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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549


FORM 10-Q

(Mark One)

|    |  |                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|[X] |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ending December 31, 2002

OR

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

Commission file number  000-31089

VIRAGE LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes  X      No   ___

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

As of January 31, 2003 there were 20,983,624 shares of the Registrants Common
Stock outstanding.

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##### Table of Contents



VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX

|                                                                                                                             |                                                                                                                 |  |      |   | 
|---------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                                                             |                                                                                                                 |  | Page
|                                                                                                                             |                                                                                                                 |  |     
|PART I  Financial Information                                                                                               |                                                                                                                 |  |      |  
|ITEM 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
December 31, 2002 and September 30, 2002 |                                                                                                                 |  | 3    |  
|                                                                                                                             | Unaudited Condensed Consolidated Statements of Operations for the
three months ended December 31, 2002 and 2001 |  |      | 4 | 
|                                                                                                                             | Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2002 and 2001 |  |      | 5 | 
|                                                                                                                             | Notes to Unaudited Condensed Consolidated Financial Statements                                                  |  |      | 6 | 
|ITEM 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations                               |                                                                                                                 |  | 10   |  
|ITEM 3  Quantitative and Qualitative Disclosures about Market Risk                                                          |                                                                                                                 |  | 29   |  
|ITEM 4  Controls and Procedures                                                                                             |                                                                                                                 |  | 30   |  
|PART II  Other Information                                                                                                  |                                                                                                                 |  |      |  
|ITEM 1  Legal Proceedings                                                                                                   |                                                                                                                 |  | 31   |  
|ITEM 2  Changes in Securities and Use of Proceeds                                                                           |                                                                                                                 |  | 31   |  
|ITEM 3  Defaults upon Senior Securities                                                                                     |                                                                                                                 |  | 31   |  
|ITEM 4  Submission of Matters to a Vote of Security Holders                                                                 |                                                                                                                 |  | 31   |  
|ITEM 5  Other Information                                                                                                   |                                                                                                                 |  | 31   |  
|ITEM 6  Exhibits and Reports on Form 8-K                                                                                    |                                                                                                                 |  | 31   |  
|Signatures                                                                                                                   |                                                                                                                 |  | 33   |  
|Exhibit Index                                                                                                                |                                                                                                                 |  | 36   |  

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|                            |                                                                                               |                                                           |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|                            |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS          
|                            |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                            |                                                                                               | UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS             
|                            |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                            | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                            | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION
|                            | ITEM 1. Legal Proceedings                                                                    
|                            | ITEM 2. Changes in Securities and Use of Proceeds                                            
|                            | ITEM 3. Defaults upon Senior Securities                                                      
|                            | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                            | ITEM 5. Other Information                                                                    
|                            | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 
|EXHIBIT INDEX              
|EXHIBIT 10.34              
|EXHIBIT 99.1               
|EXHIBIT 99.2               



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VIRAGE LOGIC CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |         |    |         | 
|------------------------------------ | ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------ | ------------- | ------- | -- | ------- | 
|                                     |                                                              |                                                                                                             |                                            |         | December 31, |        | September 30,
|                                     |                                                              |                                                                                                             |                                            |         | 2002         |        | 2002         
|                                     |                                                              |                                                                                                             |                                            |         |              |        |              
|ASSETS                               |                                                              |                                                                                                             |                                            |         |              |        |               |        
|Current assets:                      |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     | Cash and cash equivalents                                    |                                                                                                             | $                                          | 49,497  |              |        | $             | 35,422  |   
|                                     | Short-term investments                                       |                                                                                                             |                                            |        |              |        |               | 5,008   |   
|                                     | Accounts receivable, net                                     |                                                                                                             |                                            | 15,559  |              |        |               | 15,688  |   
|                                     | Costs in excess of related billings on uncompleted
contracts |                                                                                                             |                                            | 620     |              |        |               | 820     |   
|                                     | Prepaid expenses and other                                   |                                                                                                             |                                            | 2,890   |              |        |               | 2,512   |   
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total current assets                       |         |              | 68,566 |               |         |    | 59,450  | 
|                                     | Long-term investments                                        |                                                                                                             |                                            | 8,039   |              |        |               | 19,029  |   
|                                     | Property and equipment, net                                  |                                                                                                             |                                            | 6,881   |              |        |               | 5,708   |   
|                                     | Goodwill                                                     |                                                                                                             |                                            | 9,782   |              |        |               | 9,782   |   
|                                     | Intangible assets, net                                       |                                                                                                             |                                            | 3,436   |              |        |               | 3,533   |   
|                                     | Deferred tax assets                                          |                                                                                                             |                                            | 2,442   |              |        |               | 2,442   |   
|                                     | Other assets                                                 |                                                                                                             |                                            | 409     |              |        |               | 410     |   
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total assets                               |         | $            | 99,555 |               |         | $  | 100,354 | 
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                              |                                                                                                             |                                            |         |              |        |               |        
|Current liabilities:                 |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     | Accounts payable                                             |                                                                                                             | $                                          | 418     |              |        | $             | 438     |   
|                                     | Accrued expenses                                             |                                                                                                             |                                            | 4,173   |              |        |               | 4,240   |   
|                                     | Deferred revenue                                             |                                                                                                             |                                            | 3,048   |              |        |               | 2,936   |   
|                                     | Capital lease obligations, current                           |                                                                                                             |                                            | 71      |              |        |               | 96      |   
|                                     | Income taxes payable                                         |                                                                                                             |                                            | 845     |              |        |               | 2,049   |   
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total current liabilities                  |         |              | 8,555  |               |         |    | 9,759   | 
|Deferred tax liabilities             |                                                              |                                                                                                             | 1,343                                      |         |              |        | 1,343         |        
|Other                                |                                                              |                                                                                                             | 1,000                                      |         |              |        | 1,000         |        
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total liabilities                          |         |              | 10,898 |               |         |    | 12,102  | 
|Stockholders equity:                |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     | Common stock, $.001 par value:                               |                                                                                                             |                                            |         |              |        |               |         |   
|                                     |                                                              | Authorized shares  150,000 at December 31, 2002
and September 30, 2002,                                    |                                            |         |              |        |               |         |    |        
|                                     |                                                              | Issued and outstanding shares  20,975 and
20,928 at December 31, 2002 and September 30,
2002, respectively |                                            |         | 21           |        |               |         | 20 |        
|                                     | Additional paid-in capital                                   |                                                                                                             |                                            | 108,736 |              |        |               | 110,530 |   
|                                     | Accumulated other comprehensive income                       |                                                                                                             |                                            | 39      |              |        |               | 28      |   
|                                     | Deferred stock-based compensation                            |                                                                                                             |                                            | (754    | )            |        |               | (3,326  | ) 
|                                     | Accumulated deficit                                          |                                                                                                             |                                            | (19,385 | )            |        |               | (19,000 | ) 
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total stockholders equity                 |         |              | 88,657 |               |         |    | 88,252  | 
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        
|                                     |                                                              |                                                                                                             | Total liabilities and stockholders equity |         | $            | 99,555 |               |         | $  | 100,354 | 
|                                     |                                                              |                                                                                                             |                                            |         |              |        |               |        

See accompanying notes to unaudited condensed consolidated financial statements.

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

|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |       |        |       | 
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------ | ------ | ------------------ | ----- | ----- | ----- | ------ | ----- | 
|                                                                                                           |                                                                                                                     |         |                          |        | Three Months Ended
|                                                                                                           |                                                                                                                     |         |                          |        | December 31,      
|                                                                                                           |                                                                                                                     |         |                          |        |                   
|                                                                                                           |                                                                                                                     |         |                          |        | 2002               |       | 2001 
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |      
|Revenue:                                                                                                   |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           | License                                                                                                             |         |                          | 11,050 |                    |       |       | 9,294 |       
|                                                                                                           | Royalties                                                                                                           |         |                          | 515    |                    |       |       | 353   |       
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Revenues                                                                                                   |                                                                                                                     | $       | 11,565                   |        |                    | $     | 9,647 |      
|Cost of revenues (exclusive of amortization of
deferred stock compensation of $132 and $195,
respectively) |                                                                                                                     |         | 2,651                    |        |                    |       | 1,924 |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           |                                                                                                                     |         | Gross profit             |        |                    | 8,914 |       |       |        | 7,723 | 
|Operating expenses:                                                                                        |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           | Research and development (exclusive of
amortization of deferred stock compensation of
$230 and $287, respectively)  |         |                          | 4,629  |                    |       |       | 2,840 |       
|                                                                                                           | Sales and marketing (exclusive of amortization
of deferred stock compensation of $154 and
$254, respectively)       |         |                          | 3,083  |                    |       |       | 2,509 |       
|                                                                                                           | General and administrative (exclusive of
amortization of deferred stock compensation of
$59 and $104, respectively) |         |                          | 1,185  |                    |       |       | 1,025 |       
|                                                                                                           | Stock-based compensation                                                                                            |         |                          | 575    |                    |       |       | 840   |       
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           |                                                                                                                     |         | Total operating expenses |        |                    | 9,472 |       |       |        | 7,214 | 
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Operating income (loss)                                                                                    |                                                                                                                     |         | (558                     | )      |                    |       | 509   |      
|Interest income and other expense, net                                                                     |                                                                                                                     |         | 249                      |        |                    |       | 438   |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Income (loss) before taxes                                                                                 |                                                                                                                     |         | (309                     | )      |                    |       | 947   |      
|Income tax provision                                                                                       |                                                                                                                     |         | 76                       |        |                    |       | 615   |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Net income (loss)                                                                                          |                                                                                                                     | $       | (385                     | )      |                    | $     | 332   |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Basic and diluted net income (loss) per share                                                              |                                                                                                                     | $       | (0.02                    | )      |                    | $     | 0.02  |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|Shares used in computing per share amounts:                                                                |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           |                                                                                                                     | Basic   |                          |        | 20,453             |       |       |       | 19,326 |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      
|                                                                                                           |                                                                                                                     | Diluted |                          |        | 20,453             |       |       |       | 20,607 |      
|                                                                                                           |                                                                                                                     |         |                          |        |                    |       |       |      

See accompanying notes to unaudited condensed consolidated financial statements.

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

|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |        |     |  |        |  
|------------------------------------------------ | --------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------ | ---- | ------------------ | ------ | ------ | --- |  | ------ | -
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      | Three Months Ended
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      | December 31,      
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                   
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      | 2002               |        | 2001  
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|Operating activities                             |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 |                                                     | Net income (loss)                                                                                  |                                              | $                                                            | (385 | )                  |        | $      | 332 | 
|                                                 |                                                     | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                              |                                                              |      |                    |        |        |     | 
|                                                 |                                                     |                                                                                                    |                                              | Provision for doubtful accounts                              |      |                    |       |        |     |  | 89     |  
|                                                 |                                                     |                                                                                                    |                                              | Depreciation and amortization                                |      |                    | 703    |        |     |  | 791    |  
|                                                 |                                                     |                                                                                                    |                                              | Amortization of intangible assets                            |      |                    | 97     |        |     |  | 54     |  
|                                                 |                                                     |                                                                                                    |                                              | Amortization of stock-based compensation                     |      |                    | 575    |        |     |  | 840    |  
|                                                 |                                                     |                                                                                                    | Changes in operating assets and liabilities: |                                                              |      |                    |        |        |     |  |       
|                                                 |                                                     |                                                                                                    |                                              | Accounts receivable                                          |      |                    | 129    |        |     |  | (3,104 | )
|                                                 |                                                     |                                                                                                    |                                              | Costs in excess of related billings on uncompleted contracts |      |                    | 200    |        |     |  | (40    | )
|                                                 |                                                     |                                                                                                    |                                              | Prepaid expenses and other                                   |      |                    | (377   | )      |     |  | 143    |  
|                                                 |                                                     |                                                                                                    |                                              | Taxes receivable                                             |      |                    |       |        |     |  | 1,065  |  
|                                                 |                                                     |                                                                                                    |                                              | Deferred tax assets                                          |      |                    |       |        |     |  | (41    | )
|                                                 |                                                     |                                                                                                    |                                              | Accounts payable                                             |      |                    | (20    | )      |     |  | (20    | )
|                                                 |                                                     |                                                                                                    |                                              | Accrued expenses                                             |      |                    | (67    | )      |     |  | 411    |  
|                                                 |                                                     |                                                                                                    |                                              | Deferred revenue                                             |      |                    | 112    |        |     |  | 956    |  
|                                                 |                                                     |                                                                                                    |                                              | Income taxes payable                                         |      |                    | (1,204 | )      |     |  | 612    |  
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by (used in) operating activities |                                                                                                    |                                              | (237                                                         | )    |                    |        | 2,088  |    
|Investing activities                             |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 | Purchase of property and equipment                  |                                                                                                    |                                              | (1,876                                                       | )    |                    |        | (1,052 | )  
|                                                 | Purchase of investments                             |                                                                                                    |                                              | (3,989                                                       | )    |                    |        | (237   | )  
|                                                 | Proceeds from maturities of investments             |                                                                                                    |                                              | 19,998                                                       |      |                    |        | 5,000  |    
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by investing activities           |                                                                                                    |                                              | 14,133                                                       |      |                    |        | 3,711  |    
|Financing activities                             |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 | Net proceeds from issuance of common stock          |                                                                                                    |                                              | 204                                                          |      |                    |        | 187    |    
|                                                 | Repayment from stockholders                         |                                                                                                    |                                              |                                                             |      |                    |        | 785    |    
|                                                 | Principal payments on capital lease obligations     |                                                                                                    |                                              | (25                                                          | )    |                    |        | (45    | )  
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|                                                 | Net cash provided by financing activities           |                                                                                                    |                                              | 179                                                          |      |                    |        | 927    |    
|Net increase in cash and cash equivalents        |                                                     |                                                                                                    | 14,075                                       |                                                              |      |                    | 6,726  |       
|Cash and cash equivalents at beginning of period |                                                     |                                                                                                    | 35,422                                       |                                                              |      |                    | 27,868 |       
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       
|Cash and cash equivalents at end of the period   |                                                     | $                                                                                                  | 49,497                                       |                                                              |      | $                  | 34,594 |       
|                                                 |                                                     |                                                                                                    |                                              |                                                              |      |                    |        |       

See accompanying notes to unaudited condensed consolidated financial statements.

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VIRAGE LOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Organization and Summary of Significant Policies

Description of Business

Virage Logic Corporation (the Company) was incorporated in California in
November 1995 and subsequently reincorporated in Delaware in July 2000. The
Company provides application-optimized semiconductor intellectual property
(semiconductor IP) platforms based on memory, logic and IP development tools
that are silicon proven and production ready. These various forms of
intellectual property are utilized by the Companys customers to design and
manufacture system-on-a-chip (SOC) integrated circuits that power todays
Internet and high-speed communications, computer and consumer products, such as
cellular and digital phones, pagers, digital cameras, DVD players, switches and
modems

Use of Estimates

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

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements as of December 31,
2002 and September 30, 2002, and for the three months ended December 31, 2002
and 2001, are unaudited. The unaudited condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly our financial position, as of December 31, 2002, and our results
of operations and cash flows for the three months ended December 30, 2002 and
2001, respectively. These condensed consolidated financial statements and
related notes should be read in conjunction with our audited consolidated
financial statements and related notes included in our 2002 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on December 16,
2002. Our balance sheet as of September 30, 2002, was derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles. Our results for the three months ended December
31, 2002 are not necessarily indicative of the expected results for any other
interim period or the year ending September 30, 2003. The accompanying
condensed consolidated financial statements include the accounts of Virage
Logic Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

Note 2. Net Income (Loss) Per Share

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

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

|                                                           |                                                     |                                               |        |                    |       |      |        |        |      | 
|---------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------- | ------ | ------------------ | ----- | ---- | ------ | ------ | ---- | 
|                                                           |                                                     |                                               |        | Three Months Ended
|                                                           |                                                     |                                               |        | December 31,      
|                                                           |                                                     |                                               |        |                   
|                                                           |                                                     |                                               |        | 2002               |       | 2001
|                                                           |                                                     |                                               |        |                    |       |     
|Net income (loss)                                          |                                                     | $                                             | (385   | )                  |       | $    | 332    |       
|                                                           |                                                     |                                               |        |                    |       |      |        |       
|Basic:                                                     |                                                     |                                               |        |                    |       |      |        |       
|                                                           | Weighted average shares of common stock outstanding |                                               |        | 20,971             |       |      |        | 20,088 |     
|                                                           | Less weighted average shares subject to repurchase  |                                               |        | (518               | )     |      |        | (762   | )   
|                                                           |                                                     |                                               |        |                    |       |      |        |       
|Shares used in computing basic net income (loss)
per share |                                                     |                                               | 20,453 |                    |       |      | 19,326 |       
|                                                           |                                                     |                                               |        |                    |       |      |        |       
|Diluted:                                                   |                                                     |                                               |        |                    |       |      |        |       
|Items net of treasury stock buyback:                       |                                                     |                                               |        |                    |       |      |        |       
|                                                           |                                                     | Employee stock options stock outstanding      |        |                    |      |      |        |        | 560  | 
|                                                           |                                                     | Weighted average shares subject to repurchase |        |                    |      |      |        |        | 687  | 
|                                                           |                                                     | Warrants                                      |        |                    |      |      |        |        | 34   | 
|                                                           |                                                     |                                               |        |                    |       |      |        |       
|Shares used in computing diluted net income per share      |                                                     |                                               | 20,453 |                    |       |      | 20,607 |       
|                                                           |                                                     |                                               |        |                    |       |      |        |       
|Net income (loss) per share:                               |                                                     |                                               |        |                    |       |      |        |       
|                                                           |                                                     | Basic and diluted                             |        | $                  | (0.02 | )    |        | $      | 0.02 | 
|                                                           |                                                     |                                               |        |                    |       |      |        |       

The weighted average dilutive potential shares that were anti-dilutive and
excluded from the calculation of diluted net income per share for the three
months ended December 31, 2002 amount to approximately 829,000 shares. There
were no anti-dilutive shares for the three months ended December 31, 2001.

Note 3. Comprehensive Income (Loss)

The Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130)
established standards for the reporting and display of comprehensive income
(loss) and its related components. Total comprehensive income (loss), related
primarily to the change in unrealized gains and losses on investments made by
the Company. Total comprehensive income (loss) did not differ materially from
net income (loss) reported for the three months ended December 31, 2002 and
2001.

Note 4. Segment Information

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

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

Information regarding revenues for the three months ended December 31, 2002 and
2001 are as follows (in thousands):

|          |               |       |   |                    |        |      |   |       |       | 
|--------- | ------------- | ----- | - | ------------------ | ------ | ---- | - | ----- | ----- | 
|          |               |       |   | Three Months Ended
|          |               |       |   | December 31,      
|          |               |       |   |                   
|          |               |       |   | 2002               |        | 2001
|          |               |       |   |                    |        |     
|Revenues: |               |       |   |                    |        |      |   |      
|          | North America |       | $ | 5,385              |        |      | $ | 6,281 |      
|          | EMEA          |       |   | 2,252              |        |      |   | 1,458 |      
|          | Asia Pacific  |       |   | 3,928              |        |      |   | 1,908 |      
|          |               |       |   |                    |        |      |   |      
|          |               | Total |   | $                  | 11,565 |      |   | $     | 9,647 | 
|          |               |       |   |                    |        |      |   |      

The allocation of revenues by geographic region in the table above is based on
the location of our customers operations. As the majority of the Companys
long-lived assets are located primarily in North America no separate disclosure
of the long-lived assets by geographic location is considered meaningful.

Note 5. Recently Issued Accounting Pronouncements

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

In November 2002, the Emerging Issues
Task Force (EITF) reached a consensus on Issue No. 00-21 (EITF 00-21),
Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue-generating activities. EITF 00-21 will be
effective for interim periods

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beginning after June 15, 2003. The Company has assessed the impact of EITF
00-21 and believes its current accounting policies are in compliance, therefore
the Company does not expect the adoption of EITF 00-21 to have a material
impact on its financial statements.

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

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

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15,
2003. The Company believes that the adoption of this standard will
have no material impact on its financial statements.

Note 6. Commitments and Contingencies

On December 18, 2002, the Company and Dr. Tushar Gheewala reached a resolution
of the lawsuit Dr. Gheewala filed against the Company in the California
Superior Court in Alameda County. Dr. Gheewala has agreed to dismiss the
lawsuit with prejudice and to withdraw his claims against the
Company. The results of this settlement were not material to the
financial statement for the period ended December 31, 2002.

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ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Statements made in this section, Managements Discussion and Analysis of
Financial Condition and Results of Operations, other than statements of
historical fact, are forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance and includes statements relating to products, customers,
business prospects, trends and effects of acquisitions. In some cases,
forward-looking statements can be identified by terminology such as may,
will, should, expect, anticipate, intend, plan, believe,
estimate, potential, or continue, the negative of these terms or other
comparable terminology. Forward-looking statements are subject to a number of
known and unknown risks and uncertainties which might cause actual results to
differ materially from those expressed or implied by such statements. These
risks include our ability to overcome the challenges associated with
establishing licensing relationships with semiconductor companies, our ability
to obtain royalty revenues from customers in addition to license fees, business
and economic conditions generally and in the semiconductor industry in
particular, competition in the market for embedded memories and logic
platforms, the ability to integrate In-Chip and its products into the Company
and to maintain and develop relationships with existing In-Chip customers, and
other risks and uncertainties including those set forth below under Risk
Factors. These forward-looking statements speak only as of the date hereof,
we expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein. The
following information should be read in conjunction with the Managements
Discussion and Analysis of Financial Condition and Results of Operations
section of the Companys Form 10-K for the fiscal year ended September 30, 2002
filed with the Securities and Exchange Commission on December 16, 2002.

Overview

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

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



| |  |  | embedded memories and logic elements;                                                                
| | - |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | standard and custom memory compilers;                                                                
|
| |  |  | memory test processor and fuse box components for embedded test
and repair of defective memory cells;

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| |  |  | software development tools.
| | - |  | ---------------------------

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

The license of our semiconductor IP typically covers a range of embedded
memory and logic products. Licenses of our semiconductor IP products can be
either perpetual or term-based. In addition, maintenance can be purchased for
both types of licenses. All revenues to date have been denominated in U.S.
dollars.

Revenues from sales of perpetual licenses for our semiconductor IP
products are generally recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, there are no significant
remaining obligations of us, the fee is fixed or determinable, and
collectability is probable. If any of these criteria are not met, we defer
recognizing the revenues until such time as all criteria are met. Revenues from
term licenses are recognized ratably over the term of the license, provided the
criteria mentioned above are met.

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

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

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

We derive our royalty revenues from third-party foundries that manufacture
chips incorporating our ASAP memory products for our fabless customers. In
addition, we have entered into agreements that provide for the payment of
royalties for our CUSTOM-TOUCH® STAR Memory System, NetCAM and NOVeA
technologies directly by our customers, as well as from third-party foundries
that manufacture chips incorporating these technologies. Royalty payments are
in addition to the license fees we collect from our customers, and are
calculated based on production volumes of wafers containing chips utilizing our
semiconductor IP technologies based on a rate per-chip or rate per-wafer
depending on the terms of the respective license agreement. Royalty revenues
are generally determined and recognized one quarter in arrears, when a
production volume report is received from the customer or foundry. Time delays
for receiving royalty revenues are due

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to the typical length of time required for the customer to implement our
semiconductor IP into their design, and then to manufacture and bring to market
a product incorporating our products.

Currently, license fees represent substantially all of our revenues.
Royalty revenues for the three months ended December 31, 2002 and 2001 were
$515,000 and $353,000, respectively.

Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have
a significant impact on deferred revenues in any given period.

We have been dependent on a limited number of customers for a substantial
portion of our annual revenues, although that dependence continues to decrease.
The composition of our top ten customers has changed from time to time. For the
three months ended December 31, 2002, no single customer generated more than
10% of our revenues. For the three months ended December 31, 2001, ATI
Technologies and United Microelectronics Company (UMC) accounted for 10% and
15% of revenues, respectively.

We have incurred, and will incur in future periods, substantial expenses
relating to the amortization of stock-based compensation, which represents
non-cash charges incurred as a result of the issuance of stock options and
restricted stock to employees at less than their deemed fair value. These
charges are recorded based on the difference between the deemed fair value of
the common stock and the option exercise price of such options at the date of
grant. The deferred stock-based compensation balance at December 31, 2002 and
2001 was $0.8 million and $3.3 million, respectively. This amount is presented
as a reduction of stockholders equity and is being amortized using the
graded-vesting method over the vesting period of the applicable options,
generally four years. The amortization of stock-based compensation for options
granted through December 31, 2002 is estimated to be $0.6 million in 2003 and
$0.2 million in 2004.

Critical Accounting Policies

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

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



| |  |  | revenue recognition                           
| | - |  | ----------------------------------------------
|
| |  |  | accounts receivable                           
|
| |  |  | valuation of long-lived assets and investments
|
| |  |  | purchased intangibles, including goodwill     
|
| |  |  | accounting for stock options                  

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| |  |  | income taxes.
| | - |  | -------------

Revenue recognition

Our revenue recognition policy uses specific and detailed guidelines and
is based on the American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition as amended by Statement of
Position 98-4 and Statement of Position 98-9.

Revenues from perpetual licenses for our semiconductor IP products are
generally recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, there are no significant remaining obligations on
our part, the fee is fixed or determinable, and collectability is probable. If
any of these criteria are not met, we defer recognizing the revenue until such
time as all criteria are met. Revenue from term licenses are recognized ratably
over the term of the license, provided the criteria mentioned above are met.

Revenues from custom memory compilers involve customization to the
functionality of the software and are therefore recognized over the period that
we perform services. Revenues derived from library development services are
recognized using a percentage-of-completion method, and revenues from technical
consulting services are recognized as the services are being completed. For all
license and service agreements accounted for using the percentage-of-completion
method, we determine progress-to-completion using input measures based on labor
hours incurred. A provision for estimated losses on engagements is made in the
period in which the loss becomes probable and can be reasonably estimated.
Costs incurred in advance of billings are recorded as costs in excess of
related billings on uncompleted contracts. If customer acceptance is required
for completion of specified milestones, related revenue is deferred until the
acceptance criteria is met.

For agreements which include multiple elements, such as maintenance, we
recognize revenues attributable to delivered or completed elements covered by
such agreements. The amount of such revenues is determined by deducting the
aggregate value of the undelivered or uncompleted elements, which we determine
by each such elements vendor-specific objective evidence of fair value, from
the total revenues recognizable under such agreement. Vendor specific objective
evidence for maintenance revenue is determined based on the stated renewal rate
in each contract. Revenues with respect to which, recognition was deferred are
recognized once we deliver that element or once we complete the provision of
the services. Maintenance revenues are recognized ratably over the term of the
maintenance period, which is generally one year.

Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have
a significant impact on deferred revenues in any given period.

Royalty revenues are generally determined and recognized one quarter in
arrears, when a production volume report is received from the customer or
foundry, and are calculated based on production volumes of wafers containing
chips utilizing our semiconductor IP

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technologies based on a rate per-chip or rate per-wafer depending on the
terms of the respective license agreement.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust
customers credit limits based upon payment history and the customers current
credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and the provisions we have established, we cannot guarantee that
we will continue to experience the same credit loss rates that we have in the
past. Since our accounts receivable are concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of
any one of these customers could have a material adverse impact on the
collectability of our accounts receivables and our future operating results.

Valuation of Long-Lived Assets and Investments

We periodically review the carrying value of our long-lived assets and
investments for continued appropriateness. This review is based upon our
projections of anticipated future cash flows from such assets and investments.
While we believe that our estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect our
evaluations.

Purchased Intangibles, Including Goodwill

In accordance with SFAS 142, we will evaluate purchased intangibles,
including goodwill, for impairment. An assessment of goodwill is subjective by
nature, and significant management judgment is required to forecast future
operating results and projected cash flows. If our estimates or related
assumptions change in the future, these changes in conditions could require
material write-downs of net intangible assets, including impairment charges for
goodwill. In connection with the acquisition of In-Chip, the valuation of
intangible assets was based on managements estimates using a report prepared
by an independent third-party valuation consultant. Such estimates include cash
flow projections, discount rates and estimated life of technology, which
management believes are reasonable under the circumstances. Use of other
estimates or assumptions may have resulted in a different valuation for such
intangible assets acquired.

Accounting for Stock Options

We account for outstanding stock options under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
Financial Accounting Standards Board Interpretation No. 44 (Fin 44), and comply
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). In accordance with APB 25, we do not recognize
compensation expense for options granted to employees as all employee options
are granted with an exercise price equal to the fair market value of the
underlying stock.

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Income taxes

We record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets. These differences result in deferred
tax assets and liabilities. The carrying value of the companys net deferred
tax assets assumes that we will be able to generate sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions.
Management evaluates the recoverability of the deferred tax assets and assesses
the need, if any, for additional valuation allowances.

Results of Operations

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

|                            |                         |                            |           |      |                    |      |       |     |      |      |  
|--------------------------- | ----------------------- | -------------------------- | --------- | ---- | ------------------ | ---- | ----- | --- | ---- | ---- | -
|                            |                         |                            |           |      | Three Months Ended
|                            |                         |                            |           |      | December 31,      
|                            |                         |                            |           |      |                   
|                            |                         |                            |           |      | 2002               |      | 2001 
|                            |                         |                            |           |      |                    |      |      
|Revenue:                    |                         |                            |           |      |                    |      |       |    
|                            |                         |                            | License   |      |                    | 95.5 | %     |     |      | 96.3 | %
|                            |                         |                            | Royalties |      |                    | 4.5  |       |     |      | 3.7  |  
|                            |                         |                            |           |      |                    |      |       |    
|Revenues                    |                         |                            | 100.0     |      |                    |      | 100.0 |    
|Cost of revenues            |                         |                            | 22.9      |      |                    |      | 19.9  |    
|                            |                         |                            |           |      |                    |      |       |    
|Gross profit                |                         |                            | 77.1      |      |                    |      | 80.1  |    
|Operating expenses:         |                         |                            |           |      |                    |      |       |    
|                            |                         | Research and development   |           |      | 40.0               |      |       |     | 29.4 |     
|                            |                         | Sales and marketing        |           |      | 26.7               |      |       |     | 26.0 |     
|                            |                         | General and administrative |           |      | 10.2               |      |       |     | 10.6 |     
|                            |                         | Stock-based compensation   |           |      | 5.0                |      |       |     | 8.7  |     
|                            |                         |                            |           |      |                    |      |       |    
|Total operating expenses    |                         |                            | 81.9      |      |                    |      | 74.7  |    
|                            |                         |                            |           |      |                    |      |       |    
|                            | Operating income (loss) |                            |           | (4.8 | )                  |      |       | 5.4 |     
|Interest and other expenses |                         |                            | 2.2       |      |                    |      | 4.5   |    
|Income tax provision        |                         |                            | (0.7      | )    |                    |      | (6.4  | )  
|                            |                         |                            |           |      |                    |      |       |    
|Net income (loss)           |                         |                            | (3.3      | )%   |                    |      | 3.5   | %  
|                            |                         |                            |           |      |                    |      |       |    

Three Months Ended December 31, 2002 and 2001

Revenues.Revenues increased by 20% to $11.6 million from $9.6 million for
the three months ended December 31, 2002 and 2001, respectively. The increase
in revenues for the three months ended December 31, 2002 is primarily due to
the continuing sale of our embedded memory and logic products with differing
geometry variations for a multitude of process foundries. First quarter sales
for fiscal year 2003 were lower than expected due to a delay of purchases by
our customers.

For the three months ended December 31, 2002 and 2001, sales by geometry
and by application are as follows:
15Table of Contents

|                |                         |  |                    |    |      |  |  |    |  
|--------------- | ----------------------- |  | ------------------ | -- | ---- |  |  | -- | -
|                |                         |  | Three Months Ended
|                |                         |  | December 31,      
|                |                         |  |                   
|                |                         |  | 2002               |    | 2001
|                |                         |  |                    |    |     
|By geometry:    |                         |  |                    |    |      |  |  |   
|                | 0.18 micron technology  |  |                    | 19 | %    |  |  | 19 | %
|                | 0.13 micron technology  |  |                    | 53 |      |  |  | 63 |  
|                | 90 nanometer technology |  |                    | 20 |      |  |  | 5  |  
|                | Other                   |  |                    | 8  |      |  |  | 13 |  
|By application: |                         |  |                    |    |      |  |  |   
|                | Communications          |  |                    | 59 | %    |  |  | 52 | %
|                | Consumer electronics    |  |                    | 36 |      |  |  | 28 |  
|                | Computer applications   |  |                    | 5  |      |  |  | 20 |  

We have experienced increased revenues from EMEA and Asia for the three
months ended December 31, 2002 over the same period last fiscal year. These
results are attributable to our growing sales forces in these geographies and a
further enhancement of customer relationships in these regions. Royalty
revenues totaled $515,000 for the three months ended December 31, 2002, up from
$353,000 for the same period last fiscal year.

Gross Profit.Gross profit is calculated as revenues less cost of
revenues. Cost of revenues consists primarily of personnel expenses and the
allocation of facilities and equipment expenses. Gross margin percentage
decreased to 77% for the three months ended December 31, 2002, from 80% the
comparable period in fiscal year 2002. This decrease is primarily due to the
lower than expected sales volume, coupled with fixed personnel facilities and
equipment costs. Although efforts were made to redeploy engineering capacity
to certain research and development activities, such efforts could not fully
offset the impact of lower than expected sales. The Company believes cost of
revenues will continue to fluctuate in the future, both in absolute dollars and
as a percentage of revenues, as sales volume levels continue to fluctuate
relative to the engineering capacity. Cost of revenues excludes $132,000 and
$195,000 of amortization of stock-based compensation for the three months ended
December 31, 2002 and 2001, respectively.

Research and Development Expense.Research and development expense
primarily includes personnel expense, software license and maintenance fees,
and depreciation related to capital spending. Research and development expense
increased 63% to $4.6 million for the three months ended December 31, 2002 from
$2.8 million for the same period last fiscal year. The increase in research
and development expense was primarily due to the increase in the number of
employees involved in research and development for the 90 nanometer and 65
nanometer technologies, NOVeA embedded memory technologies, and ASAP Logic
product offerings. Research and development expense as a percentage of
revenues increased to 40% for the three months ended December 31, 2002, as
compared to 29% for the same period last fiscal year. This increase is due to
the redeployment of engineering capacity from cost of revenue activities to
research and

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development, increases in depreciation related to capital spending for
both computer hardware and software and software license and maintenance fees
for software technology used in the development of our products. We anticipate
that research and development expense will continue to increase as we expand
our product offerings and invest in technologies for future delivery. Research
and development expense excludes $230,000 and $287,000 of amortization of
stock-based compensation for the three months ended December 31, 2002 and 2001,
respectively.

Sales and Marketing Expense.Sales and marketing expense consists
primarily of personnel expenses, commissions, advertising and promotion related
costs. Sales and marketing expense increased 23% to $3.1 million for the three
months ended December 31, 2002 from $2.5 million for the same period last
fiscal year. Sales and marketing expense as a percentage of revenues increased
to 27% for the three months ended December 31, 2002, as compared to 26% for the
same period last fiscal year. The increase in sales and marketing expense was
due to the hiring of additional personnel, additional commissions based on
increased sales volume, advertising and promotional costs and expanded sales
and marketing activities. We anticipate that sales and marketing expense will
continue to increase as we expand our product lines and target new customers
and markets for our technologies. Sales and marketing expense excludes
$154,000 and $254,000 of amortization of stock-based compensation for the three
months ended December 31, 2002 and 2001, respectively.

General and Administrative Expense.General and administrative expense
consists primarily of personnel and other costs associated with the management
of our business. General and administrative expense increased by 16% to $1.2
million for the three months ended December 31, 2002 from $1.0 million for the
same period last fiscal year. The increase in general and administrative
expense was primarily due to increased professional service costs, principally
for legal advisory and accounting services and increased patent amortization
costs. General and administrative expense excludes $59,000 and $104,000 of
amortization of stock-based compensation for the three months ended December
31, 2002 and 2001, respectively.

Stock-Based Compensation.With respect to the grant of stock options and
restricted stock to employees, the Company has aggregated deferred stock-based
compensation of approximately $754,000 for the period ended December 31, 2002
and $3.3 million for the period ended September 30, 2002. The amount of
deferred stock-based compensation is presented as a reduction of stockholders
equity and is being amortized over the vesting period of the applicable options
or stock, generally four years. The deferred stock-based compensation balance
decreased $2.5 million primarily due to the cancellation of unvested shares
associated with the resignation of Tushar Gheewala and amortization of other
stock based awards. The Company amortized, net of cancellations, $575,000 and
$840,000 during the three months ended December 31, 2002 and 2001,
respectively.

Interest Income and Other Expenses.Interest income decreased to $249,000
for the three months ended December 31, 2002 from $438,000 for the same period
last fiscal year. This decrease was due to a continuing decline in interest
rates.

Income Tax Provision.The provision for income taxes was $76,000 and
$615,000 for the three months ended December 31, 2002 and 2001, respectively.
The effective tax rates

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differed from the combined federal and state rates due primarily to
stock-based compensation related charges that are non-deductible for tax
purposes.

Liquidity and Capital Resources

As of December 31, 2002, the Company had $57.5 million in cash, cash
equivalents and government security investments, as compared with $59.5 million
at September 30, 2002. We believe that our cash, cash equivalents and
investments will be sufficient to meet our operating and capital needs for at
least the next 12 months.

Net cash
used in operating activities was $237,000 for the first three
months of fiscal 2003. Net cash used in operating activities resulted from a
net loss of $385,000, an increase in prepaid expenses and other, and a decrease in
income taxes payable, offset by non-cash charges associated with the
amortization of stock-based compensation and depreciation and amortization.

Net cash
provided by investing activities was $14.1 million for the first
three months of fiscal 2003. Net cash provided by investing activities was due
to the accelerated maturity of government security investments resulting from
the exercise of call options by the issuer, offset by the purchase of
short-term and long-term government investments and acquisitions of property
and equipment.

Net cash provided by financing activities was $179,000 for the first three
months of fiscal 2003. Net cash provided by financing activities was due to
proceeds from the issuance of common stock offset in part by principal payments
on capital lease obligations.

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

The Company has outstanding obligations under capital lease lines, with
payments due through June 2003. At December 31, 2002, $71,000 was outstanding
under these lines. There is no remaining availability under these capital lease
lines.

The following table summarizes our contractual obligations as of December
31, 2002 (Less than 1 year amounts are for January 1, 2003 to September 30,
2003):

|                              |  |                                       |       |        |  |           |       |       |  |       |       |         |  |   |       |  |  |   |     | 
|----------------------------- |  | ------------------------------------- | ----- | ------ |  | --------- | ----- | ----- |  | ----- | ----- | ------- |  | - | ----- |  |  | - | --- | 
|                              |  | Payments Due by Period (in thousands)
|                              |  |                                      
|                              |  |                                       |       |        |  | Less than |       | 1-3   |  | 4-5   |       | After 5
|Contractual obligations       |  | Total                                 |       | 1 Year |  | Years     |       | Years |  | Years
|                              |  |                                       |       |        |  |           |       |       |  |      
|Operating lease obligations   |  | $                                     | 4,802 |        |  | $         | 760   |       |  | $     | 1,759 |         |  | $ | 1,756 |  |  | $ | 527 | 
|Capital lease obligations     |  |                                       | 71    |        |  |           | 71    |       |  |       |      |         |  |   |      |  |  |   |    | 
|Building purchase             |  |                                       | 524   |        |  |           | 524   |       |  |       |      |         |  |   |      |  |  |   |    | 
|Other contractual obligations |  |                                       | 1,500 |        |  |           | 500   |       |  |       | 1,000 |         |  |   |      |  |  |   |    | 
|                              |  |                                       |       |        |  |           |       |       |  |       |       |         |  |   |       |  |  |   |     | 
|Total contractual obligations |  | $                                     | 6,897 |        |  | $         | 1,855 |       |  | $     | 2,759 |         |  | $ | 1,756 |  |  | $ | 527 | 

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In July 2002, the Company signed an initial contract to purchase a
building in the Republic of Armenia. The total cost of the building and
certain renovations is approximately $1.7 million of which the Company has paid
approximately $1.2 million to date. The Company plans to use the building as
office space for its engineering and design center based in Yerevan.

Risk Factors

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

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

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



| |  |  | our ability to anticipate and respond in a timely manner to changes
in the requirements of semiconductor companies;                                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the emergence of new semiconductor manufacturing processes and our
ability to enter into strategic relationships with third-party
semiconductor foundries to develop and test technologies for these new
processes and provide customer referrals;
|
| |  |  | the significant research and development investment that we may be
required to make before market acceptance, if any, of a particular
technology;                                                                                                 
|
| |  |  | the possibility that the industry may not accept a new technology
after we have invested a significant amount of resources to develop it;
and                                                                                                     
|
| |  |  | new technologies introduced by our competitors.                                                                                                                                                                                                   

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

In addition, research and development requires a significant expense and
resource commitment. Since we have a limited operating history, we are unable
to predict our future resources. As a result, we may not have the financial and
other resources necessary to

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develop the technologies demanded in the future and may be unable to
attract or retain customers.

Our quarterly operating results may fluctuate significantly and any failure to
meet financial expectations for any fiscal quarter may cause our stock price to
decline.

Our quarterly operating results are likely to fluctuate in the future due
to a variety of factors, many of which are outside of our control. Because our
expenses are largely independent of our revenues in any particular period, we
are unable to accurately forecast our operating results. As a result, if our
revenues are below expectations in any quarter, our inability to adjust
spending in a timely manner to compensate for the revenue shortfall may magnify
the negative effect of the revenue shortfall.

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;                                                                                                                                                                                                                                                                                                                      
|
| |  |  | timing of new technologies and technology enhancements by us and our
competitors;                                                                                                                                                                                                                                                                                                                               
|
| |  |  | shifts in demand for products that incorporate our intellectual property;                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | the timing and completion of milestones under customer agreements;                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | the impact of competition on license revenues or royalty rates;                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | the cyclical nature of the semiconductor industry and the general
economic environment;                                                                                                                                                                                                                                                                                                                         
|
| |  |  | difficulties in forecasting royalty revenues because of factors out
of our control, like timing of manufacturing of semiconductors subject
to royalty obligations and the number of such semiconductors actually
produced (manufactured);                                                                                                                                                                       
|
| |  |  | changes in development schedules, research and development
expenditure levels and product support by us and our customers;                                                                                                                                                                                                                                                                                      
|
| |  |  | recording a significant portion of our quarterly revenues in the last
month of a quarter. This is the result of closing more product orders,
and therefore, a higher percentage of product shipments, in the last
month of a quarter than in the first months of a quarter. Some customers
believe they can enhance their bargaining power by waiting until the end
of the quarter to finalize negotiations; and
|
| |  |  | costs associated with merger and acquisition plans that are not
pursued.                                                                                                                                                                                                                                                                                                                                        

As a result, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and you should not rely on these
comparisons as indications of

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future performance. These factors make it difficult for us to accurately
predict our revenues and may cause our operating results to be below market
analysts expectations in some future quarters, which could cause the market
price of our stock to decline.

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

We currently have subsidiaries in Israel, Germany and Japan, and we expect
to continue expanding our direct sales force in those countries. In addition, a
growing portion of our intellectual property is being developed in development
centers located in the Republic of Armenia and India. Israel continues to face
an increased level of violence and terror and Armenia, only independent since
1991, has suffered significant political and economic instability. Accordingly,
continued and heightened unrest in areas of the world in which we operate may
adversely affect our business in a number of ways, including the following:



| |  |  | changes in the political or economic conditions in Armenia and India
and the surrounding region, such as fluctuations in exchange rates,
changes in laws protecting intellectual property, the imposition of
currency transfer restrictions or limitations, or the adoption of
burdensome trade or tax policies, procedures, rules, regulations or
tariffs, could adversely affect our ability to develop new products, to
take advantage of the cost savings associated with operations in Armenia
and India, and to otherwise conduct business effectively in Armenia and
India
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to continue conducting business in Israel and other
countries in the normal course may be adversely affected by increased
risk of social and political instability and our employees working and
visiting in Israel may be affected by terrorist attacks;                                                                                                                                                                                                                                                                                                            
|
| |  |  | our Israeli customers demand for our products may be adversely
affected because of negative economic consequences associated with
reduced levels of safety and security in Israel.                                                                                                                                                                                                                                                                                                                                                                                              

General economic conditions and recent terrorist attacks may reduce our
revenues and harm our business.

As our business has grown, we have become increasingly subject to the
risks arising from adverse changes in domestic and global economic conditions.
Because of the continued economic slowdown in the United States and in other
parts of the world, many industries are delaying or reducing technology
purchases and investments and similarly, our customers may delay payment for
Virage Logic products causing our accounts receivable to increase. In addition,
the unrest in Israel, the Middle East or India may negatively impact the
investments our worldwide customers make in these geographic regions. The
impact of this slowdown on us is difficult to predict, but if businesses or
consumers defer or cancel purchases of new products that contain complex
semiconductors, purchases by fabless semiconductor companies and integrated
device manufacturers and production levels by semiconductor manufacturers could
decline causing our revenues to be adversely affected, which would have an
adverse effect on our results of operations and could have an adverse effect on
our financial condition.

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If we are unable to maintain existing relationships and develop new
relationships with third-party semiconductor manufacturers, or foundries, we
will be unable to verify our technologies on their processes and license our
intellectual property to them or their customers.

Our ability to verify our technologies for new manufacturing processes
depends on entering into development agreements with third-party foundries to
provide us with access to these processes. In addition, we rely on third-party
foundries to manufacture our silicon test chips and to provide referrals to
their customer base. We currently have agreements with Taiwan Semiconductor
Manufacturing Company (TSMC), United Microelectronics Corporation (UMC),
Chartered Semiconductor Manufacturing (Chartered), and Tower Semiconductor
(Tower). If we are unable to maintain our existing relationships with these
foundries or enter into new agreements with other foundries, we will be unable
to verify our technologies for their manufacturing processes. We would then be
unable to license our intellectual property to fabless semiconductor companies
that use these foundries to manufacture their silicon chips, which is a
significant source of our revenues.

If demand for products incorporating complex semiconductors and embedded
memories does not rise, our business may be harmed.

Our business and the adoption and continued use of our intellectual
property by semiconductor companies depends on the demand for products
requiring complex semiconductors, embedded memories and logic elements, such as
cellular and digital phones, pagers, digital cameras, DVD players, switches and
modems. The demand for such products is uncertain and difficult to predict. A
reduction in the demand for products incorporating complex semiconductors and
semiconductor IP or in the general economic environment which results in the
cutback of research and development budgets or capital expenditures would
likely result in a reduction in demand for our products and could harm our
business.

In addition, the semiconductor industry is highly cyclical and has
fluctuated between significant economic downturns characterized by diminished
demand, accelerated erosion of average selling prices and production
overcapacity, as well as periods of increased demand and production capacity
constraints. The semiconductor industry is currently experiencing a downturn
and the U.S. economy has yet to rise out of an economic slowdown that involves
lower levels of expenditures by businesses and individuals. As a result of such
fluctuations in the semiconductor industry and the general economic slowdown,
we may face a reduced number of design starts, tightening of customers
operating budgets, extensions of the approval process for new orders and
projects and consolidation among our customers, all of which may harm the
demand for our products and may cause us to experience substantial
period-to-period fluctuations in our operating results. Further, the markets
for third-party semiconductor intellectual property have emerged only in recent
years. Because of the recent emergence of these markets, it is difficult to
forecast whether these markets will continue to develop or grow at a rate
sufficient to support our business.

Problems associated with international business operations could affect our
ability to license our intellectual property.

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Sales to customers located outside North America accounted for 53% of our
revenues for the quarter ended December 31, 2002, and 44%, 42%, and 35% of our
revenues in fiscal 2002, 2001, and 2000, respectively. We anticipate that
sales to customers located outside North America will increase and will
continue to represent a significant portion of our total revenues in future
periods. In addition, most of our customers that do not own their own
fabrication plants rely on third-party foundries that may be outside of North
America. Accordingly, our operations and revenues are subject to a number of
risks associated with doing business in international markets, including the
following:



| |  |  | managing foreign distributors and sales partners and sharing revenues
with such third parties;                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | staffing and managing foreign branch offices and subsidiaries;                                                                        
|
| |  |  | political and economic instability;                                                                                                   
|
| |  |  | greater difficulty in collecting account receivables resulting in
longer collection periods;                                          
|
| |  |  | foreign currency exchange fluctuations;                                                                                               
|
| |  |  | changes in tax laws and tariffs;                                                                                                      
|
| |  |  | compliance with, and unexpected changes in, a wide variety of foreign
laws and regulatory environments with which we are not familiar;
|
| |  |  | timing and availability of export licenses;                                                                                           
|
| |  |  | inadequate protection of intellectual property rights in some countries; and                                                          
|
| |  |  | obtaining governmental approvals for certain technologies.                                                                            

If these risks actually materialize, our international operations may be
adversely affected and sales to international customers, as well as those
domestic customers that use foreign fabrication plants, may decrease.

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

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

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



| |  |  | the lengthy and expensive process of building a relationship with a
potential licensee;
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | competition with the internal design teams of semiconductor
companies; and             
|
| |  |  | the need to persuade semiconductor companies to rely on us for
critical technology.    

These factors may make it difficult for us to maintain our current
relationships or establish new relationships with additional licensees.
Further, there is a finite number of fabless semiconductor companies and
integrated device manufacturers to which we can license our intellectual
property. If we are unable to establish and maintain these relationships, we
will be unable to generate license fees, and our revenues will decrease.

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

We have historically generated revenues almost entirely from license fees.
We have agreements with certain third-party semiconductor foundries to pay us
royalties on their sales of silicon chips they manufacture for our fabless
customers. Beginning with our CUSTOM-TOUCH STAR Memory System, CAM technologies
and more recently with the introduction of our NOVeA technology, in addition to
collecting royalties from third-party semiconductor foundries, we intend to
increase our royalty base by collecting royalties directly from our integrated
device manufacturer and fabless customers. For the quarter ended December 31,
2002 and 2001, we recorded approximately $515,000 and $353,000, respectively,
of royalty revenues. In the first quarter of fiscal year 2003, we received our
first royalty payment directly from a fabless customer. The continued growth of
our revenues depends in part on increasing our royalty revenues, but we may not
be successful in convincing all customers to agree to pay us royalties.
Additionally, these royalty arrangements may not provide us with the
anticipated benefits as sales of products incorporating our intellectual
property may not offset lower license fees. Although we have the right to audit
the records of semiconductor manufacturers and fabless semiconductor companies,
we face risks relating to the accuracy and completeness of the royalty
collection process, due to our limited experience and systems in place to
conduct reviews of the accuracy of royalty reports we receive from our
customers. In addition, many factors beyond our control, such as fluctuating
sales volumes of products that incorporate our intellectual property, potential
slow down for manufacturing of certain newer process technology, the cyclical
nature of the semiconductor industry that affect the number of designs,
commercial acceptance of these products, accuracy of revenue reports and
difficulties in the royalty collection process, limit our ability to forecast
our royalty revenues.

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

Historically, because of the complexity of our products, it can take a
significant amount of time and effort to explain the benefits of our products
and to negotiate a sale. For example, it generally takes at least three to nine
months after our first contact with a

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prospective customer before we start licensing our intellectual property
to that customer. In addition, purchase of our products is usually made in
connection with new design starts, which are out of our control. Accordingly,
we may be unable to predict accurately the timing of any significant future
sales of our products. We may also spend substantial time and management
attention on potential license agreements that are not consummated, thereby
foregoing other opportunities.

We rely on a small number of customers for a substantial portion of our
revenues and our accounts receivables are concentrated among a small number of
customers.

We have been dependent on a limited number of customers for a substantial
portion of our annual revenues in each fiscal year, although the customers
comprising this group have changed from time to time. For the quarter ended
December 31, 2002 and in fiscal 2002, no single customer generated more than
10% of our revenues. We expect a small number of companies in the aggregate to
represent between 20% to 40% of our revenues for the foreseeable future. The
license agreements we enter into with our customers do not obligate them to
license future generations of our intellectual property and, as a result, we
cannot predict the length of our relationship with any of our significant
customers. As a result of this customer concentration, we could experience a
dramatic reduction in our revenues if we lose one or more of our significant
customers and are unable to replace them. In addition, since our accounts
receivable are concentrated in a relatively few number of customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectability of our
accounts receivables and our future operating results.

The market for embedded memory is highly competitive, and we may lose market
share to larger competitors with greater resources and to companies that
develop their own memory technologies using internal design teams.

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

Many of our existing competitors have longer operating histories, greater
brand recognition and larger customer bases, as well as greater financial and
marketing resources, than we do. This may allow them to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. It may also allow them to devote greater resources than we can to
the development and promotion of their products. In addition, the intense
competition in the market for semiconductor IP could result in pricing
pressures, reduced license revenues, reduced margins or lost market share, any
of which could harm our operating results and cause our stock price to decline.

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

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

In addition, our business and operations are substantially dependent on
the performance of our key personnel, including Adam A. Kablanian, our
President and Chief Executive Officer, and Alexander Shubat, our Vice President
of Research and Development and Chief Technical Officer. We do not have formal
employment agreements with Mr. Kablanian or Mr. Shubat and do not maintain key
man life insurance policies on their lives. If Mr. Kablanian or Mr. Shubat
were to leave or become unable to perform services for our company, our
business would be severely harmed.

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

A portion of our contracts require us to provide customized products
within a set delivery timetable. We have experienced delays in the progress of
certain projects in the past, and we may experience such delays in the future.
Any failure to meet significant customer milestones could damage our reputation
in our industry and harm our ability to attract new customers.

We may need additional capital that may not be available to us and, if raised,
may dilute our stockholders ownership interest in us.

We may need to raise additional funds to develop or enhance our
technologies, to fund expansion, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. Additional
financing may not be available on terms that are acceptable to us. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders would be reduced and these
securities might have rights, preferences and privileges senior to those of our
current stockholders. If adequate funds are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance our products or services, or otherwise
respond to competitive pressures would be significantly limited.

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

During the quarter ended December 31, 2002, we recorded a net loss of
$385,000. In fiscal year 2002, we recorded our first profitable year of
operations. The most recent quarters loss was due principally to below target
revenues recorded after certain customers deferred purchasing decisions. In
order to achieve profitability again, we will need to continue to generate new
sales while controlling our costs. As we plan on continuing the growth of our
business and expect to increase the size of our company in the next twelve
months, we may not be able to successfully generate enough revenues to remain
profitable with this growth. Any failure to increase our revenues and control
costs as we pursue our planned growth would harm our profitability and would
likely negatively affect the market price of our stock.

If we are unable to effectively manage our growth, our business may be harmed.

Our future success depends on our ability to successfully manage our
growth. Our ability to manage our business successfully in a rapidly evolving
market requires an effective planning and management process. Our customers
rely heavily on our technological expertise in designing and testing our
products. Relationships with new customers may require significant engineering
resources. As a result, any increase in the demand for our products will
increase the strain on our personnel, particularly our engineers.

We have continued to grow our headcount from 284 full-time employees at
September 31, 2002 to 293 full-time employees at December 31, 2002 We have
continued to increase our international presence, have increased substantially
the number of our customers and acquired In-Chip Systems, Inc in May 2002. This
growth has placed, and is expected to continue to place, significant strain on
our managerial and financial resources as well as our limited financial and
management controls, reporting systems and procedures. Although some new
controls, systems and procedures have been implemented, our future growth, if
any, will depend on our ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls. Since our
growth has occurred over such a limited time period, we do not have sufficient
experience managing the current size of our business to be able to fully assess
our ability to continue to manage its growth in the future. Our inability to
manage any future growth effectively would be harmful to our revenues and
profitability.

Any acquisitions we make may not provide us the expected benefits and could
disrupt our business and harm our financial condition.

We acquired In-Chip Systems, Inc. in May 2002, and we may continue to
acquire businesses or technologies that we believe are a strategic fit with our
business. The In-Chip acquisition as well as other future acquisitions may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. In addition, the integration of the business of
In-Chip and of other acquisition targets may prove to be more difficult than
expected, and we may be unsuccessful in maintaining and developing

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relations with the employees, customers and business partners of In-Chip
and other acquisition targets. Since we will not be able to accurately predict
these difficulties and expenditures, it is possible that these costs may
outweigh the value we realize from a future acquisition. Future acquisitions
could result in issuances of equity securities that would reduce our
stockholders ownership interest, the incurrence of debt, contingent
liabilities, deferred stock based compensation or expenses related to the
valuation of goodwill or other intangible assets and the incurrence of large,
immediate write-offs.

If we are not able to protect our intellectual property adequately, we will
have less proprietary technology to license, which will reduce our revenues and
profits.

Our patents, copyrights, trademarks, trade secrets and other intellectual
property are critical to our success. We rely on a combination of patent,
trademark, copyright, mask work and trade secret laws to protect our
proprietary rights. We cannot be sure that the U.S. Patent and Trademark Office
will issue patents or trademark registrations for any of our pending
applications. Further, any patents or trademark rights that we hold or may hold
in the future may be challenged, invalidated or circumvented or may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We have not attempted to secure patent protection in foreign
countries, and the laws of some foreign countries may not adequately protect
our intellectual property as well as the laws of the United States. Also, the
portion of our intellectual property developed outside of the United States may
not receive the same copyright protection that it would receive if it was
developed in the United States. As we increase our international presence, we
expect that it will become more difficult to monitor the development of
competing technologies that may infringe on our rights as well as unauthorized
use of our technologies.

We use licensing agreements, confidentiality agreements and employee
nondisclosure and assignment agreements to limit access to and distribution of
our proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. Even though we have taken all customary industry
precautions, we cannot be sure that we have taken adequate steps to protect our
intellectual property rights and deter misappropriation of these rights or that
we will be able to detect unauthorized uses and take immediate or effective
steps to enforce our rights. Since we also rely on unpatented trade secrets to
protect some of our proprietary technology, we cannot be certain that others
will not independently develop or otherwise acquire the same or substantially
equivalent technologies or otherwise gain access to our proprietary technology
or disclose that technology. We also cannot be sure that we can ultimately
protect our rights to our unpatented proprietary technology. In addition, third
parties might obtain patent rights to such unpatented trade secrets, which they
could use to assert infringement claims against us.

Third parties may claim we are infringing or assisting others to infringe their
intellectual property rights, and we could suffer significant litigation or
licensing expenses or be prevented from licensing our technology.

While we do not believe that any of our technology infringes the valid
intellectual property rights of third parties, we may be unaware of
intellectual property rights of others that may cover some of our technology.
As a result, third parties may claim we or our

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##### Table of Contents



customers are infringing their intellectual property rights. Our license
agreements typically require us to indemnify our customers for infringement
actions related to our technology.

Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved makes any
outcome uncertain. If we do not prevail in any infringement action, we may be
required to pay significant damages and may be prevented from developing some
of our technology or from licensing some of our intellectual property for
certain manufacturing processes unless we enter into a royalty or license
agreement. In addition, if challenging a claim is not feasible, we might be
required to enter into royalty or license agreements in order to settle a claim
and continue to license or develop our intellectual property, which may result
in significant expenditures. We may not be able to obtain such agreements on
terms acceptable to us or at all, and thus, may be prevented from licensing or
developing our technology.

Changes to accounting standards and rules could either delay our recognition of
revenues or reduce the amount of revenues that we may recognize at a specific
time, and thus defer or reduce our profitability. These effects on our reported
results could cause our stock price to be lower than it otherwise might have
been.

We adopted the American Institute of Certified Public Accountants
Statement of Position, or SOP, 97-2, Software Revenue Recognition, as of
October 1, 1998. In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. We implemented these
provisions as of October 1, 1999. In December 1999, the Securities and Exchange
Commission issued SEC Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements which summarizes certain of the SECs views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Additional accounting guidance or pronouncements in the
future could affect the timing of our revenue recognition in the future, which
could cause our operating results to fail to meet the expectations of investors
and securities analysts. In addition, changes to accounting policies that
affect other aspects of our business, such as employee stock option grants may
adversely affect our reported financial results.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our core business, the sale of semiconductor intellectual property for the
memory and logic elements of systems-on-a-chip, has limited exposure to
financial market risks, including changes in foreign currency exchange rates
and interest rates. A significant portion of our customers are located in Asia,
Canada and Europe. However, to date, our exposure to foreign currency exchange
fluctuations has been minimal because our license agreements provide for
payment in U.S. dollars.

Our foreign subsidiaries incur most of their expenses in the local
currency. 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 structures, other
regulations and restrictions and foreign exchange rate volatility.
International operations have not been material, therefore, we do not
anticipate our future results to be materially adversely impacted by changes in
these factors.

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We maintain an investment portfolio of various issuers, types and
maturities. These securities are generally classified as available for sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders
equity. Our investments primarily consist of short-term money market mutual
funds, United States government obligations and mortgage-backed securities and
commercial paper. At December 31, 2002, we maintained $49.5 million in cash or
short-term money market mutual funds and held $8.0 million of United States
agency securities with maturities of greater than one year. Due to the overall
short-term nature of our investment portfolio and our intent to hold these
investments to maturity, we do not believe our investment balance is materially
exposed to interest rate risk.




Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the
participation of our management, including the President and Chief Executive
Officer along with the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures within 90 days
before the filing date of this quarterly report. Based on that evaluation, the
Companys management, including the President and Chief Executive Officer along
with the Chief Financial Officer, concluded that the Companys disclosure
controls and procedures were effective. There have been no significant changes
in the Companys internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation. We intend to review
and evaluate the design and effectiveness of our disclosure controls and
procedures on an ongoing basis and to improve our controls and procedures over
time and to correct any deficiencies that we may discover in the future. Our
goal is to ensure that our senior management has timely access to all material
financial and non-financial information concerning our business. While we
believe the present design of our disclosure controls and procedures is
effective to achieve our goal, future events affecting our business may cause
us to significantly modify our disclosure controls and procedures.

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##### Table of Contents






PART II  OTHER INFORMATION




ITEM 1. Legal Proceedings

On December 18, 2002, the Company and Dr. Tushar Gheewala reached a
resolution of the lawsuit Dr. Gheewala filed against the Company in the
California Superior Court in Alameda County. Dr. Gheewala has agreed to dismiss
the lawsuit with prejudice and to withdraw his claims against the Company.
Terms of the settlement were not disclosed.




ITEM 2. Changes in Securities and Use of Proceeds

Use of Proceeds From Registered Securities

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




ITEM 3. Defaults upon Senior Securities

None




ITEM 4. Submission of Matters to a Vote of Security Holders

None




ITEM 5. Other Information

None




ITEM 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits:                                                                                 
|--- |  | ------------------------------------------------------------------------------------------
|   
|    |  | 10.34   Virage Logic Corporation Fiscal Year 2003 Executive Variable
Incentive Pay Plan #*

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| |  | 99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
| |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  | 99.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002



---

|# |  | Confidential treatment requested.                       
|- |  | --------------------------------------------------------
| 
|* |  | Management contract or compensatory plan or arrangement.



|(b) |  | Reports on Form 8-K                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The registrant filed Current Reports on a Form 8-K on November 26, 2002 and
January 3, 2003, under Item 2, to disclose a litigation matter and its
outcome

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

33



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##### Table of Contents



CERTIFICATION PURSUANT TO RULE 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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



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



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



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



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



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

|                         |  |                                                         |  | 
|------------------------ |  | ------------------------------------------------------- |  | 
|Date:  February 14, 2003 |  |                                                         |  | 
|                         |  | /s/ Adam A. Kablanian                                   |  | 
|                         |  |                                                         |  | 
|                         |  | Adam A. Kablanian
President and Chief Executive Officer |  | 

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##### Table of Contents



CERTIFICATION PURSUANT TO RULE 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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



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



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



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



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



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

|                         |  |                                                                         |  | 
|------------------------ |  | ----------------------------------------------------------------------- |  | 
|Date:  February 14, 2003 |  |                                                                         |  | 
|                         |  |                                                                         |  | 
|                         |  | /s/ James R. Pekarsky                                                   |  | 
|                         |  |                                                                         |  | 
|                         |  | James R. Pekarsky
Vice President of Finance and
Chief Financial Officer |  | 

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EXHIBIT INDEX

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  | Description                                                                                                           
|        |  |                                                                                                                       
|10.34   |  | Virage Logic Corporation Fiscal Year 2003 Executive Variable Incentive Pay Plan #*                                    
|99.1    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|99.2    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



---

|# |  | Confidential treatment requested.                       
|- |  | --------------------------------------------------------
| 
|* |  | Management contract or compensatory plan or arrangement.

36