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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 DECEMBER 31, 2006

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 February 2, 2007, there were 23,089,641 shares of the Registrants Common Stock outstanding.



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VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX



|              |  |                                                                                                                        |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                        |  | PAGE
|              |  | Part I. Financial Information                                                                                          |  |     
|              |  |                                                                                                                       
|Item 1.       |  | Financial Statements                                                                                                   |  |     
|              |  |                                                                                                                       
|              |  | Unaudited Condensed Consolidated Balance Sheets  December 31, 2006 and September 30, 2006                             |  | 3   
|              |  |                                                                                                                       
|              |  | Unaudited Condensed Consolidated Statements of Operations  Three Months Ended December 31, 2006 and December 31, 2005 |  | 4   
|              |  |                                                                                                                       
|              |  | Unaudited Condensed Consolidated Statements of Cash Flows  Three Months Ended December 31, 2006 and December 31, 2005 |  | 5   
|              |  |                                                                                                                       
|              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                         |  | 6   
|              |  |                                                                                                                       
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 13  
|              |  |                                                                                                                       
|Item 3.       |  | Quantitative and Qualitative Disclosures about Market Risks                                                            |  | 22  
|              |  |                                                                                                                       
|Item 4.       |  | Controls and Procedures                                                                                                |  | 23  
|              |  |                                                                                                                       
|              |  | Part II. Other Information                                                                                             |  |     
|              |  |                                                                                                                       
|Item 1.       |  | Legal Proceedings                                                                                                      |  | 24  
|              |  |                                                                                                                       
|Item 1A.      |  | Risk Factors                                                                                                           |  | 24  
|              |  |                                                                                                                       
|Item 2.       |  | Changes in Securities and Use of Proceeds                                                                              |  | 33  
|              |  |                                                                                                                       
|Item 3.       |  | Defaults upon Senior Securities                                                                                        |  | 33  
|              |  |                                                                                                                       
|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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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                                                                                                       |  | December 31, 2006 |         |   | September 30, 2006 |  
|ASSETS:                                                                                                                                                                                |  |                   |         |   |                    |   |         |  
|Current assets:                                                                                                                                                                        |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents                                                                                                                                                              |  | $                 | 10,679  |   |                    | $ | 20,815  |  
|Short-term investments                                                                                                                                                                 |  |                   | 55,662  |   |                    |   | 49,253  |  
|Accounts receivable, net                                                                                                                                                               |  |                   | 11,170  |   |                    |   | 15,935  |  
|Costs in excess of related billings on uncompleted contracts                                                                                                                           |  |                   | 690     |   |                    |   | 656     |  
|Current deferred tax assets                                                                                                                                                            |  |                   | 1,527   |   |                    |   | 1,527   |  
|Prepaid expenses and other                                                                                                                                                             |  |                   | 3,744   |   |                    |   | 3,369   |  
|Taxes receivable                                                                                                                                                                       |  |                   | 1,315   |   |                    |   | 1,711   |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total current assets                                                                                                                                                                   |  |                   | 84,787  |   |                    |   | 93,266  |  
|Property, equipment and leasehold improvements, net                                                                                                                                    |  |                   | 4,559   |   |                    |   | 4,842   |  
|Goodwill                                                                                                                                                                               |  |                   | 9,782   |   |                    |   | 9,782   |  
|Other intangible assets, net                                                                                                                                                           |  |                   | 1,893   |   |                    |   | 1,990   |  
|Deferred tax assets                                                                                                                                                                    |  |                   | 8,622   |   |                    |   | 8,562   |  
|Long-term investments in marketable securities                                                                                                                                         |  |                   | 13,438  |   |                    |   | 7,533   |  
|Other long-term assets                                                                                                                                                                 |  |                   | 367     |   |                    |   | 300     |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total assets                                                                                                                                                                           |  | $                 | 123,448 |   |                    | $ | 126,275 |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                   |  |                   |         |   |                    |   |         |  
|Current liabilities:                                                                                                                                                                   |  |                   |         |   |                    |   |         |  
|Accounts payable                                                                                                                                                                       |  | $                 | 843     |   |                    | $ | 446     |  
|Accrued expenses                                                                                                                                                                       |  |                   | 3,766   |   |                    |   | 4,797   |  
|Deferred revenue                                                                                                                                                                       |  |                   | 7,363   |   |                    |   | 8,896   |  
|Income taxes payable                                                                                                                                                                   |  |                   | 1,135   |   |                    |   | 2,626   |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total current liabilities                                                                                                                                                              |  |                   | 13,107  |   |                    |   | 16,765  |  
|Deferred tax liabilities                                                                                                                                                               |  |                   | 692     |   |                    |   | 692     |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total liabilities                                                                                                                                                                      |  |                   | 13,799  |   |                    |   | 17,457  |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Commitments and contingencies                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|Stockholders equity:                                                                                                                                                                  |  |                   |         |   |                    |   |         |  
|Common stock, $.001 par value; Authorized shares  150,000,000; issued and outstanding shares  23,087,657 and 23,027,662 as of
December 31, 2006 and September 30, 2006, respectively |  |                   | 23      |   |                    |   | 23      |  
|Additional paid-in capital                                                                                                                                                             |  |                   | 132,448 |   |                    |   | 130,620 |  
|Accumulated other comprehensive income                                                                                                                                                 |  |                   | 528     |   |                    |   | 309     |  
|Accumulated deficit                                                                                                                                                                    |  |                   | (23,350 | ) |                    |   | (22,134 | )
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total stockholders equity                                                                                                                                                             |  |                   | 109,649 |   |                    |   | 108,818 |  
|                                                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Total liabilities and stockholders equity                                                                                                                                             |  | $                 | 123,448 |   |                    | $ | 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 |       
|                                                             |  | December 31,2006   |        |   | December 31,2005 |  
|Revenue:                                                     |  |                    |        |   |                  |   |        |  
|License                                                      |  | $                  | 8,422  |   |                  | $ | 10,410 |  
|Royalties                                                    |  |                    | 3,103  |   |                  |   | 3,315  |  
|                                                             |  |                    |        |   |                  |   |        |  
|Total revenues                                               |  |                    | 11,525 |   |                  |   | 13,725 |  
|Cost and expenses:                                           |  |                    |        |   |                  |   |        |  
|Cost of revenue                                              |  |                    | 3,727  |   |                  |   | 3,715  |  
|Research and development                                     |  |                    | 5,076  |   |                  |   | 5,628  |  
|Sales and marketing                                          |  |                    | 3,654  |   |                  |   | 4,260  |  
|General and administrative                                   |  |                    | 2,664  |   |                  |   | 2,756  |  
|                                                             |  |                    |        |   |                  |   |        |  
|Total cost and expenses                                      |  |                    | 15,121 |   |                  |   | 16,359 |  
|Operating loss                                               |  |                    | (3,596 | ) |                  |   | (2,634 | )
|Interest income and other expenses, net                      |  |                    | 943    |   |                  |   | 619    |  
|                                                             |  |                    |        |   |                  |   |        |  
|Loss before income taxes                                     |  |                    | (2,653 | ) |                  |   | (2,015 | )
|Income tax benefit                                           |  |                    | (1,437 | ) |                  |   | (1,773 | )
|                                                             |  |                    |        |   |                  |   |        |  
|Net loss                                                     |  | $                  | (1,216 | ) |                  | $ | (242   | )
|                                                             |  |                    |        |   |                  |   |        |  
|Net loss per share:                                          |  |                    |        |   |                  |   |        |  
|Basic                                                        |  | $                  | (0.05  | ) |                  | $ | (0.01  | )
|                                                             |  |                    |        |   |                  |   |        |  
|Diluted                                                      |  | $                  | (0.05  | ) |                  | $ | (0.01  | )
|                                                             |  |                    |        |   |                  |   |        |  
|Weighted average shares used in computing per share amounts: |  |                    |        |   |                  |   |        |  
|Basic                                                        |  |                    | 23,057 |   |                  |   | 22,257 |  
|                                                             |  |                    |        |   |                  |   |        |  
|Diluted                                                      |  |                    | 23,057 |   |                  |   | 22,257 |  
|                                                             |  |                    |        |   |                  |   |        |  

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)



|                                                                               |  |                    |         |   |                   |   |        |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------ | -
|                                                                               |  | Three Months Ended |        
|                                                                               |  | December 31, 2006  |         |   | December 31, 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          |  |                    |         |   |                   |   |        |  
|Net loss                                                                       |  | $                  | (1,216  | ) |                   | $ | (242   | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                    |         |   |                   |   |        |  
|Provision for doubtful accounts                                                |  |                    |        |   |                   |   |       |  
|Depreciation and amortization                                                  |  |                    | 476     |   |                   |   | 478    |  
|Amortization of intangible assets                                              |  |                    | 97      |   |                   |   | 96     |  
|Stock-based compensation                                                       |  |                    | 1,466   |   |                   |   | 1,729  |  
|Loss on disposal of fixed assets                                               |  |                    |        |   |                   |   | 10     |  
|Changes in operating assets and liabilities:                                   |  |                    |         |   |                   |   |        |  
|Accounts receivable                                                            |  |                    | 4,766   |   |                   |   | 343    |  
|Costs in excess of related billings on uncompleted contracts                   |  |                    | (28     | ) |                   |   | 536    |  
|Prepaid expenses and other assets                                              |  |                    | (343    | ) |                   |   | 536    |  
|Taxes receivable                                                               |  |                    | 396     |   |                   |   | (313   | )
|Deferred tax assets                                                            |  |                    | (60     | ) |                   |   | (1,932 | )
|Other long-term assets                                                         |  |                    | (66     | ) |                   |   | 538    |  
|Accounts payable and accrued liabilities                                       |  |                    | (664    | ) |                   |   | 552    |  
|Deferred revenue                                                               |  |                    | (1,533  | ) |                   |   | 464    |  
|Income tax payable                                                             |  |                    | (1,498  | ) |                   |   | 14     |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Net cash provided by operating activities                                      |  |                    | 1,793   |   |                   |   | 2,809  |  
|                                                                               |  |                    |         |   |                   |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          |  |                    |         |   |                   |   |        |  
|Purchase of property and equipment                                             |  |                    | (53     | ) |                   |   | (137   | )
|Purchase of investments                                                        |  |                    | (32,627 | ) |                   |   | (4,997 | )
|Proceeds from maturities of investments                                        |  |                    | 20,323  |   |                   |   | 7,099  |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Net cash provided by (used in) investing activities                            |  |                    | (12,357 | ) |                   |   | 1,965  |  
|                                                                               |  |                    |         |   |                   |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |  |                    |         |   |                   |   |        |  
|Net proceeds from issuance of common stock                                     |  |                    | 355     |   |                   |   | 496    |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Net cash provided by financing activities                                      |  |                    | 355     |   |                   |   | 496    |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Effect of exchange rates on cash                                               |  |                    | 73      |   |                   |   | 10     |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Net increase in cash and cash equivalents                                      |  |                    | (10,136 | ) |                   |   | 5,280  |  
|Cash and cash equivalents at beginning of period                               |  |                    | 20,815  |   |                   |   | 26,841 |  
|                                                                               |  |                    |         |   |                   |   |        |  
|Cash and cash equivalents at end of period                                     |  | $                  | 10,679  |   |                   | $ | 32,121 |  
|                                                                               |  |                    |         |   |                   |   |        |  

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 months ended December 31, 2006 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 their functional currencies. 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



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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 $16,000 during the three months ended December 31, 2006. Software is amortized for financial reporting purposes using the straight-line method over the estimated useful life of three years.

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 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.



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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.

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
December 31, 2006 and 2005 consisted of money market funds and commercial paper. The Company determines the appropriate classification of investment securities at the time of purchase. As of December 31, 2006 and 2005, 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 $13.4 million and $7.5 million with
maturity dates greater than one year for the fiscal years ended December 31, 2006 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 months ended December 31, 2006 and 2005 were $1.5 million and $1.7 million, respectively. As
of December 31, 2006, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $7.4 million and will be amortized over a weighted average period of 2.4 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 month
period ended December 31, 2006 and 2005 was as follows (in thousands, except per share data):



|                                                        |  |                                      |       |   |                                      |   |       |  
|------------------------------------------------------- |  | ------------------------------------ | ----- | - | ------------------------------------ | - | ----- | -
|                                                        |  | Three Months Ended December 31, 2006 |       |   | Three Months Ended December 31, 2005 |  
|Cost of revenue                                         |  | $                                    | 237   |   |                                      | $ | 263   |  
|Research and development                                |  |                                      | 333   |   |                                      |   | 580   |  
|Sales and marketing                                     |  |                                      | 380   |   |                                      |   | 503   |  
|General and administrative                              |  |                                      | 516   |   |                                      |   | 383   |  
|                                                        |  |                                      |       |   |                                      |   |       |  
|Stock-based compensation expense                        |  |                                      | 1,466 |   |                                      |   | 1,729 |  
|Related income tax benefits                             |  |                                      | (340  | ) |                                      |   | (317  | )
|                                                        |  |                                      |       |   |                                      |   |       |  
|Stock-based compensation expense, net of taxes benefits |  | $                                    | 1,126 |   |                                      | $ | 1,412 |  
|                                                        |  |                                      |       |   |                                      |   |       |  
|Net stock-based compensation expense, per common share: |  |                                      |       |   |                                      |   |       |  
|Basic                                                   |  | $                                    | 0.05  |   |                                      | $ | 0.06  |  
|                                                        |  |                                      |       |   |                                      |   |       |  
|Diluted                                                 |  | $                                    | 0.05  |   |                                      | $ | 0.06  |  
|                                                        |  |                                      |       |   |                                      |   |       |  

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 |  
|                        |  | December 31, 2006  |   |  | December 31, 2005 |  
|Volatility              |  | 59.3               | % |  | 70.9              | %
|Risk-free interest rate |  | 4.7                | % |  | 4.4               | %
|Dividend yield          |  | 0.0                | % |  | 0.0               | %
|Expected life (years)   |  | 4.25 years         |   |  | 4.30 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 values of options granted during the three months ended December 31, 2006 and 2005 were $4.58
and $4.39, respectively.

Restricted Stock Units

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.

Stock-based compensation cost for restricted stock units for the three months ended December 31, 2006 was $0.1 million. As of
December 31, 2006, the total unrecognized compensation cost related to unvested awards not yet recognized is $1 million and is expected to be recognized over period of 4.0 years.



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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 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 is summarized as follows:



|                                |  |                            |   |  |                               |   |  |                                 |      
|------------------------------- |  | -------------------------- | - |  | ----------------------------- | - |  | ------------------------------- | -----
|                                |  | Shares Available for Grant |   |  | Number of Options Outstanding |   |  | Weighted Average Exercise Price
|Balance at September, 2006      |  | 1,606,423                  |   |  | 5,631,700                     |   |  | $                               | 10.14
|SSARs granted                   |  | (182,301                   | ) |  | 182,301                       |   |  | $                               | 8.95 
|Restricted stock units granted  |  | (132,120                   | ) |  |                              |   |  |                                 |     
|Options exercised               |  |                           |   |  | (59,995                       | ) |  | $                               | 5.92 
|Options canceled                |  | 199,008                    |   |  | (199,008                      | ) |  | $                               | 13.19
|Restricted stock units canceled |  | 11,000                     |   |  |                              |   |  |                                 |     
|                                |  |                            |   |  |                               |   |  |                                 |      
|Balance at December 31, 2006    |  | 1,502,010                  |   |  | 5,554,998                     |   |  | $                               | 10.04
|                                |  |                            |   |  |                               |   |  |                                 |      

The following table summarizes information about stock options outstanding and exercisable at December 31,
2006:



|                                                    |  |                |  |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|--------------------------------------------------- |  | -------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ------------------------- | - | ---------------- |  | ------------------------------------------- |  | ------------------------------- |  | ------------------------- | ----- |  | - | -----
|                                                    |  |                |  | Options Outstanding                     |  | Options Exercisable         
|Range of Exercise Prices                            |  | NumberofShares |  | 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                                         |  | 718,988        |  | 4.82                                    |  | $                            | 3.80  |                           | $ | 3,945            |  | 664,352                                     |  | 4.70                            |  | $                         | 3.66  |  | $ | 3,738
|$5.62-$7.81                                         |  | 818,485        |  | 8.47                                    |  | $                            | 7.56  |                           | $ | 1,415            |  | 206,093                                     |  | 7.51                            |  | $                         | 7.17  |  | $ | 437  
|$7.84-$8.63                                         |  | 717,110        |  | 8.71                                    |  | $                            | 8.25  |                           | $ | 744              |  | 132,864                                     |  | 7.74                            |  | $                         | 8.58  |  | $ | 95   
|$8.65-$9.05                                         |  | 566,407        |  | 7.93                                    |  | $                            | 8.90  |                           | $ | 221              |  | 305,968                                     |  | 6.98                            |  | $                         | 8.89  |  | $ | 122  
|$9.08-$10.30                                        |  | 755,859        |  | 7.80                                    |  | $                            | 9.87  |                           | $ | 2                |  | 432,446                                     |  | 7.27                            |  | $                         | 9.95  |  | $ | 1    
|$10.31-$11.65                                       |  | 558,416        |  | 7.34                                    |  | $                            | 11.13 |                           | $ |                 |  | 385,999                                     |  | 6.73                            |  | $                         | 11.20 |  | $ |     
|$11.66-$15.83                                       |  | 559,721        |  | 5.31                                    |  | $                            | 14.37 |                           | $ |                 |  | 516,080                                     |  | 5.08                            |  | $                         | 14.30 |  | $ |     
|$15.94-$16.56                                       |  | 697,004        |  | 5.06                                    |  | $                            | 16.20 |                           | $ |                 |  | 689,779                                     |  | 5.06                            |  | $                         | 16.20 |  | $ |     
|$16.70-$22.81                                       |  | 163,008        |  | 6.36                                    |  | $                            | 17.71 |                           | $ |                 |  | 145,765                                     |  | 6.15                            |  | $                         | 17.77 |  | $ |     
|                                                    |  |                |  |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|Total                                               |  | 5,554,998      |  | 6.96                                    |  | $                            | 10.04 |                           | $ | 6,327            |  | 3,479,346                                   |  | 5.92                            |  | $                         | 10.79 |  | $ | 4,393
|                                                    |  |                |  |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      
|Vested and expected to vest as of December 31, 2006 |  | 5,355,961      |  | 6.75                                    |  | $                            | 10.09 |                           | $ | 6,134            |  |                                             |  |                                 |  |                           |       |  |   |      
|                                                    |  |                |  |                                         |  |                              |       |                           |   |                  |  |                                             |  |                                 |  |                           |       |  |   |      

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the
Companys closing stock price of $9.29 and $9.88 as of December 31, 2006 and 2005, respectively, 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 December 31, 2006 and 2005 were 1.3 million and 1.2 million, respectively.

The total fair value of
shares vested during the three months ended December 31, 2006 and 2005 were $1.1 million and $0.6 million, respectively. The total intrinsic value of options exercised during the three month period ended December 31, 2006 and 2005 were
$0.2 million and $0.8 million, respectively. The total cash received from employees as a result of employee stock option exercises during the three months ended December 31, 2006 and 2005 were approximately $0.4 million and $0.5 million.



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##### Table of Contents

A summary of the status of the Companys nonvested shares as of December 31, 2006 and changes during the three
months ended December 31, 2006, is presented below:



|                                   |  |                 |   |  |                                          |     
|---------------------------------- |  | --------------- | - |  | ---------------------------------------- | ----
|                                   |  | Stock Options  
|                                   |  | Number ofshares |   |  | Weighted- average grant- date fair
value
|Nonvested as of September 30, 2006 |  | 2,417,164       |   |  | $                                        | 5.17
|Awards granted                     |  | 314,421         |   |  | $                                        | 3.56
|Awards vested                      |  | (193,327        | ) |  | $                                        | 5.76
|Awards canceled                    |  | (210,008        | ) |  | $                                        | 6.25
|                                   |  |                 |   |  |                                          |     
|Nonvested as of December 31, 2006  |  | 2,328,250       |   |  | $                                        | 5.19
|                                   |  |                 |   |  |                                          |     

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.

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 Ended |       
|                                                                     |  | December 31, 2006  |        |   | December 31, 2005 |  
|Basic loss per share:                                                |  |                    |        |   |                   |   |        |  
|Net loss                                                             |  | $                  | (1,216 | ) |                   | $ | (242   | )
|                                                                     |  |                    |        |   |                   |   |        |  
|Shares used in computation:                                          |  |                    |        |   |                   |   |        |  
|Weighted average common shares outstanding                           |  |                    | 23,057 |   |                   |   | 22,257 |  
|Less: Weighted average number of common shares subject to repurchase |  |                    |       |   |                   |   |       |  
|                                                                     |  |                    |        |   |                   |   |        |  
|Shares used in computing basic net loss per share                    |  |                    | 23,057 |   |                   |   | 22,257 |  
|Add:Weighted average share equivalents from stock options            |  |                    |       |   |                   |   |       |  
|                                                                     |  |                    |        |   |                   |   |        |  
|Shares used in computing diluted net loss per share                  |  |                    | 23,057 |   |                   |   | 22,257 |  
|                                                                     |  |                    |        |   |                   |   |        |  
|Basic net loss per share                                             |  | $                  | (0.05  | ) |                   | $ | (0.01  | )
|                                                                     |  |                    |        |   |                   |   |        |  
|Diluted net loss per share                                           |  | $                  | (0.05  | ) |                   | $ | (0.01  | )
|                                                                     |  |                    |        |   |                   |   |        |  

For the computation of net loss per share for the three months ended December 31, 2006, the Company excluded
all stock options as the inclusion of these securities would have been anti-dilutive. Options totaling approximately 5,555,000 shares have been excluded from the calculation of the net loss per share for the quarter ended December 31, 2006.

For the computation of net loss per share for the three months ended December 31, 2005, the Company excluded all stock options as the inclusion of
these securities would have been anti-dilutive. Options totaling approximately 5,812,000 shares have been excluded from the calculation of the net loss per share for the quarter ended December 31, 2005.

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.



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Total comprehensive loss for the three-month periods ended December 31, 2006 and 2005, respectively, is as follows:



|                                                             |  |                    |        |   |                   |   |      |  
|------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ---- | -
|                                                             |  | Three Months Ended |       
|                                                             |  | December 31, 2006  |        |   | December 31, 2005 |  
|Net loss                                                     |  | $                  | (1,216 | ) |                   | $ | (242 | )
|Foreign currency translation adjustments, net of tax         |  |                    | (136   | ) |                   |   | (33  | )
|Changes in unrealized gain (loss) on investments, net of tax |  |                    | 1      |   |                   |   | 9    |  
|                                                             |  |                    |        |   |                   |   |      |  
|Comprehensive loss                                           |  | $                  | (1,351 | ) |                   | $ | (266 | )
|                                                             |  |                    |        |   |                   |   |      |  

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 geography are as follows:



|                                                  |  |                    |        |                   |   |       
|------------------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                                                  |  | Three Months Ended
|Total Revenue by Geography                        |  | December 31, 2006  |        | December 31, 2005
|                                                  |  | (in thousands)    
|United States                                     |  | $                  | 4,382  |                   | $ | 5,274 
|Canada                                            |  |                    | 504    |                   |   | 806   
|Japan                                             |  |                    | 484    |                   |   | 921   
|Taiwan                                            |  |                    | 2,640  |                   |   | 2,998 
|Europe, Middle East and Africa (EMEA)             |  |                    | 2,733  |                   |   | 1,381 
|Other Asia (China, Malaysia, Korea and Singapore) |  |                    | 782    |                   |   | 2,345 
|                                                  |  |                    |        |                   |   |       
|Total                                             |  | $                  | 11,525 |                   | $ | 13,725
|                                                  |  |                    |        |                   |   |       

Total license revenues by process node are as follows:



|                                       |  |                    |   |  |                   |  
|-------------------------------------- |  | ------------------ | - |  | ----------------- | -
|                                       |  | Three Months Ended |  
|Total License Revenues by Process Node |  | December 31, 2006  |   |  | December 31, 2005 |  
|65 Nanometer Technology                |  | 2                  | % |  | 6                 | %
|90 Nanometer Technology                |  | 37                 |   |  | 44                |  
|0.13 Micron Technology                 |  | 41                 |   |  | 29                |  
|0.18 Micron Technology                 |  | 16                 |   |  | 19                |  
|Other                                  |  | 4                  |   |  | 2                 |  
|                                       |  |                    |   |  |                   |  
|Total                                  |  | 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 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 $2.3 million and $2.0 million as of December 31, 2006 and 2005, 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.



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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 of this standard will have on our financial position or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current
Year Financial Statements (SAB 108). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity
to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The guidance is
applicable for fiscal years ending after November 15, 2006. We currently do not believe that SAB 108 will have a material impact on our consolidated financial statements.

NOTE 6  COMMITMENTS AND CONTINGENCIES

Indemnifications. The Company enters into standard license
agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement
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 December 31, 2006.

Warranties. The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date,
there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of December 31, 2006. 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.



|ITEM 2. | M
ANAGEMENT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.



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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 quarter 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 drive license revenue growth in the foreseeable
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;
| | - |  | ---------------------------



| |  |  | 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.



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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 months ended December 31, 2006 and 2005 were $3.1 million and $3.3 million, respectively.

We have been dependent on a limited number of customers for a substantial portion of our revenues, although that dependence on one specific customer over the long term continues to decrease. Our customers comprising
the top 10 customer group have changed from time to time. We have one customer that generated more than 10% of our revenue for the quarter ended December 31, 2006. We have one customer that generated more than 10% of our revenue for the quarter
ended December 31, 2005. Sales to customers located outside of North America accounted for approximately 58% and 56% for the three months ended December 31, 2006 and 2005, respectively. 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. 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.



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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.

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.



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##### Table of Contents

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 was based on managements estimates. Intangible assets with finite useful lives are amortized over the estimated life of each asset. As of
December 31, 2006, management believes no impairment of intangible assets has occurred. The carrying value of purchased intangibles, including goodwill, is $11.7 million and $11.8 million at December 31, 2006 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 December 31, 2006 the Company had an intangible value of $1.7 million
related to technology acquired through the acquisition of In-Chip Systems, Inc.

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 months ended December 31, 2006 and 2005 were $1.5 million and $1.7 million, respectively. At
December 31, 2006 and 2005, total unrecognized estimated compensation expenses related to non-vested stock options granted prior to that date were $7.4 million and $9.3 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 three months ended December 31, 2006 and
2005 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 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.



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##### Table of Contents

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 $497,000 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 $10.1 million and deferred tax
liabilities of $0.7 million as of December 31, 2006. The carrying value of the Companys net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions based on estimates and
assumptions. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates they are realizable. At such time it is determined that it is more likely than not that the
deferred tax assets are not realizable, the valuation allowance is adjusted. This assessment is based on projections of future taxable income, which is impacted in future periods by income before taxes and stock option exercises. The actual taxable
income realized in the future and other factors determine how much benefit the Company ultimately realizes from the deferred tax assets.

In addition, the
calculation of our tax liabilities involves dealing with 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 $1.1 million and $2.6 million as of December 31, 2006 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 MONTHS ENDED DECEMBER 31, 2006 AND 2005

Revenues

The table below sets forth the changes in revenues from the three months ended December 31, 2005 to the three months ended December 31, 2006 (in thousands, except percentage data):



|               |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|-------------- |  | ----------------------------------- | ------ | ------------------- | ----------------------------------- | - | ------ | - | ------------------- |  | ----- | --------------------- |  | - | ------ | - |  | ----- | --
|               |  | Three Months EndedDecember 31, 2006 |        |                     | Three Months EndedDecember 31, 2005 |   |        |   |                     |  |       |                      
|               |  | Amount                              |        | % of total Revenues |                                     |   | Amount |   | % of total revenues |  |       | Year-Over-Year Change | 
|Revenues:      |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|License        |  | $                                   | 8,422  |                     | 73.1                                | % |        | $ | 10,410              |  | 75.8  | %                     |  | $ | (1,988 | ) |  | (19.1 | )%
|Royalties      |  |                                     | 3,103  |                     | 26.9                                | % |        |   | 3,315               |  | 24.2  | %                     |  |   | (212   | ) |  | (6.4  | )%
|               |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Total revenues |  | $                                   | 11,525 |                     | 100.0                               | % |        | $ | 13,725              |  | 100.0 | %                     |  | $ | (2,200 | ) |  | (16.0 | )%
|               |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   

Revenues for the three months ended December 31, 2006 totaled $11.5 million, decreasing 16.0% from $13.7
million for the three months ended December 31, 2005. License revenue decreased $2.0 million and royalties decreased $0.2 million.



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##### Table of Contents

For the three months ended December 31, 2006 and 2005, total license revenues by process node are as follows:



|                                       |  |                                |   |  |      |  
|-------------------------------------- |  | ------------------------------ | - |  | ---- | -
|                                       |  | Three Months EndedDecember 31, |  
|                                       |  | 2006                           |   |  | 2005 |  
|Total License Revenue by Process Node: |  |                                |   |  |      |  
|65 Nanometer technology                |  | 2                              | % |  | 6    | %
|90 Nanometer technology                |  | 37                             |   |  | 44   |  
|0.13 Micron technology                 |  | 41                             |   |  | 29   |  
|0.18 Micron technology                 |  | 16                             |   |  | 19   |  
|Other                                  |  | 4                              |   |  | 2    |  
|                                       |  |                                |   |  |      |  
|Total                                  |  | 100                            | % |  | 100  | %
|                                       |  |                                |   |  |      |  

License revenue for the three months ended December 31, 2006 was $8.4 million, representing a decrease of
$2.0 million or 19% as compared to $10.4 million for the three months ended December 31, 2005. License revenue decreased for the three months ended December 31, 2006 mainly attributed to decreases of $0.5 million on the 65-nanometer, $1.5
million on the 90-nanometer technologies and $0.5 million on the 0.18 micron and older technologies, partially offset by an increase of $0.5 million on the 0.13 micron technology.

Royalties decreased by $0.2 million, or 6.4% from $3.3 million in the three months ended December 31, 2005 to $3.1 million for the three months ended December 31, 2006.

For the three months ended December 31, 2006 and 2005, total revenues by geography were as follows:



|                                                  |  |                                |        |      |   |       
|------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------
|                                                  |  | Three Months EndedDecember 31,
|                                                  |  | 2006                           |        | 2005
|Total Revenue by Geography                        |  |                                |        |      |   |       
|United States                                     |  | $                              | 4,382  |      | $ | 5,274 
|Canada                                            |  |                                | 504    |      |   | 806   
|Japan                                             |  |                                | 484    |      |   | 921   
|Taiwan                                            |  |                                | 2,640  |      |   | 2,998 
|Europe, Middle East and Africa (EMEA)             |  |                                | 2,733  |      |   | 1,381 
|Other Asia (China, Malaysia, Korea and Singapore) |  |                                | 782    |      |   | 2,345 
|                                                  |  |                                |        |      |   |       
|Total                                             |  | $                              | 11,525 |      | $ | 13,725
|                                                  |  |                                |        |      |   |       

Cost and Expenses

The table below sets forth the changes in cost and expenses from the three months ended December 31, 2005 to the three months ended December 31, 2006 (in thousands, except percentage data):



|                           |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|-------------------------- |  | ----------------------------------- | ------ | ------------------- | ----------------------------------- | - | ------ | - | ------------------- |  | ----- | --------------------- |  | - | ------ | - |  | ----- | --
|                           |  | Three Months EndedDecember 31, 2006 |        |                     | Three Months EndedDecember 31, 2005 |   |        |   |                     |  |       |                      
|                           |  | Amount                              |        | % of total Revenues |                                     |   | Amount |   | % of total revenues |  |       | Year-Over-Year Change | 
|Cost and expenses:         |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Cost of revenues           |  | $                                   | 3,727  |                     | 32.3                                | % |        | $ | 3,715               |  | 27.1  | %                     |  | $ | 12     |   |  | 0.3   | % 
|Research and development   |  |                                     | 5,076  |                     | 44.0                                | % |        |   | 5,628               |  | 41.0  | %                     |  |   | (552   | ) |  | (9.8  | )%
|Sales and marketing        |  |                                     | 3,654  |                     | 31.7                                | % |        |   | 4,260               |  | 31.0  | %                     |  |   | (606   | ) |  | (14.2 | )%
|General and administrative |  |                                     | 2,664  |                     | 23.1                                | % |        |   | 2,756               |  | 20.1  | %                     |  |   | (92    | ) |  | (3.3  | )%
|                           |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   
|Total cost and expenses    |  | $                                   | 15,121 |                     | 131.2                               | % |        | $ | 16,359              |  | 119.2 | %                     |  | $ | (1,238 | ) |  | (7.6  | )%
|                           |  |                                     |        |                     |                                     |   |        |   |                     |  |       |                       |  |   |        |   |  |       |   

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 December 31, 2006 and 2005 totaled $3.7 million. The three months ended December 31, 2006 and 2005 included stock-based compensation expense related to
the adoption of SFAS 123R of $0.3 million.



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##### Table of Contents

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 December 31, 2006 were $5.1 million, a decrease of $0.5 million, or 9.8%, from $5.6 million for the three months ended December 31, 2005. Research and development expense as a percentage of total revenue for the three months ended
December 31, 2006 increased to 44.0% from 41.0% for the same period in fiscal 2005. The decrease in research and development expense was primarily due to $0.5 million of corporate support costs, $0.2 million in consulting expenses and $0.2
million of stock-based compensation related to SFAS 123R, partially offset by increases of $0.3 million in personnel related expenses and $0.1 related test chip expenses.

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 December 31, 2006 was $3.7 million, representing a decrease of $0.6 million or 14.2% over the same period in fiscal 2005. Sales and marketing
expense as a percentage of revenue was 31.7% for the three months ended December 31, 2006, compared to 31.0% for the three months ended December 31, 2005. The decrease in sales and marketing expense for the three months was primarily
attributable to $0.8 million expense in personnel related expenses related to commissions, $0.1 million related to outside rep commissions and $0.1 million in stock-based compensation related SFAS 123R partially offset by increases of $0.2 million
in corporate support services, $0.1 million in marketing programs expenses related to tradeshow 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 December 31, 2006 was $2.7 million, representing a decrease of $0.1 million or 3.3% over the three months ended December 31, 2005. General and administrative expense
as a percentage of total revenue was 23.1% for the three months ended December 31, 2006, compared to 20.1% for the same period in fiscal 2005. The decrease in general and administrative expense for the three months ended was mainly attributable
to decreases of $0.8 million in professional services primarily related to accounting fees offset by $0.3 million of personnel related expenses, $0.2 million of bad debt expenses, $0.1 million of consulting expenses and $0.1 million in stock-based
compensation related to SFAS 123R.

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 months ended December 31, 2005 to the three months ended
December 31, 2006 (in thousands, except percentage data):



|                                                       |  |                                     |     |   |                                     |     |   |        |   |     |                     |  |      |                       |  |   |     |   |  |       |  
|------------------------------------------------------ |  | ----------------------------------- | --- | - | ----------------------------------- | --- | - | ------ | - | --- | ------------------- |  | ---- | --------------------- |  | - | --- | - |  | ----- | -
|                                                       |  | Three Months EndedDecember 31, 2006 |     |   | Three Months EndedDecember 31, 2005 |     |   |        |   |     |                     | 
|                                                       |  | Amount                              |     |   | % of total revenues                 |     |   | Amount |   |     | % of total revenues |  |      | Year-Over-Year Change | 
|Interest income and other income (expenses), net:      |  |                                     |     |   |                                     |     |   |        |   |     |                     |  |      |                       |  |   |     |   |  |       |  
|Interest income                                        |  | $                                   | 987 |   |                                     | 8.6 | % |        | $ | 623 |                     |  | 4.5  | %                     |  | $ | 364 |   |  | 58.4  | %
|Other income (expenses), net                           |  |                                     | (44 | ) |                                     | 0.4 | % |        |   | (4  | )                   |  | (0.0 | )%                    |  |   | (39 | ) |  | 957.6 | %
|                                                       |  |                                     |     |   |                                     |     |   |        |   |     |                     |  |      |                       |  |   |     |   |  |       |  
|Total interest income and other income (expenses), net |  | $                                   | 943 |   |                                     | 8.2 | % |        | $ | 619 |                     |  | 4.5  | %                     |  | $ | 324 |   |  | 52.4  | %
|                                                       |  |                                     |     |   |                                     |     |   |        |   |     |                     |  |      |                       |  |   |     |   |  |       |  

Interest income and other income (expenses), net, for the three months ended December 31, 2006 totaled $0.9
million compared to $0.6 million for the same period in fiscal 2005. 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 and a larger investment balance.



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##### Table of Contents

Income Tax Provision



|                               |  |                                     |        |   |                                     |       |    |        |   |        |                     |  |       |                       |  |   |     |  |      |  
|------------------------------ |  | ----------------------------------- | ------ | - | ----------------------------------- | ----- | -- | ------ | - | ------ | ------------------- |  | ----- | --------------------- |  | - | --- |  | ---- | -
|                               |  | Three Months EndedDecember 31, 2006 |        |   | Three Months EndedDecember 31, 2005 |       |    |        |  
|                               |  | Amount                              |        |   | % of total revenues                 |       |    | Amount |   |        | % of total revenues |  |       | Year-Over-Year Change | 
|Income tax provision (benefit) |  | $                                   | (1,437 | ) |                                     | (12.5 | %) |        | $ | (1,773 | )                   |  | (12.9 | %)                    |  | $ | 336 |  | 19.0 | %
|                               |  |                                     |        |   |                                     |       |    |        |   |        |                     |  |       |                       |  |   |     |  |      |  

For the three months ended December 31, 2006, we recorded an income tax benefit of $1.4 million. For the same
quarter in fiscal 2005, we recorded an income tax benefit of $1.8 million. The provision for income taxes for the nine months ended December 31, 2006 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 $497,000 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 $1.1 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 for 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



|                                                            |  |                  |        |                  |   |        |  |   |         |  
|----------------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------ |  | - | ------- | -
|                                                            |  | December 31,2006 |        | December31, 2005 |   | Change | 
|Cash and cash equivalents                                   |  | $                | 10,679 |                  | $ | 32,121 |  | $ | (21,442 | )
|Short-term and long-term investments                        |  |                  | 69,100 |                  |   | 38,909 |  |   | 30,191  |  
|                                                            |  |                  |        |                  |   |        |  |   |         |  
|Total cash, cash equivalents and marketable debt securities |  | $                | 79,779 |                  | $ | 71,030 |  | $ | 8,749   |  
|                                                            |  |                  |        |                  |   |        |  |   |         |  



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As of December 31, 2006, our cash and cash equivalents totaled $10.7 million, as compared to $32.1 million as of
December 31, 2005. As of December 31, 2006 and 2005, our short-term and long-term treasury investments totaled $69.1 million and $38.9 million, respectively. In aggregate, cash, cash equivalents and short- and long-investments in
marketable securities as of December 31, 2006 totaled $79.8 million, compared to $71.0 million at December 31, 2005.



|                                                     |  |                    |         |   |                   |   |        |  |   |         |  
|---------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------ |  | - | ------- | -
|                                                     |  | Three Months Ended |         |   |                  
|                                                     |  | December 31, 2006  |         |   | December 31, 2005 |   | Change | 
|Cash provided by operating activities                |  | $                  | 1,793   |   |                   | $ | 2,809  |  | $ | (1,016  | )
|Cash provided by (used in) investing activities      |  |                    | (12,357 | ) |                   |   | 1,965  |  |   | (14,322 | )
|Cash provided by financing activities                |  |                    | 355     |   |                   |   | 496    |  |   | (141    | )
|Effect of exchange rates on cash                     |  |                    | 73      |   |                   |   | 10     |  |   | 63      |  
|                                                     |  |                    |         |   |                   |   |        |  |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $                  | (10,136 | ) |                   | $ | 5,280  |  | $ | 15,416  |  
|                                                     |  |                    |         |   |                   |   |        |  |   |         |  

Net cash provided by operating activities of $1.8 million for the three months ended December 31, 2006,
representing a decrease of $1.0 million over net cash provided by operating activities of $2.8 million for the three months ended December 31, 2005. The decrease in cash provided by operating activities was mainly due to decreases of $2 million
of deferred revenue, $2 million of prepaid expenses and other assets, $1.2 million of accounts payable and accrued liabilities, $1.5 million of income taxes payable, and $0.3 of stock-based compensation. In addition, the decrease is partly due to
increase in net loss of $1 million. These decreases were offset by increases of $4.4 million related to accounts receivable due to collections, and $2.6 million related to taxes receivable and deferred tax assets.

Net cash used in investing activities was $12.4 million for the first three months of 2006, representing an increase of $14.4 million over net cash provided by investing
activities of $2.0 million for the three months ended December 31, 2005. The increase of $14.4 million in the use of cash period over period resulted from increases in net purchase of investments and proceeds from maturities of investments.

Net cash provided by financing activities totaled $0.4 million and $0.5 million for the three months ended December 31, 2006 and 2005, respectively,
and was attributed to the proceeds from exercises of employee stock options 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, 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 December 31, 2006 (dollars in thousands):



|                                               |  |       |        |     |                  |   |           |  |           |       |               |   |       |  |   |  
|---------------------------------------------- |  | ----- | ------ | --- | ---------------- | - | --------- |  | --------- | ----- | ------------- | - | ----- |  | - | -
|Contractual Obligations                        |  | Total |        |     | Less Than 1 Year |   | 1-3 Years |  | 4-5 Years |       | After 5 Years
|Operating lease obligations                    |  | $     | 2,897  |     |                  | $ | 962       |  | $         | 1,427 |               | $ | 508   |  | $ | 
|Purchase obligations                           |  |       | 12,064 | (1) |                  |   | 3,945     |  |           | 6,462 |               |   | 1,657 |  |   | 
|                                               |  |       |        |     |                  |   |           |  |           |       |               |   |       |  |   |  
|Total operating lease and purchase obligations |  | $     | 14,961 |     |                  | $ | 4,907     |  | $         | 7,889 |               | $ | 2,165 |  | $ | 
|                                               |  |       |        |     |                  |   |           |  |           |       |               |   |       |  |   |  

---

|(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).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|IT
EM 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.



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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.

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 $55.7 million at December 31, 2006 consists of instruments with original maturities of less than one
year. Due to the short duration of our investments, an immediate 10% change in market interest rates would not have a material impact on the fair value of our investments. 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. We also hold approximately $13.4 million in U.S. government obligations and corporate bonds with maturities greater than one year.



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

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to
be disclosed in the Companys Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commissions rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes
in our internal control over financial reporting identified in connection with our evaluation that occurred during our first fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



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PART II  OTHER INFORMATION



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

None.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Risk 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 platform 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.
| | - |  | -------------------------------------------------------------------------

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 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;
| | - |  | ------------------------------------------------------------------------------------------------------



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| |  |  | 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 a 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.

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.



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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 quarters ended December 31, 2006 and 2005, we recorded royalty revenues
of approximately $3.1 million and $3.3 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, and this may cause us to lose revenues.

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 defects that harm our customers could damage our reputation and cause us to lose customers and
revenue.

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 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.



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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 product 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 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. 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
three months ended December 31, 2006 and 2005, sales to customers located outside North America accounted for 58% and 56% 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
| | - | ---------------------------------------------------------



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



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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 one customer generated more than 10% of our revenue for the quarter ended December 31, 2006 and 2005. 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 $1.2 million for first quarter of fiscal 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



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our stockholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. If adequate
funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance our products or services, or otherwise respond to competitive pressures would be significantly limited.

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 $1.1 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



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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.

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;
| | - | -----------------------------------------------------------------------------------------------------------



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| |  | 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 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
controlling 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.



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Compliance with changing regulation of corporate governance and public disclosure may result in additional
expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated
by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed
laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.



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

None.



|IT
EM 3. | DEFAULTS UPON SENIOR SECURITIES
|-------- | -------------------------------

None.



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

None.



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

In connection with Adam A. Kablanians
resignation, the company entered into an Agreement and Release with Mr. Kablanian, a copy is filed as an exhibit to the Companys Quarterly Report on Form 10Q ending December 31, 2006.



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



|           |  |                                                                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Exhibits                                                                                                                                              
|10.28      |  | Agreement and Release between Adam A. Kablanian and Virage Logic Corporation.                                                                         
|           | 
|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: February 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



|      |  |                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|10.28 |  | Agreement and Release between Adam A. Kablanian and Virage Logic.                                                                                     
|      | 
|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