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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM
TO

COMMISSION FILE NUMBER: 000-31089



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VIRAGE LOGIC
CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 77-0416232                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)

VIRAGE LOGIC CORPORATION

47100 BAYSIDE PARKWAY

FREMONT, CALIFORNIA 94538

(510) 360-8000

(ADDRESS, INCLUDING
ZIP CODE AND TELEPHONE NUMBER,

INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICE)



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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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ̈No  x

As of May 7, 2007, there were 23,136,600 shares of the Registrants Common Stock outstanding.



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##### Table of Contents

VIRAGE LOGIC CORPORATION

FORM 10-Q

I
NDEX



|              |  |                                                                                                                          |  |     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|              |  |                                                                                                                          |  | PAGE
|              |  | Part I. Financial Information                                                                                            |  |     
|              |  |                                                                                                                         
|Item 1.       |  | Financial Statements                                                                                                     |  |     
|              |  |                                                                                                                         
|              |  | Unaudited Condensed Consolidated Balance Sheets  March 31, 2007 and September 30, 2006                                  |  | 3   
|              |  |                                                                                                                         
|              |  | Unaudited Condensed Consolidated Statements of Operations  Three and Six Months Ended March 31, 2007 and March 31, 2006 |  | 4   
|              |  |                                                                                                                         
|              |  | Unaudited Condensed Consolidated Statements of Cash Flows  Six Months Ended March 31, 2007 and March 31, 2006           |  | 5   
|              |  |                                                                                                                         
|              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                           |  | 6   
|              |  |                                                                                                                         
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 14  
|              |  |                                                                                                                         
|Item 3.       |  | Quantitative and Qualitative Disclosures about Market Risks                                                              |  | 23  
|              |  |                                                                                                                         
|Item 4.       |  | Controls and Procedures                                                                                                  |  | 24  
|              |  |                                                                                                                         
|              |  | Part II. Other Information                                                                                               |  |     
|              |  |                                                                                                                         
|Item 1.       |  | Legal Proceedings                                                                                                        |  | 24  
|              |  |                                                                                                                         
|Item 1A.      |  | Risk Factors                                                                                                             |  | 24  
|              |  |                                                                                                                         
|Item 2.       |  | Unregistered Sale of Equity Securities and Use of Proceeds                                                               |  | 32  
|              |  |                                                                                                                         
|Item 3.       |  | Defaults upon Senior Securities                                                                                          |  | 32  
|              |  |                                                                                                                         
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                                      |  | 33  
|              |  |                                                                                                                         
|Item 5.       |  | Other Information                                                                                                        |  | 33  
|              |  |                                                                                                                         
|Item 6.       |  | Exhibits                                                                                                                 |  | 33  
|              | 
|Signatures    |  | 34                                                                                                                      
|              | 
|Exhibit Index |  | 35                                                                                                                      



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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)



|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                    |  | March 31,2007 |         |   | September 30,2006 |  
|ASSETS:                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                     |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                           |  | $             | 6,246   |   |                   | $ | 20,815  |  
|Short-term investments                                                                                                                                                              |  |               | 54,181  |   |                   |   | 49,253  |  
|Accounts receivable, net                                                                                                                                                            |  |               | 11,849  |   |                   |   | 15,935  |  
|Costs in excess of related billings on uncompleted contracts                                                                                                                        |  |               | 662     |   |                   |   | 656     |  
|Current deferred tax assets                                                                                                                                                         |  |               | 1,527   |   |                   |   | 1,527   |  
|Prepaid expenses and other                                                                                                                                                          |  |               | 3,658   |   |                   |   | 3,369   |  
|Taxes receivable                                                                                                                                                                    |  |               | 1,902   |   |                   |   | 1,711   |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                |  |               | 80,025  |   |                   |   | 93,266  |  
|Property, equipment and leasehold improvements, net                                                                                                                                 |  |               | 4,173   |   |                   |   | 4,842   |  
|Goodwill                                                                                                                                                                            |  |               | 9,782   |   |                   |   | 9,782   |  
|Other intangible assets, net                                                                                                                                                        |  |               | 1,797   |   |                   |   | 1,990   |  
|Deferred tax assets                                                                                                                                                                 |  |               | 11,511  |   |                   |   | 8,562   |  
|Long-term investments in marketable securities                                                                                                                                      |  |               | 16,940  |   |                   |   | 7,533   |  
|Other long-term assets                                                                                                                                                              |  |               | 542     |   |                   |   | 300     |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                                        |  | $             | 124,770 |   |                   | $ | 126,275 |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Accounts payable                                                                                                                                                                    |  | $             | 524     |   |                   | $ | 446     |  
|Accrued expenses                                                                                                                                                                    |  |               | 3,793   |   |                   |   | 4,797   |  
|Deferred revenue                                                                                                                                                                    |  |               | 7,803   |   |                   |   | 8,896   |  
|Income taxes payable                                                                                                                                                                |  |               | 2,632   |   |                   |   | 2,626   |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                           |  |               | 14,752  |   |                   |   | 16,765  |  
|Deferred tax liabilities                                                                                                                                                            |  |               | 692     |   |                   |   | 692     |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                   |  |               | 15,444  |   |                   |   | 17,457  |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                                       |  |               |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Common stock, $.001 par value; Authorized shares  150,000,000; issued and outstanding shares  23,136,485 and 23,027,662 as of
March 31, 2007 and September 30, 2006, respectively |  |               | 23      |   |                   |   | 23      |  
|Additional paid-in capital                                                                                                                                                          |  |               | 133,831 |   |                   |   | 130,620 |  
|Accumulated other comprehensive income                                                                                                                                              |  |               | 599     |   |                   |   | 309     |  
|Accumulated deficit                                                                                                                                                                 |  |               | (25,127 | ) |                   |   | (22,134 | )
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                          |  |               | 109,326 |   |                   |   | 108,818 |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                          |  | $             | 124,770 |   |                   | $ | 126,275 |  
|                                                                                                                                                                                    |  |               |         |   |                   |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements



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VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)



|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months Ended |        |   | Six Months Ended |  
|                                                             |  | March 31,          |        |   | March 31,        |  
|                                                             |  | 2007               |        |   | 2006             |   |        | 2007 |  |   | 2006   |  
|Revenues:                                                    |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|License                                                      |  | $                  | 7,804  |   |                  | $ | 10,358 |      |  | $ | 16,226 |   |  | $ | 20,768 |  
|Royalties                                                    |  |                    | 2,763  |   |                  |   | 4,838  |      |  |   | 5,866  |   |  |   | 8,153  |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                               |  |                    | 10,567 |   |                  |   | 15,196 |      |  |   | 22,092 |   |  |   | 28,921 |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Cost and expenses:                                           |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues                                             |  |                    | 3,376  |   |                  |   | 3,500  |      |  |   | 7,103  |   |  |   | 7,215  |  
|Research and development                                     |  |                    | 4,823  |   |                  |   | 5,328  |      |  |   | 9,900  |   |  |   | 10,956 |  
|Sales and marketing                                          |  |                    | 3,763  |   |                  |   | 4,299  |      |  |   | 7,417  |   |  |   | 8,559  |  
|General and administrative                                   |  |                    | 2,418  |   |                  |   | 2,709  |      |  |   | 5,082  |   |  |   | 5,465  |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total cost and expenses                                      |  |                    | 14,380 |   |                  |   | 15,836 |      |  |   | 29,502 |   |  |   | 32,195 |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                               |  |                    | (3,813 | ) |                  |   | (640   | )    |  |   | (7,410 | ) |  |   | (3,274 | )
|Interest income and other income (expenses), net             |  |                    | 974    |   |                  |   | 665    |      |  |   | 1,917  |   |  |   | 1,284  |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                            |  |                    | (2,839 | ) |                  |   | 25     |      |  |   | (5,493 | ) |  |   | (1,990 | )
|Income tax benefit                                           |  |                    | (1,062 | ) |                  |   | (151   | )    |  |   | (2,500 | ) |  |   | (1,924 | )
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                  | (1,777 | ) |                  | $ | 176    |      |  | $ | (2,993 | ) |  | $ | (66    | )
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                 |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                        |  | $                  | (0.08  | ) |                  | $ | 0.01   |      |  | $ | (0.13  | ) |  | $ | (0.00  | )
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                      |  | $                  | (0.08  | ) |                  | $ | 0.01   |      |  | $ | (0.13  | ) |  | $ | (0.00  | )
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares used in computing per share amounts: |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                        |  |                    | 23,073 |   |                  |   | 22,302 |      |  |   | 23,080 |   |  |   | 22,314 |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                      |  |                    | 23,073 |   |                  |   | 23,011 |      |  |   | 23,080 |   |  |   | 22,314 |  
|                                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements



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VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                               |  |                           |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                               |  | Six Months EndedMarch 31, |        
|                                                                               |  | 2007                      |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          |  |                           |         |   |      |   |         |  
|Net loss                                                                       |  | $                         | (2,993  | ) |      | $ | (66     | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Provision for doubtful accounts                                                |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                  |  |                           | 936     |   |      |   | 970     |  
|Amortization of intangible assets                                              |  |                           | 193     |   |      |   | 193     |  
|Stock-based compensation                                                       |  |                           | 2,633   |   |      |   | 3,749   |  
|Loss on disposal of fixed assets                                               |  |                           |        |   |      |   | 10      |  
|Changes in operating assets and liabilities:                                   |  |                           |         |   |      |   |         |  
|Accounts receivable                                                            |  |                           | 4,086   |   |      |   | (2,613  | )
|Costs in excess of related billings on uncompleted contracts                   |  |                           | (41     | ) |      |   | 154     |  
|Prepaid expenses and other assets                                              |  |                           | (244    | ) |      |   | 574     |  
|Taxes receivable                                                               |  |                           | (191    | ) |      |   | 62      |  
|Deferred tax assets                                                            |  |                           | (2,950  | ) |      |   | (2,183  | )
|Other long-term assets                                                         |  |                           | (241    | ) |      |   | 441     |  
|Accounts payable and accrued liabilities                                       |  |                           | (963    | ) |      |   | 1,122   |  
|Deferred revenue                                                               |  |                           | (1,093  | ) |      |   | (18     | )
|Income tax payable                                                             |  |                           | (2      | ) |      |   | (69     | )
|                                                                               |  |                           |         |   |      |   |         |  
|Net cash (used in)/provided by operating activities                            |  |                           | (870    | ) |      |   | 2,326   |  
|                                                                               |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          |  |                           |         |   |      |   |         |  
|Purchase of property and equipment                                             |  |                           | (111    | ) |      |   | (297    | )
|Purchase of investments                                                        |  |                           | (59,087 | ) |      |   | (16,967 | )
|Proceeds from maturities of investments                                        |  |                           | 44,783  |   |      |   | 14,577  |  
|                                                                               |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                          |  |                           | (14,415 | ) |      |   | (2,687  | )
|                                                                               |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |  |                           |         |   |      |   |         |  
|Net proceeds from issuance of common stock and employee stock plans            |  |                           | 611     |   |      |   | 1,738   |  
|                                                                               |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                      |  |                           | 611     |   |      |   | 1,738   |  
|                                                                               |  |                           |         |   |      |   |         |  
|Effect of exchange rates on cash                                               |  |                           | 105     |   |      |   | 7       |  
|                                                                               |  |                           |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                           |  |                           | (14,569 | ) |      |   | 1,384   |  
|Cash and cash equivalents at beginning of period                               |  |                           | 20,815  |   |      |   | 26,841  |  
|Cash and cash equivalents at end of period                                     |  | $                         | 6,246   |   |      | $ | 28,225  |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements



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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

Virage Logic Corporation (the Company) was incorporated in California in November 1995 and
subsequently reincorporated in Delaware in July 2000. The Company provides semiconductor intellectual property (IP) platforms based on memory, logic, and I/Os (input/output interface components). These various forms of IP are utilized by the
Companys customers to design and manufacture System-on-Chip (SoC) integrated circuits that are increasingly forming the foundation of todays consumer, communications and internet infrastructure, handheld and portable devices, computer
and graphics applications.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information,
and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete
financial statements, and should be read in conjunction with the Companys audited consolidated financial statements for the fiscal year ended September 30, 2006 contained in the Companys 2006 Annual Report on Form 10-K. In the
opinion of the management, the unaudited interim financial statements reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the
periods indicated. Operating results for the three and six months ended March 31, 2007 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending September 30, 2007.

The accompanying unaudited condensed consolidated financial statements include the accounts of Virage Logic Corporation and its wholly-owned subsidiaries
and operations located in the Republic of Armenia, Germany, India, Israel, Japan and the United Kingdom. All intercompany balances and transactions have been eliminated upon consolidation.

Reclassification

Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation. Specifically, the Company has reclassified certain prior year amounts relating to short- and long-term deferred tax assets.

Foreign Currency

The financial position and results of operations of
the Companys foreign operations are measured using currencies other than the U.S. dollar as the functional currency. Accordingly, for these operations all assets and liabilities are translated into U.S. dollars at the current
exchange rates as of the respective balance sheet dates. Revenue and expense items are translated using the weighted average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these operations
financial statements are reported as a separate component of stockholders equity, while foreign currency transactions gains or losses, resulting from remeasuring local currencies to the U.S. dollar are recorded in the consolidated
statements of operations. The net transaction gains and losses recorded in the consolidated statements of operations were not significant for the periods presented.

Use of Estimates

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

Accounting for Internal-Use Computer Software

In
March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal-use software. SOP 98-1 permits the capitalization of certain costs, including internal payroll costs, incurred in the
connection with the development or acquisition of software for internal use during the application development stage. In accordance with SOP 98-1, the Company purchased and capitalized costs of approximately $48,000 and $26,000 during the six months
ended March 31, 2007 and 2006, respectively. Software is amortized for financial reporting purposes using the straight-line method over the estimated useful life of three years.



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Revenue Recognition

The Companys revenue recognition policy 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. Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

Revenues from perpetual licenses for the semiconductor IP products are generally recognized when persuasive evidence of an arrangement exists, delivery of the product
has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met. Revenues from term-based licenses are recognized
ratably over the term of the license, which is generally twelve months in duration, provided the criteria mentioned above are met.

License of custom
memory compilers and logic libraries may involve customization to the functionality of the software; therefore revenues from such licenses are recognized in accordance with Statement of Position 81-1 over the period that services are performed.
Revenue 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 performed. For all license and service agreements accounted
for using the percentage-of-completion method, the Company determines progress-to-completion based on labor hours incurred in comparison to the estimated total service hours required to complete the development or service or on the value of contract
milestones completed. The Company believes that it is able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method based on historical experience of similar project requirements. If
the Company cannot reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed, at which time revenues and related costs are
recognized. A provision for estimated losses on projects is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognition are recorded as costs in excess of related revenue on
uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a
specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.

For agreements that include
multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or delivered. The amount of revenues is determined by applying the residual method of accounting by deducting the
aggregate fair value of the undelivered or uncompleted elements, which the Company determines 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 higher of the normal pricing for such licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is
determined based on 20% of the net selling price of the license for a new agreement starting in fiscal 2007 or the higher of the actual price stated in the contract or the stated renewal rate in each contract for all contracts entered prior to
fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining
contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally twelve months.

The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company
recognizes the revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If
collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of the payment.

Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in advance of invoicing the customer are recorded as unbilled accounts receivable. 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 and unbilled accounts receivable in any given period. All of the criteria under
SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.

Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from the customer or foundry, and are calculated based on actual production volumes of
wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Depending on the contractual terms, prepaid royalties are recognized as
revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.



7



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##### Table of Contents

Fair Value of Financial Instruments

The Companys financial instruments, including cash equivalents, accounts receivable and accounts payable are recorded at cost, which approximates their fair value because of the short-term maturity of these
instruments.

Cash and Cash Equivalents, Short-term and Long-term Investments

For purposes of the accompanying consolidated statements of cash flows, the Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash
equivalents. Cash and cash equivalents as of March 31, 2007 and 2006 consisted of money market funds and commercial paper. The Company determines the appropriate classification of investment securities at the time of purchase. As of
March 31, 2007 and 2006, all investment securities are designated as available-for-sale and are carried at fair value. The Company considers all investments that are available-for-sale that have a maturity date longer than three
months and less than twelve months to be short-term investments. The Company considers all investments that have a maturity of more than twelve months to be long-term investments. Long-term investments include government and federal agency bonds of
$16.9 million and $7.5 million with maturity dates greater than one year for the periods ended March 31, 2007 and September 30, 2006, respectively.

Stock-Based Compensation

Stock Options and Stock Settled Appreciation Rights (SSARS)

As of October 1, 2005, we adopted SFAS 123R, Share-Based Payment. We use the fair value method to apply the provisions of SFAS
123R with a modified prospective application which provides for certain changes to the method for valuing stock-based compensation. The valuation provisions of SFAS 123R apply to new awards and to unvested awards that are outstanding on the
effective date. Under the modified prospective application, prior periods are not revised for comparative purposes. Total SFAS 123R compensation expense recognized for the three and six months ended March 31, 2007 was $1.1 million and $2.6
million, respectively. Total SFAS 123R compensation expense recognized for the three and six months ended March 31, 2006 was $2 million and $3.7 million respectively. As of March 31, 2007, total unrecognized estimated compensation expense
related to non-vested stock options granted prior to that date was $7.2 million and will be amortized over a weighted average period of 2.6 years.

In
December 2004, FASB issued a Statement, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (SFAS 123R), that addresses the accounting for share-based payment transactions in which a company receives employee
services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates
the ability to account for stock-based compensation transactions using the intrinsic method and generally requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statements of
income. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 regarding the Staffs interpretation of SFAS 123R. This interpretation provides the Staffs views regarding interactions between SFAS 123R and
certain SEC rules and regulations and provides interpretations of the valuation of stock-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users
of the financial statements in analyzing the information provided.

SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as cash flow from financing activities rather than as cash flow from operations as required under Emerging Issues Task Force (EITF) issue No. 00-15, Classification in the Statement of Cash Flow of
the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.



8



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##### Table of Contents

The estimated stock-based compensation expense related to the Companys stock-based awards for the three and six
months period ended March 31, 2007 was as follows (in thousands, except per share data):



|                                                        |  |                                   |       |   |                                 |   |       |  
|------------------------------------------------------- |  | --------------------------------- | ----- | - | ------------------------------- | - | ----- | -
|                                                        |  | Three Months Ended March 31,
2007 |       |   | Six Months Ended March 31,
2007 |  
|Cost of revenue                                         |  | $                                 | 240   |   |                                 | $ | 478   |  
|Research and development                                |  |                                   | 285   |   |                                 |   | 617   |  
|Sales and marketing                                     |  |                                   | 255   |   |                                 |   | 635   |  
|General and administrative                              |  |                                   | 387   |   |                                 |   | 903   |  
|                                                        |  |                                   |       |   |                                 |   |       |  
|Stock-based compensation expense                        |  |                                   | 1,167 |   |                                 |   | 2,633 |  
|Related income tax benefits                             |  |                                   | (286  | ) |                                 |   | (626  | )
|                                                        |  |                                   |       |   |                                 |   |       |  
|Stock-based compensation expense, net of tax benefits   |  | $                                 | 881   |   |                                 | $ | 2,007 |  
|                                                        |  |                                   |       |   |                                 |   |       |  
|Net stock-based compensation expense, per common share: |  |                                   |       |   |                                 |   |       |  
|Basic                                                   |  | $                                 | 0.04  |   |                                 | $ | 0.09  |  
|                                                        |  |                                   |       |   |                                 |   |       |  
|Diluted                                                 |  | $                                 | 0.04  |   |                                 | $ | 0.09  |  
|                                                        |  |                                   |       |   |                                 |   |       |  

Consistent with our valuation method for the disclosure-only provisions of SFAS 123, we are using the
Black-Scholes option pricing model to value the compensation expense associated with our stock-based awards and SSARs under SFAS 123R. In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of
forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the
period of change and will also impact the amount of compensation expense to be recognized in future periods.

The following weighted average assumptions
were used in the estimated grant date fair value calculations for stock option and stock purchase awards:



|                        |  |                    |   |  |                  |   |  |                |   |  |                |  
|----------------------- |  | ------------------ | - |  | ---------------- | - |  | -------------- | - |  | -------------- | -
|                        |  | Three Months Ended |   |  | Six Months Ended |  
|                        |  | March 31, 2007     |   |  | March 31, 2006   |   |  | March 31, 2007 |   |  | March 31, 2006 |  
|Volatility              |  | 54.1               | % |  | 70               | % |  | 56             | % |  | 70             | %
|Risk-free interest rate |  | 4.5                | % |  | 4.7              | % |  | 4.6            | % |  | 4.6            | %
|Dividend yield          |  | 0.0                | % |  | 0.0              | % |  | 0.0            | % |  | 0.0            | %
|Expected life (years)   |  | 4.25 years         |   |  | 4.3 years        |   |  | 4.25 years     |   |  | 4.3 years      |  

The expected stock price volatility rates are based on historical volatilities of our common stock. The risk free
interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The average expected life represents the weighted average period of time that options granted
are expected to be outstanding, giving consideration to vesting schedules and our historical exercise patterns. The Black-Scholes weighted average fair value of options granted during the three and six months ended March 31, 2007 were $4.04 and
$4.24, respectively.

Restricted Stock Units (RSU)

During the first quarter of fiscal year 2007, the Company began issuing restricted stock unit awards as an additional form of equity compensation to its employees and officers, pursuant to Companys
stockholder-approved 2002 Equity Incentive Plan. Restricted stock units generally vest over a four-year period and unvested restricted stock units are forfeited and cancelled as of the date that employment terminates. Restricted stock units are
settled in shares of the Companys common stock upon vesting. The cost of restricted stock and restricted stock unit awards is determined using the fair value of the Companys common stock on the date of the grant, and compensation expense
is recognized over the vesting period.



9



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##### Table of Contents

The following table summarizes the activity of the Companys unvested restricted stock units as of March 31,
2007 and changes during the six months ended March 31, 2007, is presented below:



|                                   |  |                        |   |  |                                          |     
|---------------------------------- |  | ---------------------- | - |  | ---------------------------------------- | ----
|                                   |  | Restricted Stock Units
|                                   |  | Number ofshares        |   |  | Weighted- average grant- date
fair value
|Nonvested as of September 30, 2006 |  |                       |   |  |                                          |    
|RSU granted                        |  | 144,615                |   |  | $                                        | 6.47
|RSU vested                         |  |                       |   |  |                                          |    
|RSU canceled                       |  | (18,700                | ) |  | $                                        | 8.82
|                                   |  |                        |   |  |                                          |     
|Nonvested as of March 31, 2007     |  | 125,915                |   |  | $                                        | 8.76
|                                   |  |                        |   |  |                                          |     

Stock-based compensation cost for restricted stock units for the six months ended March 31, 2007 was $0.2
million. As of March 31, 2007, the total unrecognized compensation cost related to unvested awards not yet recognized is $0.9 million and is expected to be amortized over a weighted average period of 1.6 years.

Equity Incentive Plans

The Company has three incentive plans:
1997 Equity Incentive Plan, 2001 Incentive and Non-statutory Stock Option Plan and 2002 Equity Incentive Plan. In November 2006, the Company began issuing Stock Settled Appreciation Rights (SSARs) which provide the holder the right to
receive an amount settled in stock at the time of the exercise. Under our equity incentive plans, stock options and SSARs generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of grant and
are generally granted at prices not less than the fair value of our common stock at the time of grant.

Information with respect to the Equity Incentive
Plans for the six month period ended March 31, 2007 is summarized as follows:



|                                |  |                            |   |  |                              |   |  |                                 |      
|------------------------------- |  | -------------------------- | - |  | ---------------------------- | - |  | ------------------------------- | -----
|                                |  | Shares Available for Grant |   |  | Number of Awards Outstanding |   |  | Weighted Average Exercise Price
|Balance at September 30, 2006   |  | 1,606,423                  |   |  | 5,631,700                    |   |  | $                               | 10.14
|SSARs granted                   |  | (513,787                   | ) |  | 513,787                      |   |  | $                               | 8.66 
|Restricted stock units granted  |  | (144,615                   | ) |  | 144,615                      |   |  |                                 |     
|Options exercised               |  |                           |   |  | (97,869                      | ) |  | $                               | 5.34 
|Options canceled                |  | 651,216                    |   |  | (651,216                     | ) |  | $                               | 11.60
|Restricted stock units canceled |  | 18,700                     |   |  | (18,700                      | ) |  |                                 |     
|                                |  |                            |   |  |                              |   |  |                                 |      
|Balance at March 31, 2007       |  | 1,617,937                  |   |  | 5,522,317                    |   |  | $                               | 9.70 
|                                |  |                            |   |  |                              |   |  |                                 |      



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##### Table of Contents

The following table summarizes information about stock options and SSARs outstanding and exercisable at March 31,
2007:



|                                                                                               |  |                    |     |                    |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|---------------------------------------------------------------------------------------------- |  | ------------------ | --- | ------------------ | --------------------------------------- |  | ---------------------------- | ----- | ------------------------- | - | ---------------- |  | ------------------------------------------- |  | ------------------------------- |  | ------------------------- | ----- |  | - | -----
|                                                                                               |  | Awards Outstanding |     | Awards Exercisable
|Range of Exercise Prices                                                                       |  | Number of Shares   |     |                    | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | Aggregate Intrinsic Value |   | Number of Shares |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |  | Aggregate Intrinsic Value
|                                                                                               |  |                    |     |                    | (In years)                              |  |                              |       | (In thousands)            |   |                  |  | (In years)                                  |  |                                 |  | (In thousands)           
|$  0.13-$5.61                                                                                  |  | 681,302            |     |                    | 4.64                                    |  | $                            | 3.78  |                           | $ | 2,381            |  | 679,745                                     |  | 4.64                            |  | $                         | 3.77  |  | $ | 2,377
|$  5.62-$7.81                                                                                  |  | 846,015            |     |                    | 8.55                                    |  | $                            | 7.65  |                           | $ | 63               |  | 282,236                                     |  | 8.01                            |  | $                         | 7.41  |  | $ | 62   
|$  7.84-$8.63                                                                                  |  | 605,496            |     |                    | 8.68                                    |  | $                            | 8.23  |                           | $ |                 |  | 147,531                                     |  | 7.62                            |  | $                         | 8.58  |  | $ |     
|$  8.65-$9.00                                                                                  |  | 658,987            |     |                    | 8.48                                    |  | $                            | 8.87  |                           | $ |                 |  | 283,026                                     |  | 6.71                            |  | $                         | 8.88  |  | $ |     
|$  9.04-$10.30                                                                                 |  | 802,660            |     |                    | 7.76                                    |  | $                            | 9.57  |                           | $ |                 |  | 559,237                                     |  | 7.55                            |  | $                         | 9.65  |  | $ |     
|$10.31-$14.00                                                                                  |  | 772,408            |     |                    | 6.36                                    |  | $                            | 10.59 |                           | $ |                 |  | 663,243                                     |  | 6.02                            |  | $                         | 10.51 |  | $ |     
|$14.03-$16.11                                                                                  |  | 785,484            |     |                    | 5.15                                    |  | $                            | 12,90 |                           | $ |                 |  | 766,423                                     |  | 5.09                            |  | $                         | 12.91 |  | $ |     
|$16.55-$22.37                                                                                  |  | 243,800            |     |                    | 5.18                                    |  | $                            | 15.90 |                           | $ |                 |  | 228,667                                     |  | 4.99                            |  | $                         | 15.90 |  | $ |     
|$22.81-$22.81                                                                                  |  | 250                |     |                    | 5.04                                    |  | $                            | 22.81 |                           | $ |                 |  | 250                                         |  | 5.04                            |  | $                         | 22.81 |  | $ |     
|                                                                                               |  |                    |     |                    |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|Total                                                                                          |  | 5,396,402          | (*) |                    | 6.99                                    |  | $                            | 9.93  |                           | $ | 2,444            |  | 3,610,358                                   |  | 6.01                            |  | $                         | 10.54 |  | $ | 2,439
|                                                                                               |  |                    |     |                    |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|(*)    Number
of awards outstanding does not include 125,915 shares of restricted stock units.
|Awards vested and expected to vest as of March 31, 2007                                        |  | 5,216,734          |     |                    | 6.66                                    |  | $                            | 9.97  |                           | $ | 2,444            |  |                                             |  |                                 |  |                           |       |  |   |      
|                                                                                               |  |                    |     |                    |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the
Companys closing stock price of $7.27 at of March 31, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of
March 31, 2007 and 2006 was 0.7 million and 1.6 million, respectively.

The total fair value of awards vested during the six months ended
March 31, 2007 and 2006 was $2.1 million and $1.8 million, respectively. The total intrinsic value of awards exercised during the six months period ended March 31, 2007 and 2006 was $0.3 million and $1.1 million, respectively. The total
cash received from employees as a result of employee stock option exercises during the six months ended March 31, 2007 and 2006 was approximately $0.5 million and $1.6 million.

A summary of the status of the Companys nonvested stock options and SSARs as of March 31, 2007 and changes during the six months ended March 31, 2007, is presented below:



|                                   |  |                 |   |  |                                          |     
|---------------------------------- |  | --------------- | - |  | ---------------------------------------- | ----
|                                   |  | Awards         
|                                   |  | Number ofshares |   |  | Weighted- average grant- date fair value
|Nonvested as of September 30, 2006 |  | 2,417,164       |   |  | $                                        | 5.17
|Awards granted                     |  | 513,787         |   |  | $                                        | 2.26
|Awards vested                      |  | (362,213        | ) |  | $                                        | 5.73
|Awards canceled                    |  | (651,216        | ) |  | $                                        | 6.27
|                                   |  |                 |   |  |                                          |     
|Nonvested as of March 31, 2007     |  | 1,917,522       |   |  | $                                        | 4.60
|                                   |  |                 |   |  |                                          |     

NOTE 2  NET LOSS PER SHARE

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



11



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##### Table of Contents

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



|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | --------------------------- | ------ | ------------------------- | ---- | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months EndedMarch 31, |        | Six Months EndedMarch 31, |     
|                                              |  | 2007                        |        |                           | 2006 |   | 2007   |  |   | 2006   |  
|Net (loss) income                             |  | $                           | (1,777 | )                         |      | $ | 176    |  | $ | (2,993 | ) |  | $ | (66    | )
|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  Basic   |  |                             | 23,073 |                           |      |   | 22,302 |  |   | 23,080 |   |  |   | 22,314 |  
|Effect of potentially dilutive securities     |  |                             |       |                           |      |   | 709    |  |   |       |   |  |   |       |  
|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  
|Weighted average shares outstanding  Diluted |  |                             | 23,073 |                           |      |   | 23,011 |  |   | 23,080 |   |  |   | 22,314 |  
|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  
|Net income (loss) per basic share             |  | $                           | (0.08  | )                         |      | $ | 0.01   |  | $ | (0.13  | ) |  | $ | (0.00  | )
|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  
|Net income (loss) per diluted share           |  | $                           | (0.08  | )                         |      | $ | 0.01   |  | $ | (0.13  | ) |  | $ | (0.00  | )
|                                              |  |                             |        |                           |      |   |        |  |   |        |   |  |   |        |  

For the computation of net loss per share for the six months ended March 31, 2007, the Company excluded all
stock options as the inclusion of these securities would have been anti-dilutive. Additionally, for the three and six months ended March 31, 2007, the Company excluded options totaling approximately 4.7 million and 4.6 million shares,
respectively, from the calculation of the net loss per share as they are anti-dilutive.

For the computation of net loss per share for the six months ended
March 31, 2006, the Company excluded all stock options as the inclusion of these securities would have been anti-dilutive. Additionally, for the three and six months ended March 31, 2006, the Company excluded options totaling approximately
3.5 million and 4.2 million shares, respectively, from the calculation of the net loss per share as they are anti-dilutive.

NOTE 3 
COMPREHENSIVE INCOME (LOSS)

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130) established standards for the reporting and display of comprehensive income (loss). Comprehensive income (loss) includes unrealized gains (losses) on investments and foreign currency translation adjustments.

Total comprehensive loss for the three and six months periods ended March 31, 2007 and 2006, respectively, is as follows (in thousands):



|                                                             |  |                             |        |                           |      |   |      |  |   |        |   |  |   |     |  
|------------------------------------------------------------ |  | --------------------------- | ------ | ------------------------- | ---- | - | ---- |  | - | ------ | - |  | - | --- | -
|                                                             |  | Three Months EndedMarch 31, |        | Six Months EndedMarch 31, |     
|                                                             |  | 2007                        |        |                           | 2006 |   | 2007 |  |   | 2006   |  
|Net (loss) income                                            |  | $                           | (1,777 | )                         |      | $ | 176  |  | $ | (2,993 | ) |  | $ | (66 | )
|Foreign currency translation adjustments, net of tax         |  |                             | (38    | )                         |      |   | 12   |  |   | (174   | ) |  |   | (21 | )
|Changes in unrealized gain (loss) on investments, net of tax |  |                             | (5     | )                         |      |   | 17   |  |   | (4     | ) |  |   | 26  |  
|                                                             |  |                             |        |                           |      |   |      |  |   |        |   |  |   |     |  
|Comprehensive income (loss), net of tax                      |  | $                           | (1,820 | )                         |      | $ | 205  |  | $ | (3,171 | ) |  | $ | (61 | )
|                                                             |  |                             |        |                           |      |   |      |  |   |        |   |  |   |     |  

NOTE 4  SEGMENT INFORMATION

The Company operates in one industry segment, the sale of semiconductor IP platforms based on memory, logic, and I/Os, and the sale of the individual platform components and has one reportable segment.

The Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and
performance assessment.

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

Total revenues by geographic area are as follows (in thousands):



|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | Three Months EndedMarch 31, |        | Six Months EndedMarch 31,
|                                                        |  | 2007                        |        | 2006                      |   | 2007   |  | 2006
|Total Revenue by Geographic Area                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|United States                                           |  | $                           | 3,276  |                           | $ | 5,137  |  | $    | 7,658  |  | $ | 10,411
|Canada                                                  |  |                             | 418    |                           |   | 909    |  |      | 922    |  |   | 1,715 
|Japan                                                   |  |                             | 254    |                           |   | 960    |  |      | 738    |  |   | 1,881 
|Taiwan                                                  |  |                             | 3,101  |                           |   | 3,998  |  |      | 5,741  |  |   | 6,996 
|Europe, Middle East and Africa (EMEA)                   |  |                             | 2,505  |                           |   | 2,452  |  |      | 5,238  |  |   | 3,833 
|Other Asia (China, Malaysia, South Korea and Singapore) |  |                             | 1,013  |                           |   | 1,740  |  |      | 1,795  |  |   | 4,085 
|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total                                                   |  | $                           | 10,567 |                           | $ | 15,196 |  | $    | 22,092 |  | $ | 28,921
|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       



12



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##### Table of Contents

Total license revenues by process node are as follows:



|                                      |  |                             |   |  |                           |   |  |      |   |  |      |  
|------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                      |  | Three Months EndedMarch 31, |   |  | Six Months EndedMarch 31, |  
|                                      |  | 2007                        |   |  | 2006                      |   |  | 2007 |   |  | 2006 |  
|Total License Revenue by Process Node |  |                             |   |  |                           |   |  |      |   |  |      |  
|65 Nanometer technology               |  | 13                          | % |  | 9                         | % |  | 7    | % |  | 8    | %
|90 Nanometer technology               |  | 27                          |   |  | 40                        |   |  | 32   |   |  | 42   |  
|0.13 Micron technology                |  | 38                          |   |  | 34                        |   |  | 39   |   |  | 31   |  
|0.18 Micron technology                |  | 11                          |   |  | 14                        |   |  | 14   |   |  | 16   |  
|Other                                 |  | 11                          |   |  | 3                         |   |  | 8    |   |  | 3    |  
|                                      |  |                             |   |  |                           |   |  |      |   |  |      |  
|Total                                 |  | 100                         | % |  | 100                       | % |  | 100  | % |  | 100  | %
|                                      |  |                             |   |  |                           |   |  |      |   |  |      |  

The Company has only one product line, and as such disclosure by product groupings is not applicable.

Long-lived assets are located primarily in the United States, with the exception of a building in the Republic of Armenia, which is owned by the Company. The Armenian
building and leasehold improvements are valued at cost less accumulated depreciation and amortization and amounted to approximately $2.2 million and $1.9 million as of March 31, 2007 and 2006, respectively.

NOTE 5  RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, or SFAS 157. The standard provides guidance for using fair value to measure assets and liabilities. The standard also
responds to investors requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The
standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the
beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are still evaluating the impact
adoption of this standard will have on our financial position or results of operations.

In February 2007, the FASB issued FASB Statement
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the company beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. We are
currently evaluating the impact of this standard will have on our financial position or results of operations.

NOTE 6  COMMITMENTS AND
CONTINGENCIES

Indemnification. The Company enters into standard license agreements in the 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 claims by any third party with respect to the Companys
products. These agreements generally have perpetual terms. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company has no
history of claims and accordingly, no liabilities have been recorded for indemnification under these agreements as of March 31, 2007.

Warranty. The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date, there have been no payments or material costs incurred related to
fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of March 31, 2007. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that
a warranty reserve will not become necessary in the future.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Statements made in this section, Managements Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical fact, are forward-looking statements that
involve risks and uncertainties. Some of these statements relate to products, customers, business prospects, technologies, trends and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as
may, will, should, expect, anticipate, intend, plan, believe, estimate, potential, or continue, the negative of these
terms or other comparable terminology. Forward-looking statements are subject to a number of known and unknown risks and uncertainties which might cause actual results to differ materially from those expressed or implied by such statements. These
risks include our ability to forecast our business, including our revenue, income and order flow outlook, our ability to execute on our strategy of being a provider of semiconductor IP platforms, our ability to continue to develop new products and
maintain and develop new relationships with third-party foundries, integrated device manufacturers, and fabless semiconductor companies, our ability to overcome the challenges associated with establishing licensing relationships with semiconductor
companies, our ability to obtain royalty revenues from customers in addition to license fees, our ability to receive accurate information necessary for calculation of royalty revenues and to collect royalty revenues from customers, business and
economic conditions generally and in the semiconductor industry in particular, pace of adoption of new technologies by our customers and increases or fluctuations in the demand for their products, competition in the market for semiconductor IP
platforms, 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, 2006 filed with the Securities and Exchange Commission.

Overview

Business Environment

Virage Logic Corporation
provides semiconductor intellectual property (semiconductor IP) platforms comprising memories, logic and I/Os (input/output interface components). These various forms of IP are utilized by our customers to design and manufacture system-on-chip (SoC)
integrated circuits that power todays consumer, communications, internet infrastructure, handheld and portable devices, computer, and graphics applications.

Our customers include fabless semiconductor companies, integrated device manufacturers and foundries. As semiconductor companies face increasing pressures to bring products to market faster and semiconductors have shorter product cycles, we
focus on providing our customers a broad product offering as a means to satisfy a larger portion of our customers semiconductor IP needs, while positioning ourselves to offer advanced products as the semiconductor industry migrates to smaller
geometries.

The timing of customer purchases of our products is typically related to new design starts by fabless companies and migration to new
manufacturing processes by IDMs and foundries. Because of the high costs involved in new design starts and migration to new manufacturing processes, our customers decision regarding these matters is heavily dependent on their long-term
business outlook. As a result, our business, and specifically our license revenues, is likely to grow at times of positive outlook for the semiconductor industry.

In the first half of fiscal 2007, we derived approximately 39% of license revenue from the more advanced 65nm and 90nm technology processes and approximately 61% from the legacy process nodes, predominantly 0.13 and 0.18 micron
technologies. The Company expects the 90nm and 65 nm technologies to eventually drive license revenue growth in the future as the legacy process nodes decline. We expect growth in royalty revenues to be driven by the advanced 90nm and 65nm
technology processes, in addition to continued production on the older process nodes.

We sell our products early in the design process, and there are time
delays of 24 to 36 months between the sale of our products and the time we expect to receive royalty revenues. These time delays are due to the length of time required for our customers to implement our semiconductor IP into their designs, and then
to manufacture, market and sell a product incorporating our products. As a result, we expect our royalty revenues to increase in periods in which manufacturing volumes of semiconductors are growing. Future growth of our royalty revenue is dependent
on our ability to increase the number of designs incorporating our products and on such designs achieving substantial manufacturing volumes.

Sources of
Revenues

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



| |  |  | semiconductor IP platforms;
| | - |  | ---------------------------



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| |  |  | embedded memory, logic and I/O elements;
| | - |  | ----------------------------------------



| |  |  | standard and custom memory compilers; and
| | - |  | -----------------------------------------



| |  |  | memory test processor and fuse box components for embedded test and repair of defective memory cells.
| | - |  | -----------------------------------------------------------------------------------------------------

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

The license of our semiconductor IP typically covers a range of embedded memory, logic and I/O products. Licenses of our semiconductor IP products can be either
perpetual or term-based. In addition, maintenance can be purchased for both types of licenses.

We derive our royalty revenues from third-party foundries
that manufacture chips incorporating our Area, Speed and Power (ASAP) memory products for our fabless customers, and from integrated device manufacturers and fabless customers that utilize our STAR Memory System(TM) , NetCAM(TM) and NOVeA(TM)
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 on a per-chip or per-wafer basis
depending on the terms of the respective license agreement. Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry.

Currently, license fees represent the majority of our revenues. Royalty revenues for the three and six months ended March 31, 2007 were $2.8 million and $5.9
million, respectively. Royalty revenues for the three and six months ended March 31, 2006 were $4.8 million and $8.2 million, respectively.

We have
been dependent on a limited number of customers for a substantial portion of our revenues. Our customers comprising the top 10 customer group have changed from time to time. We have two customers that generated more than 10% of our revenue for the
quarter ended March 31, 2007. We have one customer that generated more than 10% of our revenue for the quarter ended March 31, 2006. For the six months ended March 31, 2007 and 2006, one customer accounted for more than 10%,
respectively, of our total revenues. Sales to customers located outside of North America accounted for approximately 65% and 60% of revenues for the three months ended March 31, 2007 and 2006, respectively. For the six months ended
March 31, 2007 and 2006, sales to customers located outside North America accounted approximately 61% and 58% of our total revenues. Substantially all of our direct sales representatives and field application engineers are located in North
America and Europe and service those regions. In Japan and the rest of Asia, we sell both indirectly through distributors and directly through our sales representatives. All revenues to date have been denominated in U.S. dollars.

Critical Accounting Policies and Estimates

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

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



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | valuation of accounts receivable;
| | - |  | ---------------------------------



| |  |  | valuation of purchased intangibles, including goodwill;
| | - |  | -------------------------------------------------------



| |  |  | valuation of long-lived assets;
| | - |  | -------------------------------



| |  |  | stock-based compensation; and
| | - |  | -----------------------------



| |  |  | accounting for income taxes.
| | - |  | ----------------------------

Revenue Recognition

The Companys revenue recognition policy 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.



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Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts.

Revenues from perpetual licenses for the semiconductor IP products
are generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. If any of these criteria are not met, revenue recognition
is deferred until such time as all criteria are met. Revenues from term-based licenses are recognized ratably over the term of the license, which is generally twelve months in duration, provided the criteria mentioned above are met.

License of custom memory compilers and logic libraries may involve customization to the functionality of the software; therefore revenues from such licenses are
recognized in accordance with Statement of Position 81-1 over the period that services are performed. Revenue 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 performed. For all license and service agreements accounted for using the percentage-of-completion method, the Company determines progress-to-completion based on labor hours incurred in comparison to the
estimated total service hours required to complete the development or service or on the value of contract milestones completed. The Company believes that it is able to reasonably and reliably estimate the costs to complete projects accounted for
using the percentage-of-completion method based on historical experience of similar project requirements. If the Company cannot reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used,
such that costs are deferred until the project is completed, at which time revenues and related costs are recognized. A provision for estimated losses on any projects is made in the period in which the loss becomes probable and can be reasonably
estimated. Costs incurred in advance of revenue recognition are recorded as costs in excess of related revenue on uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until
the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.

For agreements that include multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or
delivered. The amount of such revenues is determined by applying the residual method of accounting by deducting the aggregate fair value of the undelivered or uncompleted elements, which the Company determines 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 higher of the normal pricing for such
licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is determined based on 20% of the net selling price of the license for new agreement starting in fiscal 2007 or the higher of the
actual price stated in the contract or the stated renewal rate in each contract for all contracts entered prior to fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or
once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally
twelve months.

The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and
evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company recognizes the revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectibility based on a number
of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon
receipt of the payment.

Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in
advance of invoicing the customer are recorded as unbilled accounts receivable. 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
and unbilled accounts receivable in any given period. All of the criteria under SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.

Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from
the customer or foundry, and are calculated based on actual production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license
agreement. Depending on the contractual terms, prepaid royalties are recognized as revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.



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Valuation of Accounts Receivable

We monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon specific customer collection risks that we have identified. While such credit losses have
historically been within our expectations and the allowance we have established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a
relatively small number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the quality of our accounts receivables and our future operating results.

Valuation of Purchased Intangibles, Including Goodwill

We periodically evaluate purchased intangibles, including goodwill, for impairment. An assessment of goodwill is subjective by nature, and significant management judgment is required to forecast future operating results, projected cash
flows and current period market capitalization levels. If our estimates or related assumptions change in the future, these changes in conditions could require material write-downs of net intangible assets, including impairment charges for goodwill.
The valuation of intangible assets is based on managements estimates. Intangible assets with finite useful lives are amortized over the estimated life of each asset. As of March 31, 2007, management believes no impairment of intangible
assets has occurred. The carrying value of purchased intangibles, including goodwill, is $11.6 million and $11.8 million at March 31, 2007 and September 30, 2006, respectively. If the asset is deemed impaired, the maximum amount of
impairment would be the full carrying value of the asset.

Valuation of Long-Lived Assets

We review the carrying value of our long-lived assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying
amounts may not be fully recoverable or that their useful lives are no longer appropriate. This review is based upon our projections of anticipated future cash flows from such assets. While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially affect our evaluations, which could result in an impairment charge. As of March 31, 2007 the Company had an intangible asset of $1.6 million related to technology
acquired through the acquisition of In-Chip Systems, Inc. in May 2002.

Stock-based compensation

As of October 1, 2005, we adopted SFAS 123R, Share-Based Payment. We use the fair value method to apply the provisions of SFAS 123R with a modified
prospective application which provides for certain changes to the method for valuing stock-based compensation. The valuation provisions of SFAS 123R apply to new awards and to unvested awards that are outstanding on the effective date. Under the
modified prospective application, prior periods are not revised for comparative purposes. Total SFAS 123R compensation expense recognized for the three and six months ended March 31, 2007 was $1.1 million and $2.6 million, respectively. Total
SFAS 123R compensation expense recognized for the three and six months ended March 31, 2006 was $2 million and $3.7 million respectively. At March 31, 2007 and 2006, total unrecognized estimated compensation expenses related to non-vested
stock options granted prior to that date were $7.2 million and $10.8 million.

We value our stock-based awards and SSARs on the date of grant using the
Black-Scholes model. For purposes of estimating the fair value of stock options granted during the six months ended March 31, 2007 using the Black-Scholes model, we have made an estimate regarding our stock price volatility using the historical
volatility in our stock price for the expected volatility assumption input to the model rather than any implied volatility. This approach is consistent with the guidance in SFAS 123R and the Securities and Exchange Commissions Staff Accounting
Bulletin No. 107 (SAB 107).

The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a
remaining term equal to the expected term of the options on the grant date.

Furthermore, as required under SFAS 123R, we now estimate forfeitures for
options granted which are not expected to vest. We calculated the pre-vesting forfeiture rate by using our historical option cancellation information.

If
factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current period. Therefore, we
believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate stock-based compensation under SFAS 123R. There is a risk that our estimates of the fair values of our
stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments,
such as employee stock options or stock settled appreciation rights, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial



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statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant
date and reported in our financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare
and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined in accordance with SFAS 123R and SAB 107 using an option-pricing model, which value may not be indicative of the fair value observed in a
willing buyer /willing seller market transaction.

Accounting for income taxes

We calculate our income taxes based on an estimated annual effective tax rate in compliance with SFAS No. 109 Accounting for Income Taxes. Under SFAS No. 109, income tax expense
(benefit) is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entitys financial statements or tax
returns. However, as required by FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (FIN 18), the impact of items of tax expense (or benefit) that do not relate to ordinary income in the
current year generally should be accounted for discretely in the period in which it occurs and be excluded from the effective tax rate calculation. As a result the Company reported a discrete tax benefit of approximately $432,000 relating primarily
to the federal research and development benefit from fiscal 2006 due to the re-instatement of the research and development credit. Significant components affecting the tax rate include an increase from stock-based compensation relating to
non-deductible incentive stock options and the composite state tax rate.

For financial statement purposes, we make certain estimates and judgments in
determining income tax expense. These estimates and judgments occur in the calculation of tax credits, tax benefits, deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition
of revenue and expense for tax and financial statement purposes. If actual results differ from our estimates, future income tax expense could be materially affected.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets. These differences resulted in
deferred tax assets of $13 million and deferred tax liabilities of $0.7 million as of March 31, 2007. The carrying value of the Companys net deferred tax assets assumes that we will be able to generate sufficient future taxable income in
certain tax jurisdictions based on estimates and assumptions allowing us to utilize assets. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates they are
realizable. At such time it is determined that it is more likely than not that the deferred tax assets are not realizable, the valuation allowance is adjusted. This assessment is based on projections of future taxable income, which is impacted in
future periods by income before taxes and stock option exercises. The actual taxable income realized in the future and other factors determine how much benefit the Company ultimately realizes from the deferred tax assets.

In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax
audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are probable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the
liability and recognize a tax benefit during the period in which we determine that the liability is less than we expect the ultimate assessment to be. Taxes payable were $2.6 million as of March 31, 2007 and September 30, 2006,
respectively.

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

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006

Revenues

The table below sets forth the changes in revenues from the three and six months ended March 31, 2006 to the three and six months ended March 31, 2007 (in
thousands, except percentage data):



|               |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                      |  |   |        |   |  |       |   
|-------------- |  | --------------------------------- | ------ | ------------------- | --------------------------------- | - | ------ | - | ------------------- |  | ----- | -------------------- |  | - | ------ | - |  | ----- | --
|               |  | Three Months Ended March 31, 2007 |        |                     | Three Months Ended March 31, 2006 |   |        |   |                     |  |       |                     
|               |  | Amount                            |        | % of total Revenues |                                   |   | Amount |   | % of total revenues |  |       | Year-Over-YearChange | 
|Revenues:      |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                      |  |   |        |   |  |       |   
|License        |  | $                                 | 7,804  |                     | 73.9                              | % |        | $ | 10,358              |  | 68.2  | %                    |  | $ | (2,554 | ) |  | (24.7 | %)
|Royalties      |  |                                   | 2,763  |                     | 26.1                              | % |        |   | 4,838               |  | 31.8  | %                    |  |   | (2,075 | ) |  | (42.9 | %)
|               |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                      |  |   |        |   |  |       |   
|Total revenues |  | $                                 | 10,567 |                     | 100.0                             | % |        | $ | 15,196              |  | 100.0 | %                    |  | $ | (4,629 | ) |  | (30.5 | %)
|               |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                      |  |   |        |   |  |       |   



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|               |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |    |        |   |  |       |   
|-------------- |  | ------------------------------- | ------ | ------------------- | ------------------------------- | - | ------ | - | ------------------- |  | ----- | --------------------- |  | -- | ------ | - |  | ----- | --
|               |  | Six Months Ended March 31, 2007 |        |                     | Six Months Ended March 31, 2006 |   |        |   |                     |  |       |                      
|               |  | Amount                          |        | % of total revenues |                                 |   | Amount |   | % of total revenues |  |       | Year-Over-Year Change | 
|Revenues:      |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |    |        |   |  |       |   
|License        |  | $                               | 16,226 |                     | 73.4                            | % |        | $ | 20,768              |  | 71.8  | %                     |  | ($ | 4,542  | ) |  | (21.9 | %)
|Royalties      |  |                                 | 5,866  |                     | 26.6                            | % |        |   | 8,153               |  | 28.2  | %                     |  |    | (2,287 | ) |  | (28.1 | %)
|               |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |    |        |   |  |       |   
|Total revenues |  | $                               | 22,092 |                     | 100.0                           | % |        | $ | 28,921              |  | 100.0 | %                     |  | $  | (6,829 | ) |  | (23.6 | %)
|               |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |    |        |   |  |       |   

Revenues for the three months ended March 31, 2007 totaled $10.6 million, decreasing 30.5% from $15.2 million
for the three months ended March 31, 2006. The decrease resulted from the $2.6 million decrease in license revenue and $2.0 million in royalty revenue.

Revenue for the six months ended March 31, 2007 totaled $22.1 million, decreasing 23.6% from $28.9 million for the six months ended March 31, 2006. The decrease resulted from the decrease of $2.3 million in royalty revenue and
$4.5 million in license revenue.

For the three and six months ended March 31, 2007 and 2006, total license revenues by process node are as follows:



|                                       |  |                             |   |  |                           |   |  |      |   |  |      |  
|-------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                       |  | Three Months EndedMarch 31, |   |  | Six Months EndedMarch 31, |  
|                                       |  | 2007                        |   |  | 2006                      |   |  | 2007 |   |  | 2006 |  
|Total License Revenue by Process Node: |  |                             |   |  |                           |   |  |      |   |  |      |  
|65 Nanometer technology                |  | 13                          | % |  | 9                         | % |  | 7    | % |  | 8    | %
|90 Nanometer technology                |  | 27                          |   |  | 40                        |   |  | 32   |   |  | 42   |  
|0.13 Micron technology                 |  | 38                          |   |  | 34                        |   |  | 39   |   |  | 31   |  
|0.18 Micron technology                 |  | 11                          |   |  | 14                        |   |  | 14   |   |  | 16   |  
|Other                                  |  | 11                          |   |  | 3                         |   |  | 8    |   |  | 3    |  
|                                       |  |                             |   |  |                           |   |  |      |   |  |      |  
|Total                                  |  | 100                         | % |  | 100                       | % |  | 100  | % |  | 100  | %
|                                       |  |                             |   |  |                           |   |  |      |   |  |      |  

License revenue for the three months ended March 31, 2007 was $7.8 million, representing a decrease of $2.6
million or 24.7% as compared to $10.4 million for the three months ended March 31, 2006. License revenue decreased for the three months ended March 31, 2007 mainly attributed to a decrease of $2 million on the 90-nanometer technology, $0.6
million on the 0.13 micron, and $0.6 million on the 0.18 micron, partially offset by increase of $0.6 in other larger technologies

License revenue for the
six months ended March 31, 2007 was $16.2 million, representing a decrease of $4.5 million or 21.9% as compared to $20.7 million for the six months ended March 31, 2006. The decrease for the six months was due to a $5.2 million, or 25.8%,
decline in 0.13 micron and 0.18 micron technologies, 90- nanometer and 65-nanometer technologies partially offset by a $0.7 million, or 124.1%, increase in the other larger technologies. However, we expect license revenue to increase in the future
as we continue to develop and deliver our 90 and 65 nanometer technologies. In addition, we had four of our major customers involved in merger related activity which contributed to the declined in revenue.

Royalties decreased by $2 million, or 42.9% from $4.8 million in the three months ended March 31, 2006 to $2.8 million for the three months ended March 31,
2007. For the six months ended March 31, 2007 and 2006, royalties were $5.9 million and $8.2 million, respectively. In the first six months of fiscal 2007, we have experienced a significant decline in royalties. We believe that the 90-
nanometer royalties would have ramped to higher levels in the first six months of fiscal 2007. This has not come to fruition.

For the three and six months
ended March 31, 2007 and 2006, total revenues by geography were as follows:



|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | Three Months EndedMarch 31, |        | Six Months EndedMarch 31,
|                                                        |  | 2007                        |        | 2006                      |   | 2007   |  | 2006
|Total Revenue by Geography                              |  |                             |        |                           |   |        |  |      |        |  |   |       
|United States                                           |  | $                           | 3,276  |                           | $ | 5,137  |  | $    | 7,658  |  | $ | 10,411
|Canada                                                  |  |                             | 418    |                           |   | 909    |  |      | 922    |  |   | 1,715 
|Japan                                                   |  |                             | 254    |                           |   | 960    |  |      | 738    |  |   | 1,881 
|Taiwan                                                  |  |                             | 3,101  |                           |   | 3,998  |  |      | 5,741  |  |   | 6,996 
|Europe, Middle East and Africa (EMEA)                   |  |                             | 2,505  |                           |   | 2,452  |  |      | 5,238  |  |   | 3,833 
|Other Asia (China, Malaysia, South Korea and Singapore) |  |                             | 1,013  |                           |   | 1,740  |  |      | 1,795  |  |   | 4,085 
|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total                                                   |  | $                           | 10,567 |                           | $ | 15,196 |  | $    | 22,092 |  | $ | 28,921
|                                                        |  |                             |        |                           |   |        |  |      |        |  |   |       



19



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##### Table of Contents

Cost and Expenses

The table below sets forth the changes in cost and expenses from the three and six months ended March 31, 2006 to the three and six months ended March 31, 2007 (in thousands, except percentage data):



|                           |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|-------------------------- |  | --------------------------------- | ------ | ------------------- | --------------------------------- | - | ------ | - | ------------------- |  | ----- | --------------------- |  | - | ------ | - |  | ----- | --
|                           |  | Three Months Ended March 31, 2007 |        |                     | Three Months Ended March 31, 2006 |   |        |   |                     |  |       |                      
|                           |  | Amount                            |        | % of total Revenues |                                   |   | Amount |   | % of total revenues |  |       | Year-Over-Year Change | 
|Cost and expenses:         |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Cost of revenues           |  | $                                 | 3,376  |                     | 31.9                              | % |        | $ | 3,500               |  | 23.0  | %                     |  | $ | (124   | ) |  | (3.5  | %)
|Research and development   |  |                                   | 4,823  |                     | 45.6                              | % |        |   | 5,328               |  | 35.1  | %                     |  |   | (505   | ) |  | (9.5  | %)
|Sales and marketing        |  |                                   | 3,763  |                     | 35.6                              | % |        |   | 4,299               |  | 28.3  | %                     |  |   | (536   | ) |  | (12.5 | %)
|General and administrative |  |                                   | 2,418  |                     | 22.9                              | % |        |   | 2,709               |  | 17.8  | %                     |  |   | (291   | ) |  | (10.7 | %)
|                           |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Total cost and expenses    |  | $                                 | 14,380 |                     | 136.1                             | % |        | $ | 15,836              |  | 104.2 | %                     |  | $ | (1,456 | ) |  | (9.2  | %)
|                           |  |                                   |        |                     |                                   |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   



|                           |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|-------------------------- |  | ------------------------------- | ------ | ------------------- | ------------------------------- | - | ------ | - | ------------------- |  | ----- | --------------------- |  | - | ------ | - |  | ----- | --
|                           |  | Six Months Ended March 31, 2007 |        |                     | Six Months Ended March 31, 2006 |   |        |   |                     |  |       |                      
|                           |  | Amount                          |        | % of total revenues |                                 |   | Amount |   | % of total revenues |  |       | Year-Over-Year Change | 
|Cost and expenses:         |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Cost of revenues           |  | $                               | 7,103  |                     | 32.2                            | % |        | $ | 7,215               |  | 24.9  | %                     |  | $ | (112   | ) |  | (1.6  | %)
|Research and development   |  |                                 | 9,900  |                     | 44.8                            | % |        |   | 10,956              |  | 37.9  | %                     |  |   | (1,056 | ) |  | (9.6  | %)
|Sales and marketing        |  |                                 | 7,417  |                     | 33.6                            | % |        |   | 8,559               |  | 29.6  | %                     |  |   | (1,142 | ) |  | (13.3 | %)
|General and administrative |  |                                 | 5,082  |                     | 23.0                            | % |        |   | 5,465               |  | 18.9  | %                     |  |   | (383   | ) |  | (7.0  | %)
|                           |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Total cost and expenses    |  | $                               | 29,502 |                     | 133.5                           | % |        | $ | 32,195              |  | 111.3 | %                     |  | $ | (2,693 | ) |  | (8.4  | %)
|                           |  |                                 |        |                     |                                 |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   

Cost of Revenues

Cost of revenues is determined principally based on allocation of costs associated with custom contracts and maintenance contracts, which consist primarily of personnel expenses, allocation of facilities costs, and depreciation expenses of
acquired software and capital equipment. Cost of revenues for the three months ended March 31, 2007 totaled $3.4 million, representing a decrease of $0.1 million or 3.5% over $3.5 million for the three months ended March 31, 2006. The
decrease for the three months was primarily attributable to $0.1 million stock based compensation expense related to SFAS 123R.

For the six months ended
March 31, 2007, cost of revenues totaled $7.1 million, representing a decrease of $0.1 million or 1.6% over $7.2 million for the six months ended March 31, 2006. The decrease for the six months was primarily attributable to $0.1 million
stock based compensation expense related to SFAS 123R and decreases in contract loss and deferred contract expenses associated with customer projects. We believe that cost of revenues will continue to fluctuate in the future, both in absolute
dollars and as a percentage of revenues, based on the mix of products sold by us, the impact of the adoption of SFAS 123R and the level of license revenues.

Research and Development Expenses

Research and development expenses primarily include personnel expense, software license and maintenance
fees, as well as capital equipment depreciation expenses. Research and development expenses for the three months ended March 31, 2007 were $4.8 million, a decrease of $0.5 million, or 9.5%, from $5.3 million for the three months ended
March 31, 2006. Research and development expense as a percentage of total revenue for the three months ended March 31, 2007 increased to 45.6% from 35.1% for the same period in fiscal 2006. The decrease in research and development expense
was primarily due to $0.1 million expense in stock based-compensation related to SFAS 123R and $0.4 million in consulting and software license and maintenance expenses.

For the six months ended March 31, 2007 research and development totaled $9.9 million, representing a decrease of $1.1 million or 9.6% compared to $11.0 million for the same period in fiscal 2006. Research and
development expense as a percentage of total revenue for the six months ended March 31, 2007 was 44.8%, as compared to 37.9% for the six months ended March 31, 2006. The decrease was primarily due to $0.4 million expense in stock-based
compensation related to SFAS 123R, $0.3 million consulting fees related to subcontractors, $0.4 million corporate support costs, $0.2 million software license and maintenance fees, and $0.1 million in depreciation and amortization, partially offset
by increase of $0.3 million in personnel related expenses.



20



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##### Table of Contents

Sales and Marketing Expenses

Sales and marketing expense consists mainly of personnel expenses, commissions, advertising and promotion-related costs. Sales and marketing expense for the three months ended March 31, 2007 was $3.8 million, representing a decrease of
$0.5 million or 12.5% over the same period in fiscal 2006. Sales and marketing expense as a percentage of revenue was 35.6% for the three months ended March 31, 2007, compared to 28.3% for the three months ended March 31, 2006. The
decrease in sales and marketing expense for the three months was primarily attributable to $0.3 million expense in personnel related expenses, $0.2 million related to outside rep commissions and $0.3 million in stock-based compensation related SFAS
123R partially offset by increases of $0.3 million in travel and entertainment.

For the six months ended March 31, 2007 sales and marketing expenses
totaled $7.4 million, representing a decrease of $1.2 million or 13.3% compared to $8.6 for the same period in fiscal 2006. Sales and marketing expense as a percentage of total revenue for the six months ended March 31, 2007 was 33.6%, as
compared to 29.6% for the six months ended March 31, 2006. The decrease in sales and marketing expense for the six months was primarily due to $1.1 million expense in personnel related expenses related to commissions, $0.2 million related to
outside rep commissions and $0.2 million in stock-based compensation related SFAS 123R partially offset by increases of $0.3 million in travel and entertainment and marketing and advertising expenses.

General and Administrative Expenses

General and administrative
expense consists primarily of personnel, corporate governance and other costs associated with the management of our business. General and administrative expense for the three months ended March 31, 2007 was $2.4 million, representing a decrease
of $0.3 million or 10.7% over the three months ended March 31, 2006. General and administrative expense as a percentage of total revenue was 22.9% for the three months ended March 31, 2007, compared to 17.8% for the same period in fiscal
2006. The decrease in general and administrative expense for the three months ended was mainly attributable to decreases of $0.1 million in recruiting services and $0.4 million in stock-based compensation related to SFAS 123R, partially offset by an
increase in personnel related expenses of $0.2 million.

For the six months ended March 31, 2007 general and administrative expenses totaled $5.1
million, representing a decrease of $0.4 million or 7.0% compared to $5.5 million for the same period in fiscal 2006. General and administrative expense as a percentage of total revenue for the six months ended March 31, 2007 was 23.0%, as
compared to 18.9% for the six months ended March 31, 2006. The decrease was primarily due to $0.2 million expense in stock-based compensation related to SFAS 123R, $0.9 million professional fees primarily related to accounting and auditing
fees, partially offset by increases of $0.5 million in personnel related expenses and $0.2 million bad debt expenses.

Interest Income and Other
Income (Expenses), net

The table below sets forth the changes in interest income and other income, (expenses), net from the three and six months
ended March 31, 2006 to the three and six months ended March 31, 2007 (in thousands, except percentage data):



|                                                       |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|------------------------------------------------------ |  | -------------------------------- | ----- | - | -------------------------------- | ---- | -- | ------ | - | ----- | ------------------- |  | ---- | --------------------- |  | - | --- | - |  | ----- | --
|                                                       |  | Three MonthsEnded March 31, 2007 |       |   | Three MonthsEnded March 31, 2006 |      |    |        |   |       |                     | 
|                                                       |  | Amount                           |       |   | % of total revenues              |      |    | Amount |   |       | % of total revenues |  |      | Year-Over-Year Change | 
|Interest income and other income (expenses), net:      |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|Interest income                                        |  | $                                | 1,004 |   |                                  | 9.5  | %  |        | $ | 668   |                     |  | 4.4  | %                     |  | $ | 336 |   |  | 50.3  | % 
|Other income (expenses), net                           |  |                                  | (30   | ) |                                  | (0.3 | %) |        |   | (3    | )                   |  | (0.0 | %)                    |  |   | (27 | ) |  | (900  | %)
|                                                       |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|Total interest income and other income (expenses), net |  | $                                | 974   |   |                                  | 9.2  | %  |        | $ | 665   |                     |  | 4.4  | %                     |  | $ | 309 |   |  | 46.5  | % 
|                                                       |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|                                                       |  |                                  |       |  
|                                                       |  | Six Months Ended March 31, 2007  |       |   | Six Months Ended March 31, 2006  |      |    |        |   |       |                     | 
|                                                       |  | Amount                           |       |   | % of total revenues              |      |    | Amount |   |       | % of total revenues |  |      | Year-Over-Year Change | 
|Interest income and other income (expenses), net:      |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|Interest income                                        |  | $                                | 1,990 |   |                                  | 9.0  | %  |        | $ | 1,291 |                     |  | 4.5  | %                     |  | $ | 699 |   |  | 54.1  | % 
|Other income (expenses), net                           |  |                                  | (73   | ) |                                  | (0.3 | %) |        |   | (7    | )                   |  | (0.1 | %)                    |  |   | (66 | ) |  | 942.9 | % 
|                                                       |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   
|Total interest income and other income (expenses), net |  | $                                | 1,917 |   |                                  | 8.7  | %  |        | $ | 1,284 |                     |  | 4.4  | %                     |  | $ | 633 |   |  | 49.3  | % 
|                                                       |  |                                  |       |   |                                  |      |    |        |   |       |                     |  |      |                       |  |   |     |   |  |       |   

Interest income and other income (expenses), net, for the three months ended March 31, 2007 totaled $1.0
million compared to $0.7 million for the same period in fiscal 2006. Interest income and other income (expenses), net, for the six months ended March 31, 2007 totaled $1.9 million, compared to $1.3 million for the same period in fiscal 2006.
The increase in interest income was primarily due to the increased interest rate environment applicable to our treasury investment portfolio of marketable securities held as available-for-sale.



21



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##### Table of Contents

Income Tax Provision



|                               |  |                                   |        |   |                                   |       |    |        |   |        |                     |  |      |                       |  |   |      |   |  |       |  
|------------------------------ |  | --------------------------------- | ------ | - | --------------------------------- | ----- | -- | ------ | - | ------ | ------------------- |  | ---- | --------------------- |  | - | ---- | - |  | ----- | -
|                               |  | Three Months Ended March 31, 2007 |        |   | Three Months Ended March 31, 2006 |       |    |        |   |        |                     | 
|                               |  | Amount                            |        |   | % of total revenues               |       |    | Amount |   |        | % of total revenues |  |      | Year-Over-Year Change | 
|Income tax provision (benefit) |  | $                                 | (1,062 | ) |                                   | (10.1 | %) |        | $ | (151   | )                   |  | (1.0 | %)                    |  | $ | (911 | ) |  | 603.3 | %
|                               |  |                                   |        |   |                                   |       |    |        |   |        |                     |  |      |                       |  |   |      |   |  |       |  
|                               |  |                                   |        |  
|                               |  | Six Months Ended March 31, 2007   |        |   | Six Months Ended March 31, 2006   |       |    |        |   |        |                     | 
|                               |  | Amount                            |        |   | % of total revenues               |       |    | Amount |   |        | % of total revenues |  |      | Year-Over-Year Change | 
|Income tax provision (benefit) |  | $                                 | (2,500 | ) |                                   | (11.3 | %) |        | $ | (1,924 | )                   |  | (6.7 | %)                    |  | $ | (576 | ) |  | 29.9  | %
|                               |  |                                   |        |   |                                   |       |    |        |   |        |                     |  |      |                       |  |   |      |   |  |       |  

For the three months ended March 31, 2007, we recorded an income tax benefit of $1.1 million. For the same
quarter in fiscal 2006, we recorded an income tax benefit of $0.1 million. The provision for income taxes for the six months ended March 31, 2007 is based on our annual effective tax rate in compliance with SFAS 109. The annual effective rate
was calculated on the basis of our expected level of profitability and includes items such as the use of tax credits and income taxes on earnings of certain foreign subsidiaries. However, as required by FASB Interpretation 18, Accounting for
Income Taxes in Interim Periods (FIN 18), the impact of items of tax expense (or benefit) that do not relate to ordinary income in the current year generally should be accounted for discretely in the period in which it
occurs and be excluded from the effective tax rate calculation. As a result, the company reported a discrete tax benefit of approximately $432,000 relating primarily to the federal research and development benefit from fiscal 2006 due to the
re-instatement of the research and development credit. Significant components affecting the tax rate include an increase from stock-based compensation relating to non-deductible incentive stock options and the composite state tax rate. In addition,
to the extent our expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. The difference between the benefit for income taxes that would be derived by applying
the statutory rate to our loss before income taxes and the provision actually recorded is due primarily to the impact of state and foreign taxes, non-deductible stock-based compensation relating to Incentive Stock Options as well as other
miscellaneous non-deductible items.

Additionally, the Indian Tax Authorities completed its assessment of our tax returns for the tax years
2000 through 2003 and issued assessment orders in which the Indian Tax Authorities proposes to assess an aggregate tax deficiency for the three year period of approximately $1.2 million, plus interest, which interest will accrue until the
matter is resolved. The assessment orders are not final notices of deficiency, and we have immediately filed appeals. We believe that the assessments are inconsistent with applicable tax laws and that we have meritorious defense to the assessments.
On January 5, 2007, the Indian Tax Authorities issued an order allowing the company to claim a tax exemption for the year 2001-2002.

In fiscal year
2005, we made a deposit in local currency equivalent to approximately $260,000 U.S. dollars with the Indian Tax Authorities, as required.

The
ultimate outcome of the tax assessment cannot be predicted with certainty, including the amount payable or the timing of any such payments upon resolution of the matter. Should the Indian Tax Authorities assess additional taxes as a result of a
current or a future assessment, we may be required to record charges to operations that could have an adverse effect on our consolidated statements of operations.

LIQUIDITY AND CAPITAL RESOURCES



|                                                            |  |               |        |                   |   |        |  |   |         |  
|----------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------ |  | - | ------- | -
|                                                            |  | March 31,2007 |        | September 30 2006 |   | Change | 
|Cash and cash equivalents                                   |  | $             | 6,246  |                   | $ | 20,815 |  | $ | (14,569 | )
|Short-term and long-term investments                        |  |               | 71,121 |                   |   | 56,786 |  |   | 14,335  |  
|                                                            |  |               |        |                   |   |        |  |   |         |  
|Total cash, cash equivalents and marketable debt securities |  | $             | 77,367 |                   | $ | 77,601 |  | $ | (234    | )
|                                                            |  |               |        |                   |   |        |  |   |         |  

At March 31, 2007, our cash and cash equivalents totaled $6.2 million, as compared to $20.8 million at
September 30, 2006. At March 31, 2007 our short-term and long-term treasury investments totaled $71.1 million as compared to $56.8 million at September 30, 2006. In aggregate, cash, cash equivalents and investments in marketable
securities as of March 31, 2007 totaled $77.4 million, compared to $77.6 million at September 30, 2006.



22



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##### Table of Contents

|                                                      |  |                  |         |   |                |   |        |        |  |   |         |   
|----------------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------ | ------ |  | - | ------- | --
|                                                      |  | Six Months Ended |         |   |                |  
|                                                      |  | March 31, 2007   |         |   | March 31, 2006 |   |        | Change | 
|Cash provided by (used in) operating activities       |  | $                | (870    | ) |                | $ | 2,326  |        |  | $ | (3,196  | ) 
|Cash used in investing activities                     |  |                  | (14,415 | ) |                |   | (2,687 | )      |  |   | (11,728 | ) 
|Cash provided by financing activities                 |  |                  | 611     |   |                |   | 1,738  |        |  |   | (1,127  | ))
|Effect of exchange rates on cash                      |  |                  | 105     |   |                |   | 7      |        |  |   | 98      |   
|                                                      |  |                  |         |   |                |   |        |        |  |   |         |   
|Net increase (decreased) in cash and cash equivalents |  | $                | (14,569 | ) |                | $ | 1,384  |        |  | $ | (15,953 | ) 
|                                                      |  |                  |         |   |                |   |        |        |  |   |         |   

Net cash used in operating activities was $0.9 million for the six months ended March 31, 2007, as compared
to net cash provided by operating activities of $2.3 million for the six months ended March 31, 2006. The decrease in cash provided by operating activities was mainly due to decreases of $1 million of deferred revenue, $2.1 million of accounts
payable and accrued liabilities, $2.7 million of changes in operating assets and liabilities for costs in excess of related billings on uncompleted contracts, prepaid expenses and other assets, taxes receivable, deferred tax assets, and other
long-term assets, and $1.1 million of stock-based compensation. In addition, the decrease is partly due to increase in net loss of $3.0 million. These decreases were offset by increases of $6.7 million related to accounts receivable due to
collections.

Net cash used in investing activities was $14.4 million and $2.7 million for the first six months of 2007 and 2006, respectively. The
increase of $11.7 million in the use of cash resulted from increases in net purchase of investments and proceeds from maturities of investments.

Net cash
provided by financing activities totaled $0.6 million and $1.7 million for the six months ended March 31, 2007 and 2006, respectively and was attributable to the proceeds from exercises of employee stock options and employee stock purchase
plans during the respective periods.

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

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The
following table summarizes our contractual obligations and commercial commitments at March 31, 2007 (dollars in thousands):



|                                               |  |       |        |     |         |   |                    |  |                    |       |               |   |       |  |   |  
|---------------------------------------------- |  | ----- | ------ | --- | ------- | - | ------------------ |  | ------------------ | ----- | ------------- | - | ----- |  | - | -
|Contractual Obligations                        |  | Total |        |     | FY 2007 |   | FY 2008 to FY 2010 |  | FY 2011 to FY 2012 |       | After FY 2012
|Operating lease obligations                    |  | $     | 2,566  |     |         | $ | 606                |  | $                  | 1,449 |               | $ | 511   |  | $ | 
|Purchase obligations                           |  |       | 9,985  | (1) |         |   | 2,026              |  |                    | 6,555 |               |   | 1,404 |  |   | 
|                                               |  |       |        |     |         |   |                    |  |                    |       |               |   |       |  |   |  
|Total operating lease and purchase obligations |  | $     | 12,551 |     |         | $ | 2,632              |  | $                  | 8,004 |               | $ | 1,915 |  | $ | 
|                                               |  |       |        |     |         |   |                    |  |                    |       |               |   |       |  |   |  

---

|(1) | Reflects amounts payable under contracts primarily for product development software licenses and maintenance. We have no off-balance-sheet financing arrangements other than
operating leases as defined in regulation S-K Item 303 (a)(4).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|------- | -----------------------------------------------------------

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

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



23



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##### Table of Contents

We are exposed to the impact of interest rate changes and changes in the market values of our investments. We maintain an
investment portfolio of various issuers, types and maturities. These securities are 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, mortgage-backed securities and commercial paper. Our short term investments balance of $54.2 million at
March 31, 2007 consists of instruments with original maturities of less than one year. We also hold approximately $16.9 million in U.S. government obligation and corporate bonds with maturities greater than one year. The estimated fair value of
our investment portfolio as of March 31, 2007, assuming a 100 basis point increase in market interest rates, would decrease by approximately $0.4 million, which would not materially affect our operations. We have the ability to hold our fixed
income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If necessary, we
may sell short-term investments prior to maturity to meet our liquidity needs.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the
Exchange Act of 1934, as of the end of the period covered by this quarterly report. Our Chief Executive Officer and Chief Financial Officer supervised and participated in the evaluation. Based on the evaluation, our Chief Executive Officer and Chief
Financial Officer each concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective in providing reasonable assurance that material information relating to us and our consolidated subsidiary is recorded,
processed and made known to management on a timely basis, including during the period when we prepare our periodic SEC reports. The design and operation of any system of controls is based in part upon certain assumptions about the likelihood of
future events and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 that occurred during our second fiscal quarter ended March 31, 2007
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

None.



|ITEM 1A. | 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.

From inception to May 2002, most of our revenues derived from the license of our embedded memory products. After our acquisition of In-Chip
Systems, Inc. in May 2002, we expanded our product offering to also include logic products. In 2003, we added I/Os to our product offering to enable us to offer semiconductor IP platform. If our strategy to be a provider of semiconductor IP
platforms is not broadly accepted by potential customers or acceptance is delayed for any reason, our revenues and profitability could be adversely affected. In addition, our profitability could also be adversely affected due to investment of
resources directed to the development and/or acquisition of logic and I/O products and due to lower than anticipated revenues from the sale of such products. Factors that could prevent us from gaining market acceptance of our semiconductor
IP platforms include:



| |  |  | difficulties in convincing customers of our memory products to purchase other products from us; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | difficulties and delays in expanding our logic and I/O product offerings.
| | - |  | -------------------------------------------------------------------------



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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 are likely to fluctuate in the future from quarter to quarter
and on an annual basis 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 materially from quarter to quarter include:



| |  |  | large orders unevenly spaced over time;
| | - |  | ---------------------------------------



| |  |  | establishment or loss of strategic relationships with third-party semiconductor foundries;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | pace of adoption of new technologies by customers;
| | - |  | --------------------------------------------------



| |  |  | timing of new technologies and technology enhancements by us and our competitors;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | consolidation, merger and acquisition activity of our customer base may cause delays or loss of sales;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | difficulties in forecasting royalty revenues because of factors out of our control, such as the timing and 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; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and may not be
reliable as indicators 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 quarters, which could cause the market price of our stock to decline significantly.

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

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

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



| |  |  | the lengthy and expensive process of building a relationship with potential customers;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | 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 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 customers. Further, there are a finite number of fabless semiconductor companies and
integrated device manufacturers to which we can license our IP. If we are unable to establish and maintain these relationships, we will be unable to generate license fees, and our revenues will decrease.



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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 and our business will be harmed.

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

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

A portion of our agreements require us to provide customized products to our
customers within a specified delivery timetable. While we have experienced delays in delivering products to our customers, the durations of these delays have typically been short in length so as to not materially damage our relationship with our
customers. However, these delays could adversely impact our operations and our financial performance. Future failures to meet significant customer milestones could damage our reputation in our industry and harm our ability to attract new customers.

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

We have agreements with certain third-party semiconductor foundries to pay us royalties on their sales of silicon chips they manufacture for our fabless customers.
Beginning with our STAR Memory System 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. However, we may not be successful in convincing all customers to agree to pay us royalties. For the first six months of fiscal 2007 and 2006, we recorded royalty revenues of
approximately $5.9 million and $8.2 million, respectively. The continued growth of our revenues depends in part on increasing our royalty revenues, but we may not be successful in increasing our royalty revenues as expected and we face difficulties
in forecasting our royalty revenues because of many factors beyond our control, such as fluctuating sales volumes of products that incorporate our IP, short or unpredictable product life cycles for some customer products containing our IP, potential
slow down for manufacturing of certain newer process technology, foundry rate adjustments, the cyclical nature of the semiconductor industry that affects the number of designs, commercial acceptance of these products, accuracy of revenue reports
received from our customers and difficulties in the royalty collection process. In addition, occasionally we have completed agreements whereby significant upfront license fees are reduced or limited in exchange for higher royalty rates, which should
result in future royalty revenues, but these royalty arrangements may not provide us with the anticipated benefits as sales of products incorporating our IP may not offset lower license fees.

It is difficult for us to verify royalty amounts owed to us under our licensing arrangements.

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

Products that do not meet customer specifications or contain material defects could damage our reputation and cause us to lose customers and revenue.



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The complexity and ongoing development of our products could lead to design or manufacturing problems. Our semiconductor
IP products may fail to meet our customers design or technical requirements, or may contain defects, which may cause our customers to fail to complete the design and manufacturing of their products in a timely manner. Any of these problems may
harm our customers businesses. If any of our products fail to meet specifications or have reliability or quality problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result
in a decline in revenue, an increase in product returns and the loss of existing customers or failure to attract new customers. These problems may adversely affect customer relationships, as well as our business, financial condition and results of
operations.

As advanced process nodes become more complex we may have difficulty in delivering product specifications in similar timeframes and at
comparable costs to older process nodes.

The increasing complexity of our products at advanced nodes requires different customer engagements and
validation strategies. Such changes require the acceptance of different business terms and schedules by our customers. They also may require an increase of test silicon for purposes of validating performance parameters. Such changes may impact our
ability to acquire new customers and could increase our operating expenses.

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

We currently have subsidiaries or branches in the Republic of Armenia, India, the United Kingdom, Israel,
Germany and Japan. In addition, a significant portion of our IP is being developed in development centers located in the Republic of Armenia and India. Israel continues to face an increased level of violence and terror. India is experiencing rising
costs and in certain industries, intense competition for highly qualified personnel. Armenia, only independent since 1991, has suffered significant political and economic instability. Accordingly, conditions 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 changes in the economic conditions in 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, changes in the demand for technical
personnel 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 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.

Sales to customers located outside North America accounted for 60% and 63% of our revenues for fiscal years ended September 30, 2006 and 2005,
respectively. For the six months ended March 31, 2007 and 2006, sales to customers located outside North America accounted for 61% and 58% of our revenues, respectively. We anticipate that sales to customers located outside North America will
increase and will continue to represent a significant portion of our total revenues in future periods. In addition, most of our customers that do not own their own fabrication plants rely on third-party foundries located outside of North America.
Accordingly, our operations and revenues are subject to a number of risks associated with doing business in international markets, including the following:



| |  |  | 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 or the interpretation of such 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
| | - |  | ---------------------------------------------------------



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| |  |  | United States government licensing requirements for exports, which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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

Historically, because of the complexity of our products, it can take a significant
amount of time and effort to explain the benefits of our products and to negotiate a sale. For example, it generally takes at least three to nine months after our first contact with a prospective customer before we start licensing our IP to that
customer. In addition, purchase of our products is usually made in connection with new design starts, the timing of which is 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. We have two customers that generated more than 10% of our revenue for the quarter ended March 31, 2007. We have one customer that generated more than 10% of our revenue for the quarter ended March 31, 2006.
For the six months ended March 31, 2007 and 2006, one customer accounted for more than 10%, respectively, of our total revenues. Since fiscal year 2001, our five largest customers have represented between 25-47% of our revenues. The license
agreements we enter into with our customers do not obligate them to license future generations of our IP and, as a result, we cannot predict if and when they will purchase additional products from us. As a result of this customer concentration, we
could experience a dramatic reduction in our revenues if we lose one or more of our significant customers and are unable to replace them. In addition, since our accounts receivable are concentrated in a relatively small number of customers, a
significant change in the liquidity, financial position, or issues regarding timing of payments of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable, historical revenues recorded and our
future operating results.

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

We recorded a net loss of $3.0 million for the first six months ended March 31, 2007. We recorded a net loss of $0.9 million for fiscal 2006. In order to improve our
profitability, we will need to continue to generate new sales while controlling our costs. As we plan on continuing the growth of our business while implementing cost control measures, we may not be able to successfully generate enough revenues to
return to profitability 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. In addition, if we
incurred losses for a sustained period we may be prevented from being able to fully utilize our deferred tax asset which will result in the need for a valuation allowance to be recorded.

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

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

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



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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.

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 requirements on our personnel, particularly our engineers.

Our historical growth, international expansion, and our strategy of being a provider of semiconductor IP platforms, have placed, and are expected to continue to
place, a significant challenge on our managerial and financial resources as well as our 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. Our inability to manage any future
growth effectively would be harmful to our revenues and profitability.

We have received assessment orders from the Government of India, Income Tax
Department, Office of the Director of Income Tax (Indian Tax Authorities) proposing a tax deficiency in certain of our tax returns, and the outcome of the assessment or any future assessment involving similar claims may have an adverse effect on our
consolidated statements of operations.

The Indian Tax Authorities completed its assessment of our tax returns for the tax years 2000 through 2003
and issued assessment orders in which the Indian Tax Authorities proposes to assess an aggregate tax deficiency for the three year period of approximately $1.2 million, plus interest, which interest will accrue until the matter is resolved. The
assessment orders are not final notices of deficiency, and we have immediately filed appeals to the appellate tax authorities. We believe that the assessments are inconsistent with the applicable tax laws and that we have meritorious defense to the
assessments. However, the ultimate outcome cannot be predicted with certainty, including the amount payable or the timing of any such payments upon resolution of the matter. Should the Indian Tax Authorities assess additional taxes as a result of a
current or a future assessment, we may be required to record charges to operations in future periods that could have an adverse effect on our consolidated statements of operations.

Risk Related to Our Industry

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

Our business and the adoption and continued use of our IP by semiconductor companies
depends on continued demand for products requiring complex semiconductors, embedded memories and logic elements, such as cellular and digital phones, pagers, PDAs, digital cameras, DVD players, switches and modems. The demand for such products is
uncertain and difficult to predict, and it depends on factors beyond our control such as the competition faced by each customer, market acceptance of products that incorporate our IP and the financial and other resources of each customer. A
reduction in the demand for products incorporating complex semiconductors and semiconductor IP or a decline 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, with increasing complexity in each successive generation of semiconductors, we face the risk that the rate of adoption of smaller technology processes may
slow down.

In addition, the semiconductor industry is highly cyclical. Significant economic downturns characterized by diminished demand, erosion of
average selling prices, production overcapacity and production capacity constraints are other factors affecting the semiconductor industry. As a result, we may face a reduced number of design starts, tightening of customers operating budgets,
extensions of the approval process for new orders and projects and consolidation among our customers, all of which may harm the demand for our products and may cause us to experience substantial period-to-period fluctuations in our operating
results. Further, the markets for third-party semiconductor IP have emerged only in recent years. Because of the recent emergence of these markets, it is difficult to forecast whether these markets will continue to develop or grow at a rate
sufficient to support our business.



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The market for semiconductor IP platforms can be highly competitive and dynamic. We may experience loss in market
share to larger competitors with greater resources and/or our customer base may choose to develop semiconductor IP platforms using their own internal design teams.

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

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.

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

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

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



| |  |  | our ability to anticipate and respond in a timely manner to changes in the requirements of semiconductor companies;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the emergence of new semiconductor manufacturing processes and our ability to enter into strategic relationships with third-party semiconductor foundries to develop
and test technologies for these new processes and provide customer referrals;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the significant research and development investment that we may be required to make before market acceptance, if any, of a particular technology;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | new technologies introduced by our competitors.
| | - |  | -----------------------------------------------

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

In addition, research and development requires a significant
expense and resource commitment. Since we have a limited operating history, we are unable to predict our future resource requirements. 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.

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. Continued unrest in Israel and the Middle East may negatively impact the investments that our worldwide customers make in these geographic regions. If businesses or consumers defer or cancel purchases of new products that
contain complex semiconductors, purchases by fabless semiconductor companies, integrated device manufacturers and production levels by semiconductor manufacturers could decline. This could adversely affect our revenues which in turn would have an
adverse effect on our results of operations and financial condition.

Risk Related to Our Intellectual Property Rights

We rely on our proprietary technologies and we cannot assure you that the precautions taken to protect our rights will be adequate or that we will continue to be
able to adequately secure such proprietary technologies from third parties.



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We rely on a combination of patent, trademark, copyright, mask work and trade secret laws to protect our proprietary
rights in our technologies. We cannot be sure that the United States Patent and Trademark Office will issue patents or trademarks 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. Furthermore, the
laws of some foreign countries may not adequately protect our IP to the same extent as applicable laws protect our IP in the United States. For instance, some portion of our IP developed outside of the United States may not receive the same
copyright protection that it would receive if it was developed in the United States. As we increase our international presence, we expect that it will become more difficult to monitor the development of competing technologies that may infringe on
our rights as well as unauthorized use of our technologies.

We use license 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. We cannot be sure that we have taken adequate steps to protect our IP rights and deter
misappropriation of these rights or that we will be able to detect unauthorized uses and take 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 and patent the same technologies 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 and improperly disclose our proprietary technologies to others.

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.

We believe that our technologies do not infringe the IP rights of third parties to date. However, there are numerous patents in the semiconductor industry and new patents are being issued at a rapid rate. It is not
always practicable to determine in advance whether our technologies infringe the patent right of others. As a result, we may be compelled to respond to infringement claims by third parties to protect our rights or defend our customers rights.
These infringement claims, regardless of merit, could be costly and time-consuming, and divert our management and key personnel from our business operations. In settling these claims, we may be required to pay significant damages and may be
prevented from licensing some of our technologies 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. If available, the royalty
or license agreement may include terms which require us to obtain a license from the third party to sell or use the relevant technology which may result in significant expenses to the Company or to redesign the technology which would be time
consuming and costly to the Company. In the event that we are not be able to obtain such royalty or license agreements on terms acceptable to us, we may be prevented from licensing or developing our technology.

Risk Related to Our Stock

Our stock price may be volatile and
could decline substantially.

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



| |  |  | variations between our operating results and the published expectations of securities analysts;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates or investment recommendations by securities analysts following our business;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | announcements by us or our competitors of significant contracts, new products or services, acquisitions, or other significant transactions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------

A
sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

Sales of a substantial number of
shares of our common stock in the public market could adversely affect the market price of our common stock. Adam Kablanian, Chairman of the Board of Directors, and Alexander Shubat, Vice President of Research and Development, Chief Technology
Officer and a member of the Board of Directors, have adopted stock trading plans under



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Rule 10b5-1 of the Securities Exchange Act of 1934. Both plans are in effect for a one-year period ending on December 2007, and are subject to
predetermined price and volume limits. Sales transactions are also subject to the restrictions and filing requirements mandated by Securities and Exchange Commission Rule 144. Furthermore, our officers, directors and principal stockholders
controlled as of December 31, 2006 approximately 63% of our common stock. As a result, this significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages
to owning stock in companies with significant block stockholders.

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 certificate of incorporation, our bylaws and Delaware law contain provisions that make it more difficult for another company to acquire control of our Company. In addition, these provisions could limit the price that investors would be
willing to pay in the future for shares of our common stock. These provisions include:



| |  |  | 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 three 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.
| | - |  | -----------------------------------------------------------------------------------

We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our outstanding voting stock, the person is
an interested stockholder and may not engage in any business combination with us for a period of three years from the time the person acquired 15% or more of our outstanding voting stock. In addition, in February 2007, we
executed change in control agreements with our executive officers, which provide severance benefits following a termination without cause, or for good reason, following a change in control. The existence of these agreements and potential pay-outs
could act as a deterrent to a potential acquiror.



|ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
|------- | -----------------------------------------------------

We held our
Annual Meeting of Stockholders on March 2, 2007. The stockholders approved the following proposals:



|1. | Election of two Class I directors to serve for a three year term until the annual meeting of stockholders in 2010 and until their successors are elected and qualified.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  |            |  |         
|------------------ |  | ---------- |  | --------
|Nominee            |  | For        |  | Withheld
|J. Daniel McCranie |  | 19,812,966 |  | 660,171 
|Robert H. Smith    |  | 19,888,425 |  | 584,712 



|2. | To ratify the appointment of Burr Pilger & Mayer LLP as the Companys independent registered public accounting firm for the fiscal year ending September 30, 2007.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |         |  |                 
|---------- |  | ------- |  | ------- |  | ----------------
|For        |  | Against |  | Abstain |  | Broker Non-Votes
|20,399,586 |  | 71,951  |  | 1,600   |  |                



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None



|ITEM 6. | EXHIBITS
|------- | --------



|           |  |                                                                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Exhibits                                                                                                                                              
|31.1       |  | Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|           | 
|31.2       |  | Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|           | 
|32.1       |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                
|           | 
|32.2       |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                



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SIGNATURES

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



|                  |  |                                             
|----------------- |  | --------------------------------------------
|Date: May 9, 2007 |  | VIRAGE LOGIC CORPORATION                    
|                  | 
|                  |  | /s/ J. Daniel McCranie                      
|                  |  | J. Daniel McCranie                          
|                  |  | President and Chief Executive Officer       
|                  | 
|                  |  | /s/ Christine Russell                       
|                  |  | CHRISTINE RUSSELL                           
|                  |  | Chief Financial Officer                     
|                  |  | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|31.2 |  | Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                
|     | 
|32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                



35