##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 FOR THE TRANSITION PERIOD FROMTO
 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
    
    (I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)
    
    IDENTIFICATION NO.)
 
 VIRAGE LOGIC CORPORATION
47100 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(510) 360-8000
 þ o
  o þ o
 o þ




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##### 



VIRAGE LOGIC CORPORATION
 FORM 10-Q
 INDEX
 PAGEPart I. Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets  December
31, 2005 and September 30, 2005
    
    3Unaudited Condensed Consolidated Statements of Operations 
Three Months Ended December 31, 2005 and December 31, 2004
    
    4Unaudited Condensed Consolidated Statements of Cash Flows 
Three Months Ended December 31, 2005 and December 31, 2004
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risks
    
    36Item 4.
    
    Controls and Procedures
    
    37Part II. Other InformationqItem 1.
    
    Legal Proceedings
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    38Item 3.
    
    Defaults upon Senior Securities
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    38Item 5.
    
    Other Information
    
    38Item 6.
    
    Exhibits
    
    39Signatures
    
    
    
    40Exhibit IndexEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 December 31,
    
    
    September 30,2005
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    32,121
    
    
    $
    26,841Short-term investments
    
    
    35,118
    
    
    
    34,410Accounts receivable, net
    
    
    13,858
    
    
    
    14,201Costs in excess of related billings on uncompleted contracts
    
    
    408
    
    
    
    896Prepaid expenses and other
    
    
    3,981
    
    
    
    4,517Taxes receivable
    
    
    806
    
    
    
    493Total current assets
    
    
    86,292
    
    
    
    81,358Property, equipment and leasehold improvements, net
    
    
    4,678
    
    
    
    5,093Goodwill
    
    
    9,782
    
    
    
    9,782Other intangible assets, net
    
    
    2,279
    
    
    
    2,375Deferred tax assets
    
    
    10,536
    
    
    
    8,604Long-term investments
    
    
    3,791
    
    
    
    6,587Other long-term assets
    
    
    157
    
    
    
    695Total assets
    
    $
    117,515
    
    
    $
    114,494LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    453
    
    
    $
    770Accrued expenses
    
    
    4,492
    
    
    
    3,623Deferred revenue
    
    
    8,904
    
    
    
    8,440Income taxes payable
    
    
    1,455
    
    
    
    1,441Total current liabilities
    
    
    15,304
    
    
    
    14,274Deferred tax liabilities
    
    
    852
    
    
    
    852Total liabilities
    
    
    16,156
    
    
    
    15,126Stockholders equity:Common stock, $.001 par value;Authorized shares  150,000,000; issued and outstanding
shares
 22,687,779 and 22,547,504 at December 31, 2005 and
September 30, 2005, respectively
    
    
    23
    
    
    
    23Additional paid-in capital
    
    
    122,821
    
    
    
    120,548Accumulated other comprehensive income
    
    
    12
    
    
    
    52Accumulated deficit
    
    
    (21,497
    )
    
    
    (21,255
    )Total stockholders equity
    
    
    101,359
    
    
    
    99,368Total liabilities and stockholders equity
    
    $
    117,515
    
    
    $
    114,494
  3




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##### Table of Contents



VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 Three Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004Revenue:License
    
    $
    10,410
    
    
    $
    13,062Royalties
    
    
    3,315
    
    
    
    2,797Total revenues
    
    
    13,725
    
    
    
    15,859Cost and expenses:Cost of revenue
    
    
    3,715
    
    
    
    3,037Research and development
    
    
    5,628
    
    
    
    4,773Sales and marketing
    
    
    4,260
    
    
    
    3,813General and administrative
    
    
    2,756
    
    
    
    1,934Total cost and expenses
    
    
    16,359
    
    
    
    13,557Operating income (loss)
    
    
    (2,634
    )
    
    
    2,302Interest income and other expenses, net
    
    
    619
    
    
    
    294Income (loss) before income taxes
    
    
    (2,015
    )
    
    
    2,596Income tax provision (benefit)
    
    
    (1,773
    )
    
    
    857Net income (loss)
    
    $
    (242
    )
    
    $
    1,739Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.08Diluted
    
    $
    (0.01
    )
    
    $
    0.08Weighted average shares used in computing per share amounts:Basic
    
    
    22,257
    
    
    
    21,781Diluted
    
    
    22,257
    
    
    
    22,697
  4




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VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (242
    )
    
    $
    1,739Adjustment to reconcile net income (loss) to net cash provided
by operating activities:Provision for doubtful accounts
    
    
    
    
    
    
    200Depreciation and amortization
    
    
    478
    
    
    
    608Amortization of intangible assets
    
    
    96
    
    
    
    97Stock-based compensation
    
    
    1,729
    
    
    
    Loss on disposal of fixed assets
    
    
    10
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    343
    
    
    
    582Costs in excess of related billings on uncompleted contracts
    
    
    536
    
    
    
    (155
    )Prepaid expenses and other assets
    
    
    536
    
    
    
    (1,393
    )Taxes receivable
    
    
    (313
    )
    
    
    (2
    )Deferred tax assets
    
    
    (1,932
    )
    
    
    Other long-term assets
    
    
    538
    
    
    
    Accounts payable and accrued liabilities
    
    
    552
    
    
    
    1,381Deferred revenue
    
    
    464
    
    
    
    (1,842
    )Income tax payable
    
    
    14
    
    
    
    75Net cash provided by operating activities
    
    
    2,809
    
    
    
    1,290CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (137
    )
    
    
    (426
    )Purchase of investments
    
    
    (4,997
    )
    
    
    (17,959
    )Proceeds from maturities of investments
    
    
    7,099
    
    
    
    14,590Net cash provided by (used in) investing activities
    
    
    1,965
    
    
    
    (3,795
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    496
    
    
    
    2,513Net cash provided by financing activities
    
    
    496
    
    
    
    2,513Effect of exchange rates on cash
    
    
    10
    
    
    
    109Net increase in cash and cash equivalents
    
    
    5,280
    
    
    
    117Cash and cash equivalents at beginning of period
    
    
    26,841
    
    
    
    28,746Cash and cash equivalents at end of period
    
    $
    32,121
    
    
    $
    28,863
  5




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VIRAGE LOGIC CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Description of Business
  Basis of Presentation and Principles of Consolidation
   Amendments
of Statement of Cash Flow Disclosures
  Foreign Currency Translation
  Use of Estimates
  6




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VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Revenue Recognition
 Software Revenue Recognition Accounting for Performance of Construction-Type
and Certain Production-Type Contracts
      7




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Stock-Based Compensation
    8




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three MonthsEndedDecember 31,2004Net income as reported
    
    $
    1,739Less: Fair value of stock-based compensation expense for
all awards, net of taxes
    
    
    (484
    )Proforma net income
    
    $
    1,255Basic net income per share:As reported
    
    $
    0.08Proforma
    
    $
    0.06Diluted net income per share:As reported
    
    $
    0.08Proforma
    
    $
    0.06Weighted average shares used in computing per share amounts:Basic
    
    
    21,781Diluted
    
    
    22,697
   Three Months EndedDecember 31, 2005UsingPrevious
    
    
    SFAS 123R
    
    
    AsAccounting
    
    
    Adjustments
    
    
    ReportedLoss from operations
    
    $
    (905
    )
    
    $
    (1,729
    )
    
    $
    (2,634
    )Loss before income taxes
    
    
    (286
    )
    
    
    (1,729
    )
    
    
    (2,015
    )Net income (loss)
    
    
    1,170
    
    
    
    (1,412
    )
    
    
    (242
    )Basic earnings per share
    
    
    0.05
    
    
    
    (0.06
    )
    
    
    (0.01
    )Diluted earnings per share
    
    
    0.05
    
    
    
    (0.06
    )
    
    
    (0.01
    )


9



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VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three MonthsEndedDecember 31,2005Cost of revenue
    
    $
    263Research and development
    
    
    580Sales and marketing
    
    
    503General and administrative
    
    
    383Stock-based compensation expense
    
    
    1,729Related income tax benefits
    
    
    (317
    )Stock-based
compensation expense, net of taxes benefits
    
    $
    1,412Net stock-based compensation expense, per common share:Basic
    
    $
    0.06Diluted
    
    $
    0.06
   Three Months EndedDecember 31,
    
    December 31,2005
    
    2004Volatility
    
    
    70.9
    %
    
    
    78.9
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    3.3
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    4.3 years
    
    6.5 years
  10




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Equity Incentive Plans
   Shares
    
    
    Number of
    
    
    WeightedAvailable
    
    
    Options
    
    
    Averagefor Grant
    
    
    Outstanding
    
    
    Exercise PriceBalance at September 30, 2003
    
    
    1,057,532
    
    
    
    5,507,916
    
    
    $
    10.16Additional options authorized
    
    
    1,050,000
    
    
    
    
    
    
    
    Options granted
    
    
    (1,338,750
    )
    
    
    1,338,750
    
    
    $
    9.25Options exercised
    
    
    
    
    
    
    (216,636
    )
    
    $
    3.79Options canceled
    
    
    605,739
    
    
    
    (605,739
    )
    
    $
    12.14Balance at September 30, 2004
    
    
    1,374,521
    
    
    
    6,024,291
    
    
    $
    9.99Additional options authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Options granted
    
    
    (1,159,059
    )
    
    
    1,159,059
    
    
    $
    10.38Options exercised
    
    
    
    
    
    
    (705,610
    )
    
    $
    6.03Options canceled
    
    
    773,070
    
    
    
    (773,070
    )
    
    $
    12.61Balance at September 30, 2005
    
    
    1,988,532
    
    
    
    5,704,670
    
    
    $
    10.12Additional options authorized
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (266,913
    )
    
    
    266,913
    
    
    $
    7.57Options exercised
    
    
    
    
    
    
    (140,275
    )
    
    $
    3.53Options canceled
    
    
    127,061
    
    
    
    (127,061
    )
    
    $
    13.22Balance at December 31, 2005
    
    
    1,848,680
    
    
    
    5,704,247
    
    
    $
    10.10
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    
    
    
    
    AggregateRemaining
    
    
    Weighted
    
    
    Intrinsic
    
    
    
    
    
    
    Weighted
    
    
    IntrinsicNumber
    
    
    Contractual
    
    
    Average
    
    
    Value
    
    
    Number
    
    
    Average
    
    
    ValueRange of Exercise
    
    of
    
    
    Life
    
    
    Exercise
    
    
    (in
    
    
    of
    
    
    Exercise
    
    
    (inPrices
    
    Shares
    
    
    (In years)
    
    
    Price
    
    
    thousands)
    
    
    Shares
    
    
    Price
    
    
    thousands)$  0.13 - $  5.61
    
    
    913,698
    
    
    
    5.65
    
    
    $
    3.80
    
    
    $
    5,558
    
    
    
    688,776
    
    
    $
    3.24
    
    
    $
    4,570$  5.62
- $  7.48
    
    
    406,334
    
    
    
    8.66
    
    
    $
    7.14
    
    
    $
    1,112
    
    
    
    96,881
    
    
    $
    6.41
    
    
    $
    336$  7.63
- $  7.81
    
    
    574,124
    
    
    
    9.66
    
    
    $
    7.81
    
    
    $
    1,190
    
    
    
    104
    
    
    $
    7.75
    
    
    $
    0$  7.84
-
$  8.74
    
    
    595,263
    
    
    
    8.44
    
    
    $
    8.59
    
    
    $
    770
    
    
    
    256,406
    
    
    $
    8.65
    
    
    $
    316$  8.94
-
$  9.95
    
    
    806,406
    
    
    
    8.18
    
    
    $
    9.42
    
    
    $
    387
    
    
    
    276,155
    
    
    $
    9.49
    
    
    $
    114$  9.96
- $11.62
    
    
    638,614
    
    
    
    7.27
    
    
    $
    10.76
    
    
    $
    
    
    
    
    430,074
    
    
    $
    10.81
    
    
    $
    $11.64 - $14.97
    
    
    581,834
    
    
    
    6.51
    
    
    $
    13.47
    
    
    $
    
    
    
    
    476,635
    
    
    $
    13.52
    
    
    $
    $15.01 - $16.11
    
    
    843,924
    
    
    
    6.24
    
    
    $
    15.90
    
    
    $
    
    
    
    
    680,093
    
    
    $
    15.90
    
    
    $
    $16.56 - $22.37
    
    
    343,800
    
    
    
    6.59
    
    
    $
    17.15
    
    
    $
    
    
    
    
    251,163
    
    
    $
    17.16
    
    
    $
    $22.81 - $22.81
    
    
    250
    
    
    
    6.03
    
    
    $
    22.81
    
    
    $
    
    
    
    
    196
    
    
    $
    22.81
    
    
    $
    Total
    
    
    5,704,247
    
    
    
    7.33
    
    
    $
    10.10
    
    
    $
    9,017
    
    
    
    3,156,483
    
    
    $
    11.38
    
    
    $
    5,336
  11




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Stock OptionsWeighted-Number of
    
    
    average grant-shares
    
    
    date fair valueNonvested at September 30, 2005
    
    
    2,862,825
    
    
    $
    6.33Awards granted
    
    
    266,913
    
    
    $
    3.18Awards vested
    
    
    (139,183
    )
    
    $
    4.60Awards canceled/expired/forfeited
    
    
    (127,061
    )
    
    $
    4.99Nonvested at December 31, 2005
    
    
    2,863,494
    
    
    $
    5.86
 12




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2  NET INCOME (LOSS) PER SHARE
 Earnings Per Share
  Three Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004Basic income (loss) per share:Net income (loss)
    
    $
    (242
    )
    
    $
    1,739Shares used in computation:Weighted average common shares outstanding
    
    
    22,257
    
    
    
    21,956Less: Weighted average number of common shares subject to
repurchase
    
    
    
    
    
    
    (175
    )Shares used in computing basic net income (loss ) per share
    
    
    22,257
    
    
    
    21,781Add:Weighted average share equivalents from stock options
    
    
    
    
    
    
    916Shares used in computing diluted net income (loss) per share
    
    
    22,257
    
    
    
    22,697Basic net income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.08Diluted net income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.08
   NOTE 3  COMPREHENSIVE INCOME (LOSS)
 Reporting Comprehensive Income
 13




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VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004Net income (loss)
    
    $
    (242
    )
    
    $
    1,739Foreign currency translation adjustments, net of tax
    
    
    (33
    )
    
    
    62Changes in
unrealized gain (loss) on investments, net of tax
    
    
    9
    
    
    
    (25
    )Comprehensive income (loss)
    
    $
    (266
    )
    
    $
    1,776
 NOTE 4  SEGMENT INFORMATION
     Three Months EndedDecember 31,
    
    
    December 31,Total Revenue by Geography
    
    2005
    
    
    2004(in thousands)United States
    
    $
    5,274
    
    
    $
    4,728Canada
    
    
    806
    
    
    
    466Japan
    
    
    921
    
    
    
    1,738Taiwan
    
    
    2,998
    
    
    
    3,003Europe, Middle East and Africa (EMEA)
    
    
    1,381
    
    
    
    3,057Other Asia (China, Malaysia, Korea and Singapore)
    
    
    2,345
    
    
    
    2,867Total
    
    $
    13,725
    
    
    $
    15,859
 14




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedDecember 31,
    
    
    December 31,Total License Revenues by Process Node
    
    2005
    
    
    200465 Nanometer Technology
    
    
    6
    %
    
    
    3
    %90 Nanometer Technology
    
    
    44
    
    
    
    250.13 Micron Technology
    
    
    29
    
    
    
    510.18 Micron Technology
    
    
    19
    
    
    
    12Other
    
    
    2
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
   NOTE 5  RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting
Changes and Error Corrections  A Replacement of APB Opinion No. 20 and SFAS No. 3
  NOTE 6  COMMITMENTS AND CONTINGENCIES
 Indemnifications
 15




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##### Table of Contents



VIRAGE LOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Warranties
  16




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
 Business Environment
      17




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##### Table of Contents



Sources of Revenues
  
    
    embedded memory, logic and I/O elements;
    
    standard and custom memory compilers;
    
    memory test processor and fuse box components for embedded test and repair of defective memory cells.
       Critical Accounting Policies and Estimates
  18




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##### Table of Contents




    
    stock-based compensation
    
    revenue recognition
    
    valuation of accounts receivable
    
    valuation of purchased intangibles, including goodwill
    
    income taxes.
 Stock-based compensation
        19




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##### Table of Contents



Revenue Recognition
 Software Revenue Recognition Accounting for Performance of Construction-Type
and Certain Production-Type Contracts
    20




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##### Table of Contents



Valuation of Accounts Receivable
  Valuation of Purchased Intangibles, Including Goodwill
  Income taxes
  21




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##### Table of Contents



RESULTS OF OPERATIONS  THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
 Three Months EndedDecember 31,
    
    December 31,2005
    
    2004Revenue:License
    
    
    75.8
    %
    
    
    82.4
    %Royalties
    
    
    24.2
    
    
    
    17.6Total revenues
    
    
    100.0
    
    
    
    100.0Cost and expenses:Cost of revenue
    
    
    27.1
    
    
    
    19.2Research and development
    
    
    41.0
    
    
    
    30.1Sales and marketing
    
    
    31.0
    
    
    
    24.0General and administrative
    
    
    20.1
    
    
    
    12.2Total cost and expenses
    
    
    119.2
    
    
    
    85.5Operating income (loss)
    
    
    (19.2
    )
    
    
    14.5Interest income and other expense, net
    
    
    4.5
    
    
    
    1.9Income (loss) before income tax provision
    
    
    (14.7
    )
    
    
    16.4Income tax provision (benefit)
    
    
    (12.9
    )
    
    
    5.4Net income (loss)
    
    
    (1.8
    )%
    
    
    11.0
    %
 Revenues
   Three Months EndedDecember 31,
    
    December 31,Total License Revenues by Process Node
    
    2005
    
    200465 Nanometer Technology
    
    
    6
    %
    
    
    3
    %90 Nanometer Technology
    
    
    44
    
    
    
    250.13 Micron Technology
    
    
    29
    
    
    
    510.18 Micron Technology
    
    
    19
    
    
    
    12Other
    
    
    2
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
  22




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Three Months EndedDecember 31,
    
    
    December 31,Total Revenues by Geography
    
    2005
    
    
    2004(in thousands)United States
    
    $
    5,274
    
    
    $
    4,728Canada
    
    
    806
    
    
    
    466Japan
    
    
    921
    
    
    
    1,738Taiwan
    
    
    2,998
    
    
    
    3,003Europe, Middle East and Africa (EMEA)
    
    
    1,381
    
    
    
    3,057Other Asia (China, Malaysia, Korea and Singapore)
    
    
    2,345
    
    
    
    2,867Total
    
    $
    13,725
    
    
    $
    15,859
  Cost of Revenue
  Research and Development Expenses
  Sales and Marketing Expenses
  23




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General and Administrative Expenses
  Interest Income and Other Expenses
  Income Taxes Provision
  LIQUIDITY AND CAPITAL RESOURCES
     24




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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Less Than
    
    1-3
    
    4-5
    
    AfterContractual Obligations
    
    Total
    
    1 Year
    
    1 Year
    
    Years
    
    5 YearsOperating lease obligations
    
    $
    4,377
    (1)
    
    $
    1,373
    
    
    $
    2,344
    
    
    $
    645
    
    
    $
    15Purchase obligations
    
    
    6,039
    (2)
    
    
    3,002
    
    
    
    1,315
    
    
    
    861
    
    
    
    861Total operating lease and
purchase obligations
    
    $
    10,416
    
    
    $
    4,375
    
    
    $
    3,659
    
    
    $
    1,506
    
    
    $
    876
 
 (1)
    
    Includes $1.1 million payable under the lease agreement for our corporate office lease in
Fremont, California, which was extended through fiscal year 2006.(2)
    
    Reflects amounts payable under contracts primarily for product development software licenses
and maintenance.The Company has no off-balance-sheet financing arrangements other than operating leases. 25




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RISK FACTORS
 Risks Related to Our Business
 Inability or delayed execution on our strategy to be a leading provider of
semiconductor IP platforms could adversely affect our revenues and
profitability.
  
    
    Difficulty convincing customers of our memory products to purchase other products from us;
    
    Competition resulting in minority market share;
    
    Inability to migrate technologies to manufacturing processes at new foundries due to less design experience;
    
    Limited experience in sales and marketing of the platform strategy and limited knowledge of the market; and
    
    Difficulties and delays in expanding our logic and I/O product offerings.
 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.
  
    
    large orders unevenly spaced over time and timing of our sales cycle;
    
    establishment or loss of strategic relationships with third-party semiconductor foundries;
    
    pace of adoption of new technologies by customers;
    
    timing of new technologies and technology enhancements by us and our competitors;
    
    fluctuations in the demand for products that incorporate our IP;
    
    constrained or deferred spending decisions by customers;
    
    inability to collect trade receivables;
    
    the timing and completion of milestones under customer agreements;
    
    operational issues in fulfilling existing orders;
    
    the impact of competition on license revenues or royalty rates;
    
    the cyclical nature of the semiconductor industry and the general economic environment;
    
    difficulties in forecasting royalty revenues because of factors out of our control, such
as the timing of
 26




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manufacturing of semiconductors subject to royalty obligations, the
number of such semiconductors actually manufactured and the timing and results of audits
of royalty reports received from our customers;
 
    
    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.
  If we are unable to continue establishing relationships on favorable
contractual terms with semiconductor companies to license our IP, our business
will be harmed.
   
    
    the lengthy and expensive process of building a relationship with a potential licensee;
    
    competition with the customers internal design teams and other providers of
semiconductor IP, as our customers may evaluate these alternatives for each design;
and
    
    the need to persuade potential licensees to rely on us for critical technology.
  If we are unable to maintain existing relationships and/or develop new
relationships with third-party semiconductor manufacturers, or foundries, we
will be unable to verify our technologies on their processes and license our IP
to them or their customers.
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If we are unsuccessful in increasing our royalty revenues, our revenues and
profitability may not be as large as we anticipate.
  It is difficult for us to verify royalty amounts owed to us under our licensing
arrangements, and this may cause us to lose revenues or inaccurately report
revenues.
  Products that do not meet customer specifications or contain defects that harm
our customers could damage our reputation and cause us to lose customers and
revenue.
  Our international operations may be adversely affected by instability in the countries in which we operate.
  28




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
    
    changes in the political or economic conditions in Armenia and India
and the surrounding region, such as fluctuations in exchange rates,
changes in laws protecting IP, the imposition of currency transfer
restrictions or limitations, or the adoption of burdensome trade or
tax policies, procedures, rules, regulations or tariffs, could
adversely affect our ability to develop new products, to take
advantage of the cost savings associated with operations in Armenia
and India, and to otherwise conduct business effectively in Armenia
and India;
    
    our ability to continue conducting business in Israel and other
countries in the normal course may be adversely affected by increased
risk of social and political instability and our employees working and
visiting in Israel may be affected by terrorist attacks;
    
    our Israeli customers demand for our products may be adversely
affected because of negative economic consequences associated with
reduced levels of safety and security in Israel.
 Problems associated with international business operations could affect our ability to license our IP.
  
    
    managing foreign distributors and sales partners and sharing revenues with such third parties;
    
    staffing and managing foreign branch offices and subsidiaries;
    
    political and economic instability;
    
    greater difficulty in collecting account receivables resulting in longer collection periods;
    
    foreign currency exchange fluctuations;
    
    changes in tax laws and tariffs;
    
    compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory
environments with which we are not familiar;
    
    timing and availability of export licenses;
    
    inadequate protection of IP rights in some countries; and
    
    obtaining governmental approvals for certain technologies.
  29




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We have a long and unpredictable sales cycle, which can result in uncertainty
and delays in generating additional revenues.
  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 may have difficulty returning to profitability and may experience additional losses in the
future.
  We may be unable to deliver our customized memory, logic and I/O products in
the time-frame demanded by our customers, which could damage our reputation and
future sales.
  We may be unable to attract and retain key personnel who are critical to the success of our business.
  30




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We may need additional capital that may not be available to us and, if raised,
may dilute our stockholders ownership interest in us.
  If we are unable to effectively manage our growth, our business may be harmed.
   31




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Risks Related to Our Industry
 If demand for products incorporating complex semiconductors and semiconductor
IP platforms does not increase, our business may be harmed.
   The market for semiconductor IP platforms is highly competitive, and we may
lose market share to larger competitors with greater resources and to companies
that develop their semiconductor IP platforms using internal design teams.
   The technology used in the semiconductor industry is rapidly changing and if we
are unable to develop new technologies and adapt our existing IP to new
processes, we will be unable to attract or retain customers.
  32




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##### Table of Contents




    
    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 or
may delay use of a new technology after we have invested a significant
amount of resources to develop it; and
    
    new technologies introduced by our competitors.
   General economic conditions and future terrorist attacks may reduce our revenues and harm our business.
  Risk Related to Our Intellectual Property Rights
 If we are not able to protect our IP adequately, we will have less proprietary
technology to license, which will reduce our revenues and profits.
  33




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##### Table of Contents



Third parties may claim we are infringing or assisting others to infringe their
IP rights, and we could suffer significant litigation or licensing expenses or
be prevented from licensing our technology.
   Risks Related to Our Stock
 Our stock price may be volatile and could decline substantially.
  
    
    variations between our operating results and the published expectations of securities analysts;
    
    changes in financial estimates or investment recommendations by securities analysts following
our business;
    
    announcements by us or our competitors of significant contracts, new products or services,
acquisitions, or other significant transactions;
    
    sale of our common stock or other securities in the future;
    
    the inclusion or exclusion of our stock in various indices or investment categories,
especially as compared to the investment profiles of our stockholders at a given time;
    
    changes in economic and capital market conditions;
    
    changes in business regulatory conditions; and
    
    the trading volume of our common stock.
 34




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##### Table of Contents



We determined that we had material weaknesses in our internal control over financial reporting as
of September 30, 2005. These material weaknesses could result in a loss of investor confidence in
our financial reports and have an adverse impact on our stock price.
    Changes in financial accounting standards related to stock-based compensation are expected to
continue to have a significant effect on our reported results.
  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.
  35




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Our certificate of incorporation and bylaws as well as Delaware law contain
provisions that could discourage transactions resulting in a change in control,
which may negatively affect the market price of our common stock.
  
    
    our board of directors is authorized, without prior stockholder approval, to create and issue preferred
stock, commonly referred to as blank check preferred stock, with rights senior to those of common
stock;
    
    our board of directors is staggered into 3 classes, only one of which is elected at each annual meeting;
    
    stockholder action by written consent is prohibited;
    
    nominations for election to our board of directors and the submission of matters to be acted upon by
stockholders at a meeting are subject to advance notice requirements;
    
    certain provisions in our bylaws and certificate may only be amended with the approval of stockholders
holding 80% of our outstanding voting stock;
    
    the ability of our stockholders to call special meetings of stockholders is prohibited; and
    
    our board of directors is expressly authorized to make, alter or repeal our bylaws.
  Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
   36




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ITEM 4. CONTROLS AND PROCEDURES
      :
 
    
    Hiring of additional personnel, permitting enhanced segregation of duties and additional review;
    
    Additional training of staff;
    
    Identification of procedural improvements in our accounting processes;
    
    Enhancement of standardized control procedures and independent
recalculations from the ERP system for foreign exchange translation, and
implementation of redundant review controls related to the translation of
foreign currencies which are performed by an individual independent of
the preparer and initial reviewer;
    
    Engagement of another third-party firm to review the income tax provision;
    
    Expansion of standardized control procedure and checklists for quarterly
control procedures related to the preparation and review of the
statements of cash flows preparation.
 37




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##### Table of Contents



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 SECURITIES HOLDERS
  
 ITEM 5. OTHER INFORMATION
  38




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Exhibits31.1
    
    Certification Pursuant to Rule 15d-14 of the Securities and
Exchange Act as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 15d-14 of the Securities and
Exchange Act as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 39




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SIGNATURES
  Date: February 9, 2006
    VIRAGE LOGIC CORPORATION/s/ Adam KablanianADAM A. KABLANIANPresident and Chief Executive Officer /s/ Jens MeyerhoffJENS MEYERHOFFChief Financial Officer
(Principal Financial and Accounting Officer) 40




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EXHIBIT INDEX
 31.1
    
    Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    Certification Pursuant to Rule 15d-14 of the Securities and Exchange
Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002