<PAGE>
                                  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, 2001

                                       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)

<TABLE>
<S>                                          <C>
              Delaware                                 77-0416232
  (State or other jurisdiction of            (IRS Employer Identification No.)
   incorporation or organization)
</TABLE>

                              46501 LANDING 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 [ ]

As of January 31, 2002 there were 20,196,720 shares of the Registrant's Common
Stock outstanding.


                                       1


<PAGE>
                            VIRAGE LOGIC CORPORATION

                                    FORM 10-Q

                                      INDEX


<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
<S>                                                                             <C>
PART I - Financial Information

ITEM 1 -- Financial Statements
        Condensed Consolidated Balance Sheets as of  December 31, 2001
           and September 30, 2001..........................................       3
        Condensed Consolidated Statements of  Operations for the
           three months ended December 31, 2001 and 2000...................       4
        Condensed Consolidated Statements of Cash Flows for the
           three months ended December 31, 2001 and 2000 ..................       5
        Notes to 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.......      25

PART II - Other Information

ITEM 1 -- Legal Proceedings................................................      26
ITEM 2 -- Changes in Securities and Use of Proceeds........................      26
ITEM 3 -- Defaults upon Senior Securities..................................      26
ITEM 4 -- Submission of Matters to a Vote of Security Holders..............      26
ITEM 5 -- Other Information................................................      26
ITEM 6 -- Exhibits and Reports on Form 8-K.................................      26

Signatures.................................................................      27
</TABLE>


                                       2


<PAGE>
                            VIRAGE LOGIC CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                     December 31,    September 30,
                                                                        2001            2001
                                                                     ------------    -------------
ASSETS                                                               (unaudited)         (1)
<S>                                                                  <C>             <C>
Current assets:
  Cash and cash equivalents ....................................      $  34,594       $  27,868
  Investments ..................................................         19,966          24,800
  Accounts receivable, net .....................................         12,889           9,874
  Costs in excess of related billings on uncompleted
     contracts .................................................            612             572
  Prepaid expenses and other ...................................          1,578           1,579
  Taxes receivable .............................................            517           1,582
                                                                      ---------       ---------
      Total current assets .....................................         70,156          66,275
  Property, equipment and leasehold improvements, net ..........          5,071           4,810
  Intangible assets, net .......................................            216             270
  Deferred tax assets ..........................................            831             790
  Long-term investments ........................................          5,284           5,284
  Other long-term assets .......................................            228             370
                                                                      ---------       ---------
      Total assets .............................................      $  81,786       $  77,799
                                                                      =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .............................................      $     379       $     399
  Accrued payroll and related expenses .........................          1,994           1,595
  Accrued expenses .............................................          1,206           1,194
  Deferred revenue .............................................          2,002           1,046
  Current portion of capital lease obligations .................            196             240
  Income taxes payable .........................................            615               3
                                                                      ---------       ---------
      Total current liabilities ................................          6,392           4,477
Long-term portion of capital lease obligations .................              4               5
                                                                      ---------       ---------
      Total liabilities ........................................          6,396           4,482
Stockholders' equity:
  Common stock, $.001 par value:
    Authorized shares -- 150,000,000 at December 31, 2001
     and September 30, 2001,
    Issued and outstanding shares -- 20,137,512 and
    20,061,095 at December 31, 2001 and September 30, ..........             20              20
     2001, respectively
  Additional paid-in capital ...................................         96,991          96,855
  Accumulated other comprehensive income .......................             38             109
  Notes receivable from stockholders ...........................           (259)         (1,044)
  Deferred stock-based compensation ............................         (2,507)         (3,398)
  Accumulated deficit ..........................................        (18,893)        (19,225)
                                                                      ---------       ---------
      Total stockholders' equity ...............................         75,390          73,317
                                                                      ---------       ---------
      Total liabilities and stockholders' equity ...............      $  81,786       $  77,799
                                                                      =========       =========
</TABLE>

(1)     Derived from audited financial statements

           See notes to condensed consolidated financial statements.

                                       3


<PAGE>
                            VIRAGE LOGIC CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                December 31,
                                                            ----------------------
                                                              2001          2000
                                                            --------      --------
<S>                                                         <C>           <C>
Revenue:
  License ............................................         9,294         6,319
  Royalties ..........................................           353           275
                                                            --------      --------
Revenues .............................................      $  9,647      $  6,594
Cost of revenues (exclusive of amortization of
  deferred stock compensation of $195 and $519,
  respectively) ......................................         1,924         1,488
                                                            --------      --------
      Gross profit ...................................         7,723         5,106
Operating expenses:
  Research and development (exclusive of
  amortization of deferred stock compensation of
  $287 and $782, respectively ........................         2,840         2,242
  Sales and marketing (exclusive of amortization
  of deferred stock compensation of $254 and
  $509, respectively .................................         2,509         1,459
  General and administrative (exclusive of
  amortization of deferred stock compensation of
  $104 and $324, respectively ........................         1,025           929
  Stock-based compensation ...........................           840         2,134
                                                            --------      --------
      Total operating expenses .......................         7,214         6,764
                                                            --------      --------
Operating income (loss) ..............................           509        (1,658)
Interest income and other expense, net ...............           438           989
                                                            --------      --------
Income (loss) before taxes ...........................           947          (669)
Income tax provision .................................           615           615
                                                            --------      --------
Net income (loss) ....................................      $    332      $ (1,284)
                                                            ========      ========

Basic and diluted net income (loss) per share ........      $   0.02      $  (0.07)
                                                            ========      ========
Shares used in computing per share amounts:
   Basic .............................................        19,326        18,628
                                                            ========      ========
   Diluted ...........................................        20,607        18,628
                                                            ========      ========
</TABLE>


           See notes to condensed consolidated financial statements.


                                       4


<PAGE>
                            VIRAGE LOGIC CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                            December 31,
                                                                       -----------------------
                                                                         2001           2000
                                                                       --------       --------
<S>                                                                    <C>            <C>
OPERATING ACTIVITIES
  Net income (loss) .............................................      $    332       $ (1,284)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Provision for doubtful accounts ...........................            89             --
      Depreciation and amortization .............................           791            530
      Amortization of intangible asset ..........................            54             54
      Amortization of stock-based compensation ..................           840          2,134
    Changes in operating assets and liabilities:
         Accounts receivable ....................................        (3,104)            (7)
         Costs in excess of related billings on uncompleted
          contracts .............................................           (40)           (16)
         Taxes Receivable .......................................         1,065             --
         Deferred tax assets ....................................           (41)            --
         Prepaid expenses and other .............................             1           (279)
         Other assets ...........................................           142            102
         Accounts payable .......................................           (20)           433
         Accrued payroll and related expenses ...................           399            119
         Accrued expenses .......................................            12            296
         Deferred revenue .......................................           956           (415)
         Income taxes payable ...................................           612            484
                                                                       --------       --------
 Net cash provided by operating activities ......................         2,088          2,151
INVESTING ACTIVITIES

 Purchase of property, plant and equipment ......................        (1,052)          (913)
 Purchase of short-term investments .............................          (237)            --
 Proceeds from maturities of investments ........................         5,000             --
                                                                       --------       --------
 Net cash provided by (used) in investing activities ............         3,711           (913)
FINANCING ACTIVITIES

 Net proceeds from issuance of common stock .....................           187            184
 Repayment from stockholders ....................................           785             --
 Principal payments on capital lease obligations ................           (45)           (99)
                                                                       --------       --------
 Net cash provided by financing activities ......................           927             85

Net increase in cash and cash equivalents .......................         6,726          1,323
Cash and cash equivalents at beginning of period ................        27,868         58,596
                                                                       --------       --------
Cash and cash equivalents at end of the period ..................      $ 34,594       $ 59,919
                                                                       ========       ========
</TABLE>


            See notes to condensed consolidated financial statements.


                                       5


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

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended December 31,
2001 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2002. For further information refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 2 below.

The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of Virage
Logic Corporation (the "Company") for the year ended September 30, 2001, which
are included in the Company's Form 10-K filed with the Securities and Exchange
Commission, Registration No. 000-31089.

The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Virage Logic International.
Intercompany balances and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to prior period financial statements to
conform to current period presentation.

NOTE 2. SEGMENT INFORMATION

The Company operates in one business segment, the sale of semiconductor
intellectual property for the memory elements of systems-on-a-chip, which it
sells to fabless semiconductor companies as well as integrated device
manufacturers.

Segment selection is based upon the internal organization structure, the manner
in which these operations are managed and their performance evaluated by
management, the availability of separate financial information and overall
materiality considerations.


                                       6


<PAGE>
Revenues by geographic region were as follows (in thousands):


<TABLE>
<CAPTION>
                               THREE MONTHS ENDED
                                  DECEMBER 31,
                               ------------------
                                2001        2000
                               ------      ------
<S>                            <C>         <C>
Revenues:
 United States ..........      $4,190      $3,026
 Japan ..................         463       1,106
 Taiwan .................       1,345         776
 Canada .................       2,091         603
 Europe .................       1,458         552
 Other ..................         100         531
                               ------      ------
     Total ..............      $9,647      $6,594
                               ======      ======
</TABLE>


NOTE 3. COMPREHENSIVE INCOME (LOSS)

In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 established standards for the reporting and display of
comprehensive income (loss) and its components. Total comprehensive income was
not materially different from net income incurred for the three months ended
December 31, 2001.

NOTE 4. NET INCOME (LOSS) PER SHARE

Basic and diluted net income (loss) per share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the effective date of the Company's initial
public offering must be included in the calculation of basic and diluted net
income (loss) per common share as if they had been outstanding for all periods
presented.

In accordance with SFAS 128, basic and diluted net income (loss) per share have
been computed using the weighted average number of shares of common stock
outstanding during the period, less weighted average shares outstanding that are
subject to repurchase by the Company.


                                       7


<PAGE>
The following table presents the computation of basic and diluted net income
(loss) per share applicable to common stockholders (in thousands, except per
share amounts):


<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                   DECEMBER 31,
                                                             -----------------------
                                                               2001           2000
                                                             --------       --------
<S>                                                          <C>            <C>
Net income (loss) .....................................      $    332       $ (1,284)
                                                             ========       ========
Basic:
 Weighted average shares of common stock
  outstanding .........................................        20,088         19,910
 Less weighted average shares subject to
  repurchase ..........................................          (762)        (1,282)
                                                             --------       --------
Shares used in computing basic net income (loss)
  per share ...........................................        19,326         18,628
                                                             ========       ========
Diluted:
Employee stock options and unvested common
  stock outstanding ...................................           560             --
Unvested exercised options ............................           687             --
Unexercised warrants ..................................            34             --
Shares used in computing diluted net income (loss)
  per share ...........................................        20,607         18,628
                                                             ========       ========
Net income (loss) per share:
  Basic ...............................................      $   0.02       $  (0.07)
                                                             ========       ========
  Diluted .............................................      $   0.02       $  (0.07)
                                                             ========       ========
</TABLE>


NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14
include offers that a customer can use to receive a reduction in the price of a
product or service at the point of sale. The EITF changed the transition date
for Issue 00-14, concluding that a company should apply this consensus no later
than the company's annual or interim financial statements for the periods
beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products," effective for periods beginning after
December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller is (a) an adjustment of the selling prices of the vendor's
products and, therefore, should be deducted from revenue when recognized in the
vendor's statement of operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be included as a
cost or expense when recognized in the vendor's statement of operations. Upon
application of these EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements under these Issues. In September of 2001, the EITF issued
EITF Issue No. 01-09, "Accounting for Consideration Given by Vendor to a
Customer or a Reseller of the Vendor's Products," which is a codification of
EITF Issues No. 00-14, No. 00-25 and No.


                                       8


<PAGE>
00-22 "Accounting for Points and Certain Other Time-or Volume-Based Sales
Incentive Offers and Offers for Free Products or Services to be Delivered in the
Future." The Company is currently assessing the impact of the adoption of these
issues on its financial position and results of operations.

In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. The new rules require business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. As the Company has not completed any business combinations through
December 31, 2001, the Company believes that these standards will not have a
material impact on its financial position or operating results.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops
a single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. The
Company is currently assessing the impact of SFAS No. 144 on its financial
position and results of operations.


                                       9


<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements that involve
risks and uncertainties. These statements relate to future events or our future
financial performance. 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. These
statements involve a number of risks and uncertainties including those set forth
below under "Risk Factors" that could cause actual events or results to differ
materially from any forward-looking statement. 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" on pages 15-20 of the Company's Form 10-K
for the fiscal year ended September 30, 2001 filed with the Securities and
Exchange Commission on December 19, 2001.

OVERVIEW

        Virage Logic provides embedded memory in the form of semiconductor
intellectual property for systems-on-a-chip integrated circuits. These chips are
used in communications equipment, computer and consumer products, such as
cellular and digital phones, pagers, digital cameras, DVD players, switches and
modems. Our memories are optimized for our customers' manufacturing processes
and are pre-tested through actual manufacture of silicon chips at third-party
foundries.

        Revenues consist of license fees for our memories, standard and custom
memory compilers, software development tools and royalties from certain
third-party semiconductor foundries on their sales of silicon chips manufactured
for our fabless customers. Licensing of our intellectual property involves a
sales cycle of three to six months. Our memories and compilers can be customized
for our customers' specific manufacturing processes and requirements. A custom
contract would typically call for milestone payments that are defined in the
statement of work and program schedule that accompanies a master license
agreement. Milestone deliveries generally occur over three to six months as
various phases of product development and/or services are completed.

        License revenues are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, we have no significant remaining
obligations to perform, the fee is fixed or determinable and collectibility is
probable. License revenues for certain software development tools are recorded
ratably over the maintenance term as vendor-specific objective evidence of fair
value for the maintenance portion of the revenues does not exist. License
revenues on custom memory compilers are recognized using contract accounting
over the period that services are performed under the percentage-of-completion
method. For such licenses, we determine our progress-to-completion using input
measures based on labor hours incurred. A provision for estimated


                                       10


<PAGE>
losses on engagements is made in the period in which the loss becomes probable
and can be reasonably estimated. To date, no such loss provision has been
necessary.

        Support revenues related to standard and custom memory compilers are
recognized ratably over the term of the agreement for all agreements entered
into after October 1, 2001. For agreements recorded in periods prior to the
first quarter of fiscal 2002, support revenues were not deferred over the term
of the license agreement but rather, recorded up front with an estimated cost of
support accrued at the time license revenue was recognized. The increasing
complexity of our products, associated with the decreasing geometries and the
greater number of processes for each geometry, and the expected increase in
estimated support costs resulted in the deferral of support revenues.

        Currently, license fees represent a substantial portion of our revenues.
We have agreements with certain third-party semiconductor foundries to pay
royalties on their sales of silicon chips manufactured for our fabless
customers. Royalty revenues for the three months ended December 31, 2001 totaled
$353,000 as compared to $275,000 in the first quarter of fiscal 2001. The time
delays for receiving royalty revenues are due to the typical length of time
required for the customer to incorporate our embedded memories into their design
and manufacture and bring to market a product incorporating our memories.

        For the three months ended December 31, 2001, no individual customer
accounted for 10% or more of total revenues. For the three months ended December
31, 2000, Atmel, IBM, Metalink, MMC Networks, PMC-Sierra, Philips, TSMC and
Toshiba, each generated between 5% and 16% of our revenues. Collectively, these
companies represented 65% of total revenues for that period.

        We continue to increase our direct sales force in the United States and
Europe, while in Japan and the rest of Asia, we use both indirect sales through
distributors, as well as direct sales through sales representatives. Sales to
customers located outside the United States accounted for 57% of our revenues
for the three months ended December 31, 2001. All revenues to date have been
denominated in U.S. dollars.

        Since our inception in November 1995, cost of revenues and other expense
categories have progressively increased as we add personnel and increase the
level of our business activities. We intend to continue making significant
expenditures associated with research and development, sales and marketing and
general and administrative activities, and expect that costs of revenues and
these expenses will continue to be a significant percentage of revenues in
future periods.

        We have incurred, and will continue to incur, substantial amortization
of stock-based compensation, which represents non-cash charges incurred as a
result of the issuance of stock options to employees. These charges are recorded
based on the difference between the deemed fair value of the common stock at the
date of grant and the exercise price of such options. The aggregate deferred
stock-based compensation at December 31, 2001 was $2.5 million. 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. Amortization of deferred stock-based compensation for the
three months ended December 31, 2001, net of cancellations, was approximately
$840,000. We anticipate that the amortization of stock-based compensation for
options granted


                                       11


<PAGE>
through December 31, 2001 will equal approximately $1.7 million in 2002, $0.7
million in 2003 and $0.1 million in 2004.

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED
                                               DECEMBER 31,
                                         ------------------------
                                           2001            2000
                                         --------        --------
<S>                                      <C>             <C>
Revenue:
   License ........................          96.3%           95.8%
   Royalties ......................           3.7             4.2
                                         --------        --------
Revenues ..........................         100.0           100.0

Cost of revenues ..................          19.9            22.6
                                         --------        --------
Gross profit ......................          80.1            77.4
Operating expenses:
  Research and development ........          29.4            34.0
  Sales and marketing .............          26.0            22.1
  General and administrative ......          10.6            14.1
  Stock-based compensation ........           8.7            32.4
                                         --------        --------
Total operating expenses ..........          74.7           102.6
                                         --------        --------
Operating income (loss) ...........           5.4           (25.2)
Interest and other expenses .......           4.5            15.0
Income tax provision ..............          (6.4)           (9.3)
                                         --------        --------
Net income (loss) .................           3.5%          (19.5)%
                                         ========        ========
</TABLE>


THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000

        Revenues. Revenues increased 46% to $9.6 million from $6.6 million for
the three months ended December 31, 2001 and 2000, respectively. The increase in
revenues for the three months ended December 31, 2001 is primarily due to
continued migration to the 0.13 micron embedded memory technologies by our
customers, introduction of two new types of memory compilers to our area, speed
and power (ASAP) product line, an additional CAM product and the introduction of
the STAR(TM) Memory System. We have seen increased revenues from the U.S.,
Canada, and Europe for the three months ended December 31, 2001 over the same
period last fiscal year, associated with our increased sales forces in these
geographies. In addition, the Company received royalty revenues from a third
party foundry totaling $353,000 for the three months ended December 31, 2001, up
from $275,000 for the same period last fiscal year.

        Gross Profit. Gross profit is revenues less cost of revenues. Cost of
revenues consists primarily of personnel expenses and the allocated portion of
facilities and equipment expenses. Gross profit increased 51% to $7.7 million
from $5.1 million for the three months ended December 31, 2001 and 2000,
respectively. The increase in gross profit is primarily attributable to
increased sales volume and increased license fees from fabless semiconductor
companies for standard products that require minimal labor costs for
customization. Cost of revenues excludes $195,000 and $519,000 of amortization
of stock-


                                       12


<PAGE>
based compensation for the three months ended December 31, 2001 and 2000,
respectively.

        Research and Development Expense. Research and development expense
includes personnel and other costs associated with the development of successive
generations of embedded memory technologies and of new technologies. Research
and development expense increased 27% to $2.8 million for the three months ended
December 31, 2001 from $2.2 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 as we expanded
into three new product lines and the development of the 0.13 and 0.10 micron
embedded memory technologies. Increasing also is depreciation related to capital
spending for both computer hardware and software. Research and development
expense excludes $287,000 and $782,000 of amortization of stock-based
compensation for the three months ended December 31, 2001 and 2000,
respectively.

        Sales and Marketing Expense. Sales and marketing expense consists
primarily of personnel, commissions, advertising, promotion and other associated
costs. Sales and marketing expense increased 72% to $2.5 million for the three
months ended December 31, 2001 from $1.5 million for the same period last fiscal
year. The increase in sales and marketing expense was due to hiring additional
personnel, increased commissions, advertising costs, seminar costs and expanded
sales and marketing activities. We anticipate that sales and marketing expense
will continue to increase as we expand our sales force and target new customers
for our technologies. Sales and marketing expense excludes $254,000 and $509,000
of amortization of stock-based compensation for the three months ended December
31, 2001 and 2000, 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 10% to $1.0
million for the three months ended December 31, 2001 from $929,000 for the same
period last fiscal year. The increase in general and administrative expense was
primarily due to increased personnel, professional fees and an increase in the
allowance for doubtful accounts. General and administrative expense excludes
$104,000 and $324,000 of amortization of stock-based compensation for the three
months ended December 31, 2001 and 2000, respectively.

        Stock-Based Compensation. With respect to the grant of stock options to
employees, the Company has aggregate deferred stock-based compensation of
approximately $2.5 million and $7.8 million for the three months ended December
31, 2001 and 2000, respectively. The amount of deferred stock-based compensation
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 Company amortized $840,000 and $2.1 million during the
three months ended December 31, 2001 and 2000, respectively.

        Interest Income. Interest income decreased to $440,000 for the three
months ended December 31, 2001 from $1.0 million for the same period last fiscal
year. This decrease was due to lower interest rates.


                                       13


<PAGE>
        Interest and Other Expense. Interest and other expenses decreased to
$2,000 for the three months ended December 31, 2001 from $24,000 for the same
period last fiscal year. This decrease was the result of the repayment of the
outstanding balance under capital lease lines offset by refunds received from
prior periods activities.

        Income Tax Provision. The provision for income taxes was approximately
$615,000 for the three months ended December 31, 2001 and 2000, respectively.
The effective tax rates 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

        The Company has financed its operations from inception to December 31,
2001 from license and royalty revenue, through the issuance of notes and
preferred stock, borrowing under capital leases and the $50.7 million net
proceeds from the Company's initial public offering and simultaneous private
placement completed in August 2000. Net income for the three months ended
December 31, 2001 was $332,000. At December 31, 2001, the Company had $34.6
million in cash and cash equivalents, an increase of $6.7 million from cash held
at the end of last fiscal year. The increase in cash balances at December 31,
2001 was primarily due to the maturity of a short-term government security
investment. Operations were funded from revenues received.

        The Company has outstanding obligations under capital lease lines, with
payments due through June 2003. At December 31, 2001, $200,000 was outstanding
under these lines. There is no remaining availability under these capital lease
lines.

        Net cash provided by operating activities was $2.1 million for the first
three months of fiscal 2002. Net cash provided by operating activities resulted
from net income of $332,000 adjusted for non-cash charges associated with the
amortization of stock-based compensation and depreciation and amortization, a
decrease in taxes receivable, increases in deferred revenue and income taxes
payable, offset by an increase in accounts receivable. The increase in accounts
receivable at December 31, 2001 resulted from increased quarterly revenues and
from delays in payments due to holiday shutdowns.

        Net cash provided by investing activities was $3.7 million for the first
three months of fiscal 2002. Net cash provided by investing activities was due
to the maturity of a short-term government security investment, offset by the
acquisitions of property and equipment. We intend to purchase approximately $4.6
million of additional capital assets, primarily computer equipment and software,
during the remainder of fiscal 2002.

        Net cash provided by financing activities was $927,000 for the first
three months of fiscal 2002. Net cash provided by financing activities is
primarily due to the repayment of borrowings by stockholders and proceeds from
the issuance of common stock.

        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,


                                       14


<PAGE>
expansion of sales and marketing efforts, potential acquisitions and changes to
our working capital structure primarily related to accounts receivable.

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


                                       15


<PAGE>
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; and

        -       changes in development schedules, research and development
                expenditure levels and product support by us and our customers.

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

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 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, or TSMC, United Microelectronics Corporation, or UMC, and
Chartered Semiconductor Manufacturing or Chartered. If we


                                       16


<PAGE>
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 and embedded memories, 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 embedded memories
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 is facing 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 embedded memories
and may cause us to experience substantial period-to-period fluctuations in our
operating results. Further, the markets for third-party semiconductor
intellectual property and embedded memories have emerged only in recent years.
Because of the recent emergence of these markets, it is difficult to forecast
whether these markets will continue to develop or grow at a rate sufficient to
support our business.

PROBLEMS ASSOCIATED WITH INTERNATIONAL BUSINESS OPERATIONS COULD AFFECT OUR
ABILITY TO LICENSE OUR INTELLECTUAL PROPERTY.

        Sales to customers located outside the United States accounted for 55%
of our revenues in fiscal 2001 and between 44% to 50% of our revenues in the
fiscal years 1998 to 2000. We anticipate that sales to customers located outside
the United States 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 the United States. 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;


                                       17


<PAGE>
        -       staffing and managing foreign branch offices;

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

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

        -       the lengthy and expensive process of building a relationship
                with a potential licensee;

        -       competition with the internal design teams of semiconductor
                companies; and

        -       the need to persuade semiconductor companies to rely on us for
                critical technology.

        These factors may make it difficult for us to maintain our current
relationships or establish new relationships with additional licensees. Further,
there is a finite number of fabless semiconductor companies and integrated
device manufacturers to which we can


                                       18


<PAGE>
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.

OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY INSTABILITY IN THE
COUNTRIES IN WHICH WE OPERATE

        We recently established a subsidiary in Israel, and we expect to
continue expanding our direct sales force in Europe. In addition, a growing
portion of our intellectual property is being developed in development centers
located in the Republic of Armenia and India. Israel has recently faced 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
                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 to otherwise conduct
                business effectively in Armenia;

        -       our ability to continue conducting business in Israel and other
                countries in the normal course may be adversely affected by
                increased risk of violence and terror 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 recent 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 September
11, 2001 terrorist attacks in New York City, Washington, D.C. and Pennsylvania
and the anthrax-related terrorist attacks could further contribute to the
slowdown in the U.S. economy. 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 embedded memories, 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.


                                       19


<PAGE>
IF WE ARE UNSUCCESSFUL IN INCREASING OUR ROYALTY-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. For the years ended September 30, 2001 and 2000, we recorded
approximately $1,037,000 and $88,000, respectively, of royalty revenues.
Beginning with our Custom-Touch STAR Memory System and CAM technologies, 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. 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, 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 six
months after our first contact with a prospective customer before we start
licensing our intellectual property to that customer. In addition, purchase of
our products is usually made in connection with new design starts, which are out
of our control. Accordingly, we may be unable to predict accurately the timing
of any significant future sales of software licenses. We may also spend
substantial time and management attention on potential licenses that are not
consummated, thereby foregoing other opportunities.

WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES.

        We have been dependent on a relatively small 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. In fiscal 2001,
Philips Electronics and Intel Corporation generated 12% and 14% of our revenues,
respectively. In fiscal 2000, no single customer generated more than 10% of our
revenues. In fiscal 1999, ATI Technologies, MMC Networks, National Semiconductor
and Toshiba each generated between 10% and 18% of our revenues for a total of
56% 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


                                       20


<PAGE>
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.

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 embedded memories 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.

        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 embedded memory could result in pricing pressures,
reduced license revenues, reduced margins or lost market share, any of which
could harm our operating results and cause our stock price to decline.

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL WHO ARE CRITICAL TO THE
SUCCESS OF OUR BUSINESS.

        We believe that one of our significant competitive advantages is the
size and quality of our engineering team. Our future success also depends on our
ability to attract and retain engineers and other highly skilled personnel and
senior managers. In addition, in order to meet our planned growth we must
increase our sales force, both domestic and international, with qualified
employees. Hiring qualified technical, sales and management personnel is
difficult due to a limited number of qualified professionals and competition in
our industry for these types of employees. We have in the past experienced
delays and difficulties in recruiting and retaining qualified technical and
sales personnel and believe that at times our employees are recruited
aggressively by our competitors and start-up companies. Our employees are "at
will" and may leave our employment at any time, and under certain 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
Engineering 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


                                       21


<PAGE>
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 PRODUCTS IN THE TIME-FRAME
DEMANDED BY OUR CUSTOMERS, WHICH COULD DAMAGE OUR REPUTATION AND FUTURE SALES.

        A significant 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.

WE MAY HAVE DIFFICULTY SUSTAINING PROFITABILITY AND MAY EXPERIENCE LOSSES IN THE
FUTURE.

        During the quarter ended December 31, 2001, we recorded net income of
$332,000. This was our second profitable quarter on a reported (GAAP) basis. In
order to sustain profitability, 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.


                                       22


<PAGE>
        From the year ended September 30, 2000 to 2001, we grew from 138 to 202
full-time employees, have increased our international presence and have
increased substantially the number of our customers. 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 COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

        We may attempt to acquire businesses or technologies that we believe are
a strategic fit with our business. We believe that 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. 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
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


                                       23


<PAGE>
misappropriation of these rights or that we will be able to detect unauthorized
uses and take immediate or effective steps to enforce our rights. Since we also
rely on unpatented trade secrets to protect some of our proprietary technology,
we cannot be certain that others will not independently develop or otherwise
acquire the same or substantially equivalent technologies or otherwise gain
access to our proprietary technology or disclose that technology. We also cannot
be sure that we can ultimately protect our rights to our unpatented proprietary
technology. In addition, third parties might obtain patent rights to such
unpatented trade secrets, which they could use to assert infringement claims
against us.

THIRD PARTIES MAY CLAIM WE ARE INFRINGING OR ASSISTING OTHERS TO INFRINGE THEIR
INTELLECTUAL PROPERTY RIGHTS, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR
LICENSING EXPENSES OR BE PREVENTED FROM LICENSING OUR TECHNOLOGY.

        While we do not believe that any of our technology infringes the valid
intellectual property rights of third parties, we may be unaware of intellectual
property rights of others that may cover some of our technology. As a result,
third parties may claim we or our customers are infringing their intellectual
property rights. Our license agreements typically require us to indemnify our
customers for infringement actions related to our technology.

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


                                       24


<PAGE>
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 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.

        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. Our investments balance of $20.0 million at December 31, 2001 consists of
instruments with original maturities of 90 days to one year. Due to the
short-term nature of our investment portfolio and our intent to hold these
investments to maturity, we do not believe our investment balance is materially
exposed to interest rate risk.


                                       25


<PAGE>
                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS FROM REGISTERED SECURITIES

        Our registration statement (No. 333-36108) under the Securities Act 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 $3,622,500 for underwriting discounts and commissions and
approximately $1,785,000 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 the our securities, or
affiliates of Virage Logic. Offering proceeds, net of aggregate expenses were
approximately $46.3 million. We have applied all of the proceeds to temporary
investments in a commercial money market investment account.

        None of the net offering proceeds were paid directly or indirectly to
any of our directors, officers, or their associates, persons owning 10% or more
of any class of the our securities, or affiliates of Virage Logic.

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:

        10.31   Virage Logic Corporation 2002 Equity Incentive Plan

        10.32   Form of Notice of Grant of Stock Option under the Virage Logic
                Corporation 2002 Equity Incentive Plan

    (b) Reports on Form 8-K

        None


                                       26


<PAGE>
                                   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 13, 2002       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)


                                       27


<PAGE>
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
<S>       <C>
10.31     Virage Logic Corporation 2002 Equity Incentive Plan

10.32     Form of Notice of Grant of Stock Option under the Virage Logic
          Corporation 2002 Equity Incentive Plan
</TABLE>