |           |        |               | 5,708   |   
|                                     | Goodwill                                                    |                                                                                                          |                                            | 9,782   |           |        |               | 9,782   |   
|                                     | Intangible assets, net                                      |                                                                                                          |                                            | 3,341   |           |        |               | 3,533   |   
|                                     | Deferred tax assets                                         |                                                                                                          |                                            | 2,442   |           |        |               | 2,442   |   
|                                     | Other assets                                                |                                                                                                          |                                            | 413     |           |        |               | 410     |   
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total assets                               |         | $         | 96,974 |               |         | $  | 100,354 | 
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |         |   
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                             |                                                                                                          |                                            |         |           |        |               |        
|Current liabilities:                 |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     | Accounts payable                                            |                                                                                                          | $                                          | 318     |           |        | $             | 438     |   
|                                     | Accrued expenses                                            |                                                                                                          |                                            | 4,216   |           |        |               | 4,240   |   
|                                     | Deferred revenue                                            |                                                                                                          |                                            | 2,630   |           |        |               | 2,936   |   
|                                     | Capital lease obligations, current                          |                                                                                                          |                                            | 38      |           |        |               | 96      |   
|                                     | Income taxes payable                                        |                                                                                                          |                                            |        |           |        |               | 2,049   |   
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total current liabilities                  |         |           | 7,202  |               |         |    | 9,759   | 
|Deferred tax liabilities             |                                                             |                                                                                                          | 1,343                                      |         |           |        | 1,343         |        
|Other                                |                                                             |                                                                                                          | 500                                        |         |           |        | 1,000         |        
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total liabilities                          |         |           | 9,045  |               |         |    | 12,102  | 
|Stockholders equity:                |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     | Common stock, $.001 par value:                              |                                                                                                          |                                            |         |           |        |               |         |   
|                                     |                                                             | Authorized shares  150,000 at December 31, 2002
and September 30, 2002,                                 |                                            |         |           |        |               |         |    |        
|                                     |                                                             | Issued and outstanding shares  20,962 and
20,928 at March 31, 2003 and September 30,
2002, respectively |                                            |         | 21        |        |               |         | 20 |        
|                                     | Additional paid-in capital                                  |                                                                                                          |                                            | 109,172 |           |        |               | 110,530 |   
|                                     | Accumulated other comprehensive income                      |                                                                                                          |                                            | 5       |           |        |               | 28      |   
|                                     | Deferred stock-based compensation                           |                                                                                                          |                                            | (319    | )         |        |               | (3,326  | ) 
|                                     | Accumulated deficit                                         |                                                                                                          |                                            | (20,950 | )         |        |               | (19,000 | ) 
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total stockholders equity                 |         |           | 87,929 |               |         |    | 88,252  | 
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |        
|                                     |                                                             |                                                                                                          | Total liabilities and stockholders equity |         | $         | 96,974 |               |         | $  | 100,354 | 
|                                     |                                                             |                                                                                                          |                                            |         |           |        |               |         |   

See accompanying notes to unaudited condensed consolidated financial statements.

3



---



##### Table of Contents



VIRAGE LOGIC CORPORATION




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


|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |        |        |  |        | 
|------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------------------ | ------ | ----------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ |  | ------ | 
|                                            |           |                                                                                                                                |        |                         |        | Three Months Ended |        | Six Months Ended
|                                            |           |                                                                                                                                |        |                         |        | March 31,          |        | March 31,       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                 
|                                            |           |                                                                                                                                |        |                         |        | 2003               |        | 2002             |        | 2003 |        | 2002  
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |       
|Revenue:                                    |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|                                            | License   |                                                                                                                                | $      | 9,046                   |        |                    | $      | 10,239           |        |      | $      | 20,096 |        |   | $      | 19,533 |       
|                                            | Royalties |                                                                                                                                |        | 579                     |        |                    |        | 408              |        |      |        | 1,094  |        |   |        | 761    |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Revenues                                    |           |                                                                                                                                | 9,625  |                         |        |                    | 10,647 |                  |        |      | 21,190 |        |        |   | 20,294 |       
|Cost
and expenses:                          |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|                                            |           | Cost of revenues (exclusive of amortization of
deferred stock compensation of $86, $172,
$218 and $367, respectively)          |        |                         | 2,239  |                    |        |                  | 2,175  |      |        |        | 4,890  |   |        |        | 4,099  | 
|                                            |           | Research and development (exclusive of
amortization of deferred stock compensation
of $193, $239, $423 and $526, respectively) |        |                         | 5,021  |                    |        |                  | 3,028  |      |        |        | 9,650  |   |        |        | 5,868  | 
|                                            |           | Sales and marketing (exclusive of
amortization of deferred stock compensation
of $112, $214, $266 and $468, respectively)      |        |                         | 2,930  |                    |        |                  | 2,716  |      |        |        | 6,013  |   |        |        | 5,225  | 
|                                            |           | General and administrative (exclusive of
amortization of deferred stock compensation
of $50, $87, $109 and $191, respectively) |        |                         | 1,309  |                    |        |                  | 1,105  |      |        |        | 2,494  |   |        |        | 2,130  | 
|                                            |           | Stock-based compensation                                                                                                       |        |                         | 441    |                    |        |                  | 712    |      |        |        | 1,016  |   |        |        | 1,552  | 
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|                                            |           |                                                                                                                                |        | Total
cost and expenses |        |                    | 11,940 |                  |        |      | 9,736  |        |        |   | 24,063 |        |        |  | 18,874 | 
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Operating income (loss)                     |           |                                                                                                                                | (2,315 | )                       |        |                    | 911    |                  |        |      | (2,873 | )      |        |   | 1,420  |       
|Interest income and other expense, net      |           |                                                                                                                                | 139    |                         |        |                    | 260    |                  |        |      | 388    |        |        |   | 698    |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Income (loss) before taxes                  |           |                                                                                                                                | (2,176 | )                       |        |                    | 1,171  |                  |        |      | (2,485 | )      |        |   | 2,118  |       
|Income tax provision (benefit)              |           |                                                                                                                                | (611   | )                       |        |                    | 659    |                  |        |      | (535   | )      |        |   | 1,274  |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Net income (loss)                           |           | $                                                                                                                              | (1,565 | )                       |        | $                  | 512    |                  |        | $    | (1,950 | )      |        | $ | 844    |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Basic net income (loss) per share           |           | $                                                                                                                              | (0.08  | )                       |        | $                  | 0.03   |                  |        | $    | (0.09  | )      |        | $ | 0.04   |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Diluted net income (loss) per share         |           | $                                                                                                                              | (0.08  | )                       |        | $                  | 0.02   |                  |        | $    | (0.09  | )      |        | $ | 0.04   |       
|                                            |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|Shares used in computing per share amounts: |           |                                                                                                                                |        |                         |        |                    |        |                  |        |      |        |        |        |   |        |       
|                                            |           | Basic                                                                                                                          |        |                         | 20,729 |                    |        |                  | 19,624 |      |        |        | 20,649 |   |        |        | 19,475 | 
|                                            |           | Diluted                                                                                                                        |        |                         | 20,729 |                    |        |                  | 21,194 |      |        |        | 20,649 |   |        |        | 20,872 | 

See accompanying notes to unaudited condensed consolidated financial statements.

4



---



##### Table of Contents



VIRAGE LOGIC CORPORATION




UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)


|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |      |         |   |        |  
|------------------------------------------------ |  | ---------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------------------- | ------- | ---------------- | ------ | ---- | ------- | - | ------ | -
|                                                 |  |                                                                                          |                                              |                                                             |         | Six Months Ended
|                                                 |  |                                                                                          |                                              |                                                             |         | March 31,       
|                                                 |  |                                                                                          |                                              |                                                             |         |                 
|                                                 |  |                                                                                          |                                              |                                                             |         | 2003             |        | 2002
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     
|Operating activities                             |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Net income (loss)                                                                        |                                              | $                                                           | (1,950  | )                |        | $    | 844     |  
|                                                 |  | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                              |                                                             |         |                  |        |      |         |  
|                                                 |  |                                                                                          |                                              | Provision for doubtful accounts                             |         |                  | 29     |      |         |   | 139    |  
|                                                 |  |                                                                                          |                                              | Depreciation and amortization                               |         |                  | 1,677  |      |         |   | 1,685  |  
|                                                 |  |                                                                                          |                                              | Amortization of intangible assets                           |         |                  | 192    |      |         |   | 108    |  
|                                                 |  |                                                                                          |                                              | Consulting expense related to options granted               |         |                  |       |      |         |   | 34     |  
|                                                 |  |                                                                                          |                                              | Amortization of stock-based compensation                    |         |                  | 1,016  |      |         |   | 1,552  |  
|                                                 |  |                                                                                          | Changes in operating assets and liabilities: |                                                             |         |                  |        |      |         |   |       
|                                                 |  |                                                                                          |                                              | Accounts receivable                                         |         |                  | 4,063  |      |         |   | (3,432 | )
|                                                 |  |                                                                                          |                                              | Costs in excess of related billings on in process contracts |         |                  | 212    |      |         |   | (1     | )
|                                                 |  |                                                                                          |                                              | Prepaid
expenses and other current assets                   |         |                  | (3     | )    |         |   | 265    |  
|                                                 |  |                                                                                          |                                              | Taxes receivable                                            |         |                  | (148   | )    |         |   | 872    |  
|                                                 |  |                                                                                          |                                              | Deferred tax assets                                         |         |                  |       |      |         |   | (87    | )
|                                                 |  |                                                                                          |                                              | Other assets                                                |         |                  | (3     | )    |         |   | (58    | )
|                                                 |  |                                                                                          |                                              | Accounts payable                                            |         |                  | (120   | )    |         |   | 135    |  
|                                                 |  |                                                                                          |                                              | Accrued expenses                                            |         |                  | (24    | )    |         |   | 260    |  
|                                                 |  |                                                                                          |                                              | Deferred revenue                                            |         |                  | (306   | )    |         |   | 850    |  
|                                                 |  |                                                                                          |                                              | Income taxes payable                                        |         |                  | (2,049 | )    |         |   | 2      |  
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Net cash provided by operating activities                                                |                                              |                                                             | 2,586   |                  |        |      | 3,168   |  
|Investing activities                             |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Purchase of property and equipment                                                       |                                              |                                                             | (3,154  | )                |        |      | (2,656  | )
|                                                 |  | Purchase of investments                                                                  |                                              |                                                             | (24,023 | )                |        |      | (17,222 | )
|                                                 |  | Proceeds from maturities of investments                                                  |                                              |                                                             | 27,947  |                  |        |      | 24,950  |  
|                                                 |  | Payment of merger related obligation                                                     |                                              |                                                             | (500    | )                |        |      |        |  
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Net cash provided by investing activities                                                |                                              |                                                             | 270     |                  |        |      | 5,072   |  
|Financing activities                             |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Net proceeds from issuance of common stock                                               |                                              |                                                             | 634     |                  |        |      | 870     |  
|                                                 |  | Repayment of stockholder notes                                                           |                                              |                                                             |        |                  |        |      | 950     |  
|                                                 |  | Principal payments on capital lease obligations                                          |                                              |                                                             | (58     | )                |        |      | (90     | )
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     
|                                                 |  | Net cash provided by financing activities                                                |                                              |                                                             | 576     |                  |        |      | 1,730   |  
|Net increase in cash and cash equivalents        |  |                                                                                          | 3,432                                        |                                                             |         |                  | 9,970  |     
|Cash and cash equivalents at beginning of period |  |                                                                                          | 35,422                                       |                                                             |         |                  | 27,868 |     
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     
|Cash and cash equivalents at end of the period   |  | $                                                                                        | 38,854                                       |                                                             |         | $                | 37,838 |     
|                                                 |  |                                                                                          |                                              |                                                             |         |                  |        |     

See accompanying notes to unaudited condensed consolidated financial statements.

5



---



##### Table of Contents



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.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements as of March 31,
2003 and September 30, 2002, and for the three and six months ended March 31,
2003 and 2002, are unaudited. The unaudited condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly our financial position, as of March 31, 2003, our results of
operations for the three and six months ended March 31, 2003 and 2002, and cash
flows for the six months ended March 31, 2003 and 2002, respectively. These
condensed consolidated financial statements and related notes should be read in
conjunction with our audited consolidated financial statements and related
notes included in our 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 six months ended March 31, 2003 are not necessarily
indicative of the expected results for any other interim period or the year
ending September 30, 2003. 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.

Certain reclassifications have been
made to conform with current period presentation.

Note 2. Net Income (Loss) Per
Share

6



---



##### Table of Contents



Basic net income per share is computed by dividing the net income (loss) for
the period by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing the
net income (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 income (loss) per share to the extent such shares are dilutive.

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

|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |        |   | 
|------------------------------------------------------------ | --------------------------------------------------- | - | ------ | ------------------ | - | ---------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - | 
|                                                             |                                                     |   |        | Three Months Ended |   | Six Months Ended
|                                                             |                                                     |   |        | March 31,          |   | March 31,       
|                                                             |                                                     |   |        |                    |   |                 
|                                                             |                                                     |   |        | 2003               |   | 2002             |        | 2003   |   | 2002
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |     
|Net income (loss)                                            |                                                     | $ | (1,565 | )                  |   | $                | 512    |        |   | $    | (1,950 | )      |   | $ | 844    |       
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Basic:                                                       |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|                                                             | Weighted average shares of common stock
outstanding |   |        | 20,965             |   |                  |        | 20,228 |   |      |        | 20,915 |   |   |        | 20,158 |  
|                                                             | Less weighted average shares subject to
repurchase  |   |        | (236               | ) |                  |        | (604   | ) |      |        | (266   | ) |   |        | (683   | )
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Shares used in computing basic net
income (loss) per share   |                                                     |   | 20,729 |                    |   |                  | 19,624 |        |   |      | 20,649 |        |   |   | 19,475 |       
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Diluted:                                                     |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Employee stock options and unvested
common
stock outstanding |                                                     |   |       |                    |   |                  | 1,520  |        |   |      |       |        |   |   | 1,345  |       
|Unexercised warrants                                         |                                                     |   |       |                    |   |                  | 38     |        |   |      |       |        |   |   | 36     |       
|Employee stock purchase plan                                 |                                                     |   |       |                    |   |                  | 12     |        |   |      |       |        |   |   | 16     |       
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Shares used in computing diluted net
income per share        |                                                     |   | 20,729 |                    |   |                  | 21,194 |        |   |      | 20,649 |        |   |   | 20,872 |       
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|Net income (loss) per share:                                 |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|                                                             | Basic                                               |   | $      | (0.08              | ) |                  | $      | 0.03   |   |      | $      | (0.09  | ) |   | $      | 0.04   |  
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       
|                                                             | Diluted                                             |   | $      | (0.08              | ) |                  | $      | 0.02   |   |      | $      | (0.09  | ) |   | $      | 0.04   |  
|                                                             |                                                     |   |        |                    |   |                  |        |        |   |      |        |        |   |   |        |       

The weighted average diluted potential shares that were anti-dilutive and
excluded from the calculation of diluted net income per share are approximately
209,000 and 448,000 shares for the three and six months ended March 31, 2003,
respectively.

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 six months ended March 31, 2003
and 2002.

Note 4. Segment Information

7



---



##### Table of Contents



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 and IP development tools.

Information regarding revenues for the three and six months ended March 31,
2003 and 2002 are as follows (in thousands):

|          |               |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |       |        | 
|--------- | ------------- | ----- | - | ------------------ | ----- | ---------------- | - | ----- | ------ | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|          |               |       |   | Three Months Ended |       | Six Months Ended
|          |               |       |   | March 31,          |       | March 31,       
|          |               |       |   |                    |       |                 
|          |               |       |   | 2003               |       | 2002             |   | 2003  |        | 2002
|          |               |       |   |                    |       |                  |   |       |        |     
|Revenues: |               |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|          | United States |       | $ | 4,382              |       |                  | $ | 5,612 |        |      | $ | 9,073 |        |  | $ | 9,802 |       
|          | Canada        |       |   | 195                |       |                  |   | 626   |        |      |   | 890   |        |  |   | 2,717 |       
|          | Japan         |       |   | 1,042              |       |                  |   | 129   |        |      |   | 2,693 |        |  |   | 592   |       
|          | Taiwan        |       |   | 1,222              |       |                  |   | 1,025 |        |      |   | 3,418 |        |  |   | 2,370 |       
|          | EMEA          |       |   | 1,624              |       |                  |   | 3,221 |        |      |   | 3,876 |        |  |   | 4,679 |       
|          | Other         |       |   | 1,160              |       |                  |   | 34    |        |      |   | 1,240 |        |  |   | 134   |       
|          |               |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|          |               | Total |   | $                  | 9,625 |                  |   | $     | 10,647 |      |   | $     | 21,190 |  |   | $     | 20,294 | 
|          |               |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      

EMEA is defined as Europe, Middle East and Africa. The allocation of revenues
by geographic region in the table above is based on the location of our
customers operations. Sales to Singapore were $1.1 million and $1.2 million
for the three and six months ended March 31, 2003, respectively. 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 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
income (loss) and net income (loss) per share would be presented as indicated
below (in thousands):

8



---



##### Table of Contents



|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------------------------------------ | ----------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                       |                   |   | Three Months Ended |        | Six Months Ended
|                                                                                                       |                   |   | March 31,          |        | March 31,       
|                                                                                                       |                   |   |                    |        |                 
|                                                                                                       |                   |   | 2003               |        | 2002             |   | 2003   |        | 2002
|                                                                                                       |                   |   |                    |        |                  |   |        |        |     
|Net income (loss), as reported                                                                         |                   | $ | (1,565             | )      |                  | $ | 512    |        |      | $ | (1,950 | )      |   | $ | 844    |       
|Add: Stock-based compensation expense
included in reported net income (loss)                           |                   |   | 441                |        |                  |   | 712    |        |      |   | 1,016  |        |   |   | 1,552  |       
|Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards |                   |   | (3,103             | )      |                  |   | (3,571 | )      |      |   | (5,215 | )      |   |   | (5,873 | )     
|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|Proforma net loss                                                                                      |                   | $ | (4,227             | )      |                  | $ | (2,347 | )      |      | $ | (6,149 | )      |   | $ | (3,477 | )     
|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|Shares
used in computing per share amounts:                                                            |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                       | Basic             |   |                    | 20,729 |                  |   |        | 19,624 |      |   |        | 20,649 |   |   |        | 19,475 |  
|                                                                                                       | Diluted           |   |                    | 20,729 |                  |   |        | 21,194 |      |   |        | 20,649 |   |   |        | 20,872 |  
|Net income (loss) per share - as reported                                                              |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                       | Basic             |   | $                  | (0.08  | )                |   | $      | 0.03   |      |   | $      | (0.09  | ) |   | $      | 0.04   |  
|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                       | Diluted           |   | $                  | (0.08  | )                |   | $      | 0.02   |      |   | $      | (0.09  | ) |   | $      | 0.04   |  
|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|Net loss per share - proforma                                                                          |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                       | Basic and diluted |   | $                  | (0.20  | )                |   | $      | (0.12  | )    |   | $      | (0.30  | ) |   | $      | (0.18  | )
|                                                                                                       |                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       

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. The term of these agreements is
generally perpetual. 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 obligations as insignificant, based upon its history.
Accordingly, the Company has no liabilities recorded for
indemnification under
these agreements as of March 31, 2003.

Warranties. The Company offers to its
customers warranties on its software products. 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 March 31, 2003. The Company assesses the
need for a warranty reserve on a quarterly basis and there can be no guarantee
that a warranty reserve will not become necessary in the future.

Note 7. 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

9



---



##### Table of Contents



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 material as the liability
associated with the warranty provisions has not been significant for the
periods presented.

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 will have no material impact on its financial statements.

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

10



---



##### Table of Contents



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.

11



---



##### Table of Contents






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 overcome the challenges associated with
establishing licensing relationships with semiconductor companies, our ability
to obtain royalty revenues from customers in addition to license fees, 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 embedded memories and logic 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 and I/Os (input and 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;
| | - |  | -------------------------------------------
|
| |  |  | standard and custom memory compilers;      

12



---



##### Table of Contents





| |  |  | 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/Os 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 sales 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 licenses 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.

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. In addition, we have entered into agreements that provide
for the payment of royalties for our CUSTOM-TOUCH® STAR Memory System, NetCAM
and NOVeA technologies directly by our customers, as well as from third-party
foundries that manufacture chips incorporating these technologies. Royalty
payments are in addition to the license fees we collect from our customers, and
are calculated based on production volumes of wafers containing chips utilizing
our semiconductor IP technologies based on a rate per-chip or rate per-wafer
depending on the terms of the respective license agreement.

13



---



##### Table of Contents



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 substantially all of our revenues.
Royalty revenues for the three months ended March 31, 2003 and 2002 were
$579,000 and $408,000, respectively. Royalty revenues for the six months ended
March 31, 2003 and 2002 were $1.1 million and $761,000, 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 March 31, 2003, Agere Systems and Chartered Semiconductor
each accounted for 12% of our revenues and NEC Electronics Corporation
accounted for 10% of our revenues. For the three months ended March 31, 2002,
Toshiba and Tower Semiconductor accounted for 10% and 17% of revenues,
respectively.

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

14



---



##### Table of Contents



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 licenses are
recognized ratably over the term of the license, provided the criteria
mentioned above are met.

Revenues from custom memory compilers 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, related revenue is deferred until the
acceptance criteria is met.

For agreements which include multiple elements, such as maintenance, we
recognize revenues attributable to delivered or completed elements covered by
such agreements. 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, with respect to which recognition was deferred, 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

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

15



---



##### Table of Contents



determined by our review of their current credit information. We
continuously monitor collections and payments from our customers and maintain a
provision 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 provisions
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 will 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, 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 will continue to be 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 Other Than Employee Services under
SFAS 123, or EITF 96-18. 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
March 31, 2003 and 2002 were $35,000 and $171,000, respectively
and $755,000 and $206,000 for the six months ended March 31, 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 result in deferred
tax assets and liabilities. 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

16



---



##### Table of Contents



assumptions. Management evaluates the recoverability of the deferred tax
assets and assesses the need, if any, for additional valuation allowances.

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 |      | Six Months Ended
|                               |                         |                            |       | March 31,          |      | March 31,       
|                               |                         |                            |       |                    |      |                 
|                               |                         |                            |       | 2003               |      | 2002             |       | 2003 |      | 2002
|                               |                         |                            |       |                    |      |                  |       |      |      |     
|Revenue:                       |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|                               |                         | License                    |       |                    | 94.0 | %                |       |      | 96.2 | %    |       |       | 94.8 | % |       |     | 96.3 | %
|                               |                         | Royalties                  |       |                    | 6.0  |                  |       |      | 3.8  |      |       |       | 5.2  |   |       |     | 3.7  |  
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|Revenues                       |                         |                            | 100.0 |                    |      |                  | 100.0 |      |      |      | 100.0 |       |      |   | 100.0 |    
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|Cost
and expenses:             |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|                               |                         | Cost of revenues           |       |                    | 23.3 |                  |       |      | 20.4 |      |       |       | 23.1 |   |       |     | 20.2 |  
|                               |                         | Research and development   |       |                    | 52.2 |                  |       |      | 28.4 |      |       |       | 45.5 |   |       |     | 28.9 |  
|                               |                         | Sales and marketing        |       |                    | 30.4 |                  |       |      | 25.5 |      |       |       | 28.4 |   |       |     | 25.7 |  
|                               |                         | General and administrative |       |                    | 13.6 |                  |       |      | 10.4 |      |       |       | 11.8 |   |       |     | 10.5 |  
|                               |                         | Stock-based compensation   |       |                    | 4.6  |                  |       |      | 6.7  |      |       |       | 4.8  |   |       |     | 7.7  |  
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|Total
cost and expenses        |                         |                            | 124.1 |                    |      |                  | 91.4  |      |      |      | 113.6 |       |      |   | 93.0  |    
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|                               | Operating income (loss) |                            |       | (24.1              | )    |                  |       | 8.6  |      |      |       | (13.6 | )    |   |       | 7.0 |     
|Interest and other expenses    |                         |                            | 1.5   |                    |      |                  | 2.4   |      |      |      | 1.9   |       |      |   | 3.4   |    
|Income tax (provision) benefit |                         |                            | 6.3   |                    |      |                  | (6.2  | )    |      |      | 2.5   |       |      |   | (6.2  | )  
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    
|Net income (loss)              |                         |                            | (16.3 | )%                 |      |                  | 4.8   | %    |      |      | (9.2  | )%    |      |   | 4.2   | %  
|                               |                         |                            |       |                    |      |                  |       |      |      |      |       |       |      |   |       |    

Three and Six Months Ended March 31, 2003 and 2002

Revenues.Revenues decreased by 10% to $9.6 million from $10.6 million for
the three months ended March 31, 2003 and 2002, respectively. Revenues
increased by 4% to $21.2 million from $20.3 million for the six months ended
March 31, 2003 and 2002, respectively. The decrease in revenues for the three
months ended March 31, 2003 compared to the first quarter is primarily due to a
delay of purchases by our customers and slow-down in industry adoption of
90-nanometer process technology.

For the three and six months ended March 31, 2003 and 2002, sales by
geography and geometry are as follows:

17



---



##### Table of Contents



|              |                         |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |       |        | 
|------------- | ----------------------- | ----- | - | ------------------ | ----- | ---------------- | - | ----- | ------ | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|              |                         |       |   | Three Months Ended |       | Six Months Ended
|              |                         |       |   | March 31,          |       | March 31,       
|              |                         |       |   |                    |       |                 
|              |                         |       |   | 2003               |       | 2002             |   | 2003  |        | 2002
|              |                         |       |   |                    |       |                  |   |       |        |     
|By geography: |                         |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|              | United States           |       | $ | 4,382              |       |                  | $ | 5,612 |        |      | $ | 9,073 |        |  | $ | 9,802 |       
|              | Canada                  |       |   | 195                |       |                  |   | 626   |        |      |   | 890   |        |  |   | 2,717 |       
|              | Japan                   |       |   | 1,042              |       |                  |   | 129   |        |      |   | 2,693 |        |  |   | 592   |       
|              | Taiwan                  |       |   | 1,222              |       |                  |   | 1,025 |        |      |   | 3,418 |        |  |   | 2,370 |       
|              | EMEA                    |       |   | 1,624              |       |                  |   | 3,221 |        |      |   | 3,876 |        |  |   | 4,679 |       
|              | Other                   |       |   | 1,160              |       |                  |   | 34    |        |      |   | 1,240 |        |  |   | 134   |       
|              |                         |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|              |                         | Total |   | $                  | 9,625 |                  |   | $     | 10,647 |      |   | $     | 21,190 |  |   | $     | 20,294 | 
|              |                         |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|By geometry:  |                         |       |   |                    |       |                  |   |       |        |      |   |       |        |  |   |      
|              | 0.18 micron technology  |       |   | 11                 | %     |                  |   | 32    | %      |      |   | 15    | %      |  |   | 26    | %     
|              | 0.13 micron technology  |       |   | 73                 |       |                  |   | 52    |        |      |   | 62    |        |  |   | 57    |       
|              | 90 nanometer technology |       |   | 7                  |       |                  |   | 6     |        |      |   | 14    |        |  |   | 6     |       
|              | Other                   |       |   | 9                  |       |                  |   | 10    |        |      |   | 9     |        |  |   | 11    |       

EMEA is defined as Europe, Middle East and Africa. We have experienced
increased revenues from Asia for the three and six months ended March 31, 2003
over the same period last fiscal year. These results are attributable to our
further enhancement of customer relationships in these regions. Sales to EMEA
are lower as compared to the same period last year due to the continued effect
of the semiconductor industry downturn. Sales for our 0.13 micron technology
as a percentage of total revenues has increased over the prior quarter as more
customers continue to migrate toward that process geometry, while postponing
purchasing decisions on the 90-nanometer technology. During the quarter, we entered into two
key royalty-bearing contracts with Chartered Semiconductors and NEC
Electronics Corporation on the 0.13 micron technology. Revenue
comprised of sales to 26 existing and eight new customers. Royalty revenues totaled $1.1 million for the
six months ended March 31, 2003, up from $761,000 the same period last fiscal
year. Royalty revenues totaled
$579,000 for the three months ended March 31, 2003, up from $408,000 for the
same period last fiscal year. During the quarter, we signed four new direct royalty
agreements for the STAR Memory System, bringing the total number of
STAR Memory System licensees to over 45.

Cost
of Revenues.Cost of revenues consists primarily of personnel
expenses and the allocation of facilities and equipment expenses.
Cost of revenues remained fairly flat at $2.2 million for the
three months ended March 31, 2003 and 2002. Cost of revenues
increased 19% to $4.9 million for the six months ended
March 31, 2003 from $4.1 million for the same period last
fiscal year. This increase is primarily due to the lower than
expected sales volume and certain fixed costs. Continuing efforts are
being made to redeploy engineering capacity to certain research and
development activities to offset the impact of lower than expected
sales. 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
$86,000 and $172,000 of amortization of stock-based compensation for
three months ended March 31, 2003 and 2002, respectively, and
$218,000 and $367,000 for the six months ended March 31, 2003
and 2002, respectively.

Research and Development Expense.Research and development expense
primarily includes personnel expense, software license and maintenance fees,
and depreciation related to capital spending. Research and development expense
increased 66% to $5.0

18



---



##### Table of Contents



million for the three months ended March 31, 2003 from
$3.0 million for the same period last fiscal year. Research and development
expense increased 64% to $9.7 million for the six months ended March 31, 2003
from $5.9 million for the same period last fiscal year. The increase in
research and development expense was primarily due to the increase in the
number of employees involved in research and development for the 90-nanometer
technology, continued efforts to add product variations for the 0.13 micron
technology, NOVeA embedded memory technologies, and ASAP Logic product
offerings. Research and development expense as a percentage of revenues
increased to 52% for the three months ended March 31, 2003, as compared to 28%
for the same period last fiscal year. Research and development expense as a
percentage of revenues increased to 46% for the six months ended March 31,
2003, as compared to 29% for the same period last fiscal year. This increase
is due to the redeployment of engineering capacity from cost of revenue
activities to research and development, increases in headcount and related
expenses of $1.1 million and increases in software license and maintenance fees
of $409,000 for software technology used in the development of our products.
Research and development expense excludes $193,000 and $239,000 of amortization
of stock-based compensation for the three months ended March 31, 2003 and 2002,
respectively, and $423,000 and $526,000 for the six months ended March 31, 2003
and 2002, respectively.

Sales and Marketing Expense.Sales and marketing expense consists
primarily of personnel expenses, commissions, advertising and promotion related
costs. Sales and marketing expense increased 8% to $2.9 million for the three
months ended March 31, 2003 from $2.7 million for the same period last fiscal
year. Sales and marketing expense increased 15% to $6.0 million for the six
months ended March 31, 2003 from $5.2 million for the same period last fiscal
year. Sales and marketing expense as a percentage of revenues increased to 30%
for the three months ended March 31, 2003, as compared to 26% for the same
period last fiscal year. Sales and marketing expense as a percentage of
revenues increased to 28% for the six months ended March 31, 2003, as compared
to 26% for the same period last fiscal year. The increase in sales and
marketing expense was due to the increase in headcount and related expenses of
$211,000. 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 $112,000 and
$214,000 of amortization of stock-based compensation for the three months ended
March 31, 2003 and 2002, respectively, and $266,000 and $468,000 for the six
months ended March 31, 2003 and 2002, respectively

General and Administrative Expense.General and administrative expense
consists primarily of personnel and other costs associated with the management
of our business. General and administrative expense increased by 18% to $1.3
million for the three months ended March 31, 2003 from $1.1 million for the
same period last fiscal year. General and administrative expense increased by
17% to $2.5 million for the six months ended March 31, 2003 from $2.1 million
for the same period last fiscal year. General and administrative expense as a
percentage of revenues increased to 14% for the three months ended March 31,
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 six
months ended March 31, 2003, as compared to 11% for the same period last fiscal
year. The increase in general and administrative expense was primarily due to
increased professional service costs of $190,000, principally for legal
advisory and accounting services and increased patent amortization costs of
$42,000. General and administrative expense

19



---



##### Table of Contents



excludes $50,000 and $87,000 of
amortization of stock-based compensation for the three months ended March 31,
2003 and 2002, respectively, and $109,000 and $191,000 for the six months ended
March 31, 2003 and 2002.

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 $319,000 for the period ended March 31, 2003 and
$3.3 million for the period ended 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 $3.0 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, $1.0 million
and $1.6 million during the six months ended March 31, 2003 and 2002,
respectively.

Interest Income and Other Expenses.Interest income and other, net
decreased $121,000 or 47%, to $139,000 for the three months ended March 31,
2003 as compared to $260,000 for three months ended March 31, 2002. For the
six months ended March 31, 2003, interest income and other, net decreased
$310,000, or 44%, to $388,000 as compared to $698,000 for the six months ended
March 31, 2003. This decrease was due to a continuing decline in interest
rates.

Income Tax Provision.An income tax benefit of $611,000 was recorded on a
pre-tax loss of $2.2 million, yielding an effective tax rate of (28%) for the
three months ended March 31, 2003. An income tax provision of $659,000 was
recorded on a pre-tax income of $1.2 million, yielding an effective tax rate of
56% for the three months ended March 31, 2002. An income tax benefit of
$535,000 was recorded on a pre-tax loss of $2.5 million, yielding an effective
tax rate of (22%) for the six months ended March 31, 2003. An income tax
provision of $1,274,000 was recorded on a pre-tax income of $2.1 million,
yielding an effective income tax rate of 60% for the six months ended March 31,
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
approximately 60% for the periods ended March 31, 2002 to a tax
benefit of approximately 25% for the periods ended March 31,
2003 is due primarily to the shift from a pre-tax profit to a loss
position and also to the reduced amount of stock-based compensation
recorded in the 2003 periods consistent with the graded-vesting
method of amortization.

Liquidity and Capital Resources

As of March 31, 2003, the Company had $58.9 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 $2.6 million for the first
six months of fiscal 2003. Net cash provided by operating activities resulted
from a decrease in accounts receivable of $4.1 million resulting from lower
revenues and improved collections, non-cash charges associated with the
amortization of stock-based compensation of $1.0 million and depreciation and
amortization of $1.7 million, offset by a net loss of $2.0 million and a
decrease in income taxes payable of $2.0 million due to the current taxable net
loss position.

20



---



##### Table of Contents



Net cash provided by investing activities was $270,000 for the first six
months of fiscal 2003. Net cash provided by investing activities was due to
the maturity of government security investments of $27.9 million, offset by the
purchase of government security investments of $24.0 million, acquisitions of
property and equipment or $3.2 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 $576,000 for the first six
months of fiscal 2003. Net cash provided by financing activities was due to
proceeds from the issuance of common stock of $634,000 offset by principal
payments on capital lease obligations of $58,000.

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 June 2003. At March 31, 2003, $38,000 was outstanding
under these lines. There is no remaining availability under these capital lease
lines.

The following table summarizes our contractual obligations as of March 31,
2003 (Less than 1 year amounts are for April 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   |  | $     | 4,524 |        |  | $         | 482   |       |  | $     | 1,759 |         |  | $ | 1,756 |  |  | $ | 527 | 
|Capital lease obligations     |  |       | 38    |        |  |           | 38    |       |  |       |      |         |  |   |      |  |  |   |    | 
|Building purchase             |  |       | 351   |        |  |           | 351   |       |  |       |      |         |  |   |      |  |  |   |    | 
|Other contractual obligations |  |       | 1,000 |        |  |           | 500   |       |  |       | 500   |         |  |   |      |  |  |   |    | 
|                              |  |       |       |        |  |           |       |       |  |       |       |         |  |   |       |  |  |   |     | 
|Total contractual obligations |  | $     | 5,913 |        |  | $         | 1,371 |       |  | $     | 2,259 |         |  | $ | 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 $1.7 million of which the Company has paid
approximately $1.4 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.

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

21



---



##### Table of Contents



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:



| |  |  | large orders unevenly spaced over time;                                                   
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | establishment or loss of strategic relationships with third-party
semiconductor foundries;

22



---



##### Table of Contents





| |  |  | 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.

We currently have subsidiaries in Israel, Germany and Japan, and we expect
to continue expanding our direct sales force in those countries. 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
23Table of Contents

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 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), and Tower Semiconductor
(Tower). 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

24



---



##### Table of Contents



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 embedded
memories 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 the U.S. economy has yet to rise out of an economic slowdown that involves
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 52% of our
revenues for the six month period ended March 31, 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 that may be outside of North
America. Accordingly, our operations and revenues are subject to a number of
risks associated with doing business in international markets, including the
following:



| |  |  | managing foreign distributors and sales partners and sharing revenues
with such third parties;
| | - |  | ----------------------------------------------------------------------------------------------
|
| |  |  | staffing and managing foreign branch offices and subsidiaries;                                

25



---



##### Table of Contents





| |  |  | 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.    

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.

26



---



##### Table of Contents



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 March 31,
2003 and 2002, we recorded approximately $579,000 and $408,000, respectively,
of royalty revenues. For the six months ended March 31, 2003 and 2002, we
recorded approximately $1.1 million and $761,000, respectively, of royalty
revenues. 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. 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.

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 March 31, 2003, Agere Systems and Chartered Semiconductor each accounted
for 12% of our revenues, and NEC

27



---



##### Table of Contents



Electronics Corporation accounted for 10% of
our revenues. For the six months ended
March 31, 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 the length of our relationship with any of our significant customers.
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 embedded memory is highly competitive, and we may lose market
share to larger competitors with greater resources and to companies that
develop their own memory technologies 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, 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

28



---



##### Table of Contents



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.

During the quarter ended March 31, 2003, we recorded a net loss of $1.6
million. For the six months ended March 31, 2003, we recorded a net loss of
$2.0 million. In fiscal year 2002, we recorded our first profitable year of
operations. The two most recent quarters loss was due principally to below
target revenues recorded after certain customers deferred purchasing decisions.
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

29



---



##### Table of Contents



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 301 full-time employees at March 31, 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 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.

30



---



##### Table of Contents



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.

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

31



---



##### Table of Contents



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 March 31, 2003, we maintained $38.9 million in cash or
short-term money market mutual funds and held $20.1 million of United States
agency securities with maturities of less than one year. Due to the short-term
nature of our 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 within 90 days
before the filing date of this quarterly report. Based

32



---



##### Table of Contents



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.

33



---



##### 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

We held our Annual Meeting of Stockholders on February 25, 2003. Out of
20,981,759 shares of Common Stock (as of the record date of January 8, 2003)
entitled to vote at the meeting, a total of 18,509,368 shares were represented
at the Annual Meeting. The stockholders approved the following proposals:

(a)     Election of Adam Kablanian, Richard Elkus, Jr. and Michael L.
Hackworth as Class III directors until the 2006 Annual Meeting of Stockholders
and until their successors are elected. The vote for nominated directors was as
follows:

34



---



##### Table of Contents



|                     |  |          |            |          |  |  |         | 
|-------------------- |  | -------- | ---------- | -------- |  |  | ------- | 
|Nominee              |  | In Favor |            | Withheld
|                     |  |          |            |         
|Adam Kablanian       |  |          | 18,076,676 |          |  |  | 432,692 | 
|Richard Elkus, Jr.   |  |          | 17,905,486 |          |  |  | 603,882 | 
|Michael L. Hackworth |  |          | 17,908,586 |          |  |  | 600,782 | 

(b)     Approve the amendment to the Virage Logic Corporation 2002 Equity
Incentive Plan to increase the number of shares reserved under the plan by
950,000 shares. There were 11,542,670 votes in favor, 6,951,871 votes against,
14,827 abstentions and no broker non-votes.

(c)     Ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending September 30, 2003. There
were 18,040,015 votes in favor, 465,253 votes against, 4,100 abstentions and no
broker non-votes.




ITEM 5. Other Information

None




ITEM 6. Exhibits and Reports on
Form 8-K

(a) Exhibits:



|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|    
|99.2 |  | 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 filed a Current Report on a Form 8-K on February 18, 2003 in
connection with the filing by Virage Logic of a registration statement on
Form S-3 for the resale of 77,500 shares of Common Stock and in order to
comply with Article 11 of Regulation S-X.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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.                                                                                                                    

35



---



##### Table of Contents






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: May 15, 2003 |  | VIRAGE LOGIC CORPORATION

| |  |                                    
| |  | -----------------------------------
| |  | /s/  Adam A. Kablanian             
| |  |                                    
| |  | ADAM A. KABLANIAN                  
| |  | President, Chief Executive Officer 
| |  | and Chairman of the Board          
| |  |                                    
| |  | /s/  James R. Pekarsky             
| |  |                                    
| |  | JAMES R. PEKARSKY                  
| |  | Vice President, Finance and Chief  
| |  | Financial Officer                  
| |  | (Principal Financial and Accounting
| |  | Officer)                           

36



---



##### Table of Contents



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

I, Adam A. Kablanian, President and Chief Executive Officer of Virage Logic
Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Virage Logic
Corporation;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| | a) |  | such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                         
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                               



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

37



---



##### Table of Contents





|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

| |                                      
| | -------------------------------------
| | /s/ Adam A. Kablanian                
| |                                      
| | Adam A. Kablanian                    
| | President and Chief Executive Officer

38



---



##### Table of Contents



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

I, James R. Pekarsky, Vice President and Chief Financial Officer of Virage
Logic Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Virage Logic
Corporation;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

39



---



##### Table of Contents





|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

| |  |                                    
| |  | -----------------------------------
| |  | /s/ James R. Pekarsky              
| | 
| |  | James R. Pekarsky                  
| |  | Vice President of Finance and Chief
| |  | Financial Officer                  

40



---



##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Descriptions                                                                                                          
|99.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            |  |                                                                                                                       
|99.2        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002