##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 FOR THE TRANSITION PERIOD FROM TO
 COMMISSION FILE NUMBER: 000-31089
 VIRAGE LOGIC CORPORATION
 (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    77-0416232
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 VIRAGE LOGIC CORPORATION
47100 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(510) 360-8000
 þ o
  o þ o
 o þ




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##### 



VIRAGE LOGIC CORPORATION
  
 FORM 10-Q
 INDEX
 PAGEPart I. Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets at June 30, 2006 and September 30, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2006 and June 30, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2006, and June 30, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risks
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3.
    
    Defaults upon Senior Securities
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits
    
    
    36Signatures
    
    
    
    
    37Exhibit Index
    
    
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.3
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 June 30,
    
    
    September 30,2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    36,833
    
    
    $
    26,841Short-term investments
    
    
    32,942
    
    
    
    34,410Accounts receivable, net
    
    
    12,337
    
    
    
    14,201Costs in excess of related billings on uncompleted contracts
    
    
    344
    
    
    
    896Prepaid expenses and other current assets
    
    
    4,268
    
    
    
    4,517Taxes receivable
    
    
    1,193
    
    
    
    493Total current assets
    
    
    87,917
    
    
    
    81,358Property, equipment and leasehold improvements, net
    
    
    4,931
    
    
    
    5,093Goodwill
    
    
    9,782
    
    
    
    9,782Other intangible assets, net
    
    
    2,086
    
    
    
    2,375Deferred tax assets
    
    
    9,549
    
    
    
    8,604Long-term investments
    
    
    8,039
    
    
    
    6,587Other long-term assets
    
    
    277
    
    
    
    695Total assets
    
    $
    122,581
    
    
    $
    114,494LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    879
    
    
    $
    770Accrued expenses
    
    
    4,417
    
    
    
    3,623Deferred revenue
    
    
    8,488
    
    
    
    8,440Income taxes payable
    
    
    2,420
    
    
    
    1,441Total current liabilities
    
    
    16,204
    
    
    
    14,274Deferred tax liabilities
    
    
    852
    
    
    
    852Total liabilities
    
    
    17,056
    
    
    
    15,126Stockholders equity:Common stock, $.001 par value; Authorized shares -
150,000,000; issued and outstanding shares  22,958,409
and 22,547,504 at June 30, 2006 and September 30, 2005,
respectively
    
    
    23
    
    
    
    23Additional paid-in capital
    
    
    128,340
    
    
    
    120,548Accumulated other comprehensive income
    
    
    73
    
    
    
    52Accumulated deficit
    
    
    (22,911
    )
    
    
    (21,255
    )Total stockholders equity
    
    
    105,525
    
    
    
    99,368Total liabilities and stockholders equity
    
    $
    122,581
    
    
    $
    114,494
  3




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##### Table of Contents



VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:License
    
    $
    11,084
    
    
    $
    9,253
    
    
    $
    31,852
    
    
    $
    32,424Royalties
    
    
    4,262
    
    
    
    2,701
    
    
    
    12,415
    
    
    
    8,173Total revenues
    
    
    15,346
    
    
    
    11,954
    
    
    
    44,267
    
    
    
    40,597Cost and expenses:Cost of revenues
    
    
    4,151
    
    
    
    3,373
    
    
    
    11,367
    
    
    
    9,512Research and development
    
    
    5,473
    
    
    
    5,366
    
    
    
    16,429
    
    
    
    15,228Sales and marketing
    
    
    4,027
    
    
    
    3,794
    
    
    
    12,585
    
    
    
    12,116General and administrative
    
    
    2,150
    
    
    
    2,235
    
    
    
    7,615
    
    
    
    6,278Total cost and expenses
    
    
    15,801
    
    
    
    14,768
    
    
    
    47,996
    
    
    
    43,134Operating loss
    
    
    (455
    )
    
    
    (2,814
    )
    
    
    (3,729
    )
    
    
    (2,537
    )Interest income and other income (expenses), net
    
    
    924
    
    
    
    433
    
    
    
    2,208
    
    
    
    1,171Income (loss) before income taxes
    
    
    469
    
    
    
    (2,381
    )
    
    
    (1,521
    )
    
    
    (1,366
    )Income tax provision (benefit)
    
    
    2,059
    
    
    
    (1,083
    )
    
    
    135
    
    
    
    (819
    )Net loss
    
    $
    (1,590
    )
    
    $
    (1,298
    )
    
    $
    (1,656
    )
    
    $
    (547
    )Net loss per share:Basic
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.02
    )Weighted average shares used in computing per share amounts:Basic
    
    
    22,384
    
    
    
    22,359
    
    
    
    22,393
    
    
    
    22,097Diluted
    
    
    22,384
    
    
    
    22,359
    
    
    
    22,393
    
    
    
    22,097
  4




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##### Table of Contents



VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months EndedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,656
    )
    
    $
    (547
    )Adjustment to reconcile net loss to net cash provided by (used in) operating activities:Provision for (recovery of) doubtful accounts
    
    
    (417
    )
    
    
    457Depreciation and amortization
    
    
    1,461
    
    
    
    1,879Amortization of intangible assets
    
    
    290
    
    
    
    290Stock-based compensation
    
    
    5,368
    
    
    
    339Loss on disposal of fixed assets
    
    
    10
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    2,281
    
    
    
    (90
    )Costs in excess of related billings on uncompleted contracts
    
    
    560
    
    
    
    (538
    )Prepaid expenses and other assets
    
    
    240
    
    
    
    (1,464
    )Taxes receivable
    
    
    (700
    )
    
    
    985Deferred tax assets
    
    
    (943
    )
    
    
    Other long-term assets
    
    
    420
    
    
    
    Accounts payable and accrued liabilities
    
    
    910
    
    
    
    1,117Deferred revenue
    
    
    48
    
    
    
    (841
    )Income tax payable
    
    
    977
    
    
    
    (2,440
    )Net cash provided by (used in) operating activities
    
    
    8,849
    
    
    
    (853
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,195
    )
    
    
    (2,575
    )Purchase of investments
    
    
    (28,540
    )
    
    
    (38,348
    )Proceeds from maturities of investments
    
    
    28,616
    
    
    
    35,380Payment of merger-related liabilities
    
    
    
    
    
    
    (500
    )Net cash used in investing activities
    
    
    (1,119
    )
    
    
    (6,043
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    2,416
    
    
    
    5,058Net cash provided by financing activities
    
    
    2,416
    
    
    
    5,058Effect of exchange rates on cash
    
    
    (154
    )
    
    
    82Net increase (decrease) in cash and cash equivalents
    
    
    9,992
    
    
    
    (1,756
    )Cash and cash equivalents at beginning of period
    
    
    26,841
    
    
    
    28,746Cash and cash equivalents at end of period
    
    $
    36,833
    
    
    $
    26,990
  5




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##### Table of Contents



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




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##### Table of Contents



Revenue Recognition
 Software Revenue Recognition Accounting for Performance of Construction-Type
and Certain Production-Type Contracts
      7




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##### Table of Contents



Stock-Based Compensation
     Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net loss as reported
    
    $
    (1,298
    )
    
    $
    (547
    )Add: Stock-based compensation expense included in reported net loss, net of tax
    
    
    
    
    
    
    207Less:Fair value of stock-based compensation expense for all awards, net of tax
    
    
    (775
    )
    
    
    (3,380
    )Proforma net loss
    
    $
    (2,073
    )
    
    $
    (3,720
    )Basic and diluted net loss per share:As reported
    
    $
    (0.06
    )
    
    $
    (0.02
    )Proforma
    
    $
    (0.09
    )
    
    $
    (0.17
    )Weighted average shares used in computing per share amounts:Basic
    
    
    22,359
    
    
    
    22,097Diluted
    
    
    22,359
    
    
    
    22,097
 8




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006
    
    
    2006Cost of revenues
    
    $
    276
    
    
    $
    913Research and development
    
    
    351
    
    
    
    1,357Sales and marketing
    
    
    389
    
    
    
    1,344General and administrative
    
    
    603
    
    
    
    1,754Stock-based compensation expense
    
    
    1,619
    
    
    
    5,368Related income tax benefits
    
    
    (365
    )
    
    
    (1,123
    )Stock-based compensation expense, net of taxes benefits
    
    $
    1,254
    
    
    $
    4,245Net stock-based compensation expense, per common share:Basic
    
    $
    0.06
    
    
    $
    0.19Diluted
    
    $
    0.06
    
    
    $
    0.19
 
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Volatility
    
    
    68
    %
    
    
    75
    %
    
    
    70
    %
    
    
    74%-79
    %Risk-free interest rate
    
    
    5.1
    %
    
    
    4.0
    %
    
    
    4.6
    %
    
    
    3.0%-4.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    4.3 years
    
    3  4 years
    
    4.3 years
    
    3  5 years
  9




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##### Table of Contents



Equity Incentive Plans
  Shares
    
    
    Number of
    
    
    WeightedAvailable
    
    
    Options
    
    
    Averagefor Grant
    
    
    Outstanding
    
    
    Exercise PriceBalance at September 30, 2003
    
    
    1,057,532
    
    
    
    5,507,916
    
    
    $
    10.16Additional options authorized
    
    
    1,050,000
    
    
    
    
    
    
    
    Options granted
    
    
    (1,338,750
    )
    
    
    1,338,750
    
    
    $
    9.25Options exercised
    
    
    
    
    
    
    (216,636
    )
    
    $
    3.79Options canceled
    
    
    605,739
    
    
    
    (605,739
    )
    
    $
    12.14Balance at September 30, 2004
    
    
    1,374,521
    
    
    
    6,024,291
    
    
    $
    9.99Additional options authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Options granted
    
    
    (1,159,059
    )
    
    
    1,159,059
    
    
    $
    10.38Options exercised
    
    
    
    
    
    
    (705,610
    )
    
    $
    6.03Options canceled
    
    
    773,070
    
    
    
    (773,070
    )
    
    $
    12.61Balance at September 30, 2005
    
    
    1,988,532
    
    
    
    5,704,670
    
    
    $
    10.12Additional options authorized
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (967,803
    )
    
    
    967,803
    
    
    $
    9.53Options exercised
    
    
    
    
    
    
    (399,093
    )
    
    $
    5.73Options expired/forfeited
    
    
    758,850
    
    
    
    (758,850
    )
    
    $
    10.74Balance at June 30, 2006
    
    
    1,779,579
    
    
    
    5,514,530
    
    
    $
    10.25
  Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AggregateRemaining
    
    
    Weighted
    
    
    Intrinsic
    
    
    
    
    
    
    Remaining
    
    
    Weighted
    
    
    IntrinsicNumber
    
    
    Contractual
    
    
    Average
    
    
    Value
    
    
    Number
    
    
    Contractual
    
    
    Average
    
    
    ValueRange of Exercise
    
    of
    
    
    Life (In
    
    
    Exercise
    
    
    (in
    
    
    of
    
    
    Life (In
    
    
    Exercise
    
    
    (inPrices
    
    Shares
    
    
    years)
    
    
    Price
    
    
    thousands)
    
    
    Shares
    
    
    years)
    
    
    Price
    
    
    thousands$0.13   -
$5.61
    
    
    818,519
    
    
    
    5.60
    
    
    $
    3.86
    
    
    $
    4,530
    
    
    
    654,193
    
    
    
    5.26
    
    
    $
    3.44
    
    
    $
    3,892$5.62   -
$7.81
    
    
    883,656
    
    
    
    9.17
    
    
    $
    7.54
    
    
    $
    1,634
    
    
    
    103,814
    
    
    
    6.64
    
    
    $
    6.67
    
    
    $
    283$7.84   -
$8.95
    
    
    619,077
    
    
    
    8.26
    
    
    $
    8.64
    
    
    $
    464
    
    
    
    268,291
    
    
    
    7.87
    
    
    $
    8.71
    
    
    $
    183$9.00   -
$9.96
    
    
    563,587
    
    
    
    8.10
    
    
    $
    9.32
    
    
    $
    86
    
    
    
    226,160
    
    
    
    7.65
    
    
    $
    9.36
    
    
    $
    34$10.00 - $10.75
    
    
    598,447
    
    
    
    8.65
    
    
    $
    10.34
    
    
    $
    
    
    
    
    291,525
    
    
    
    7.68
    
    
    $
    10.32
    
    
    $
    $10.79 - $14.00
    
    
    763,369
    
    
    
    7.02
    
    
    $
    12.43
    
    
    $
    
    
    
    
    547,597
    
    
    
    6.30
    
    
    $
    12.81
    
    
    $
    $14.03 - $16.00
    
    
    360,334
    
    
    
    6.36
    
    
    $
    15.16
    
    
    $
    
    
    
    
    293,107
    
    
    
    5.79
    
    
    $
    15.13
    
    
    $
    $16.11 - $16.11
    
    
    568,491
    
    
    
    5.99
    
    
    $
    16.11
    
    
    $
    
    
    
    
    547,117
    
    
    
    5.99
    
    
    $
    16.11
    
    
    $
    $16.56 - $22.37
    
    
    338,800
    
    
    
    6.50
    
    
    $
    17.13
    
    
    $
    
    
    
    
    283,830
    
    
    
    6.05
    
    
    $
    17.15
    
    
    $
    $22.81 - $22.81
    
    
    250
    
    
    
    5.91
    
    
    $
    22.81
    
    
    $
    
    
    
    
    221
    
    
    
    5.91
    
    
    $
    22.81
    
    
    $
    Total
    
    
    5,514,530
    
    
    
    7.40
    
    
    $
    10.25
    
    
    $
    6,714
    
    
    
    3,215,855
    
    
    
    6.33
    
    
    $
    11.05
    
    
    $
    4,392
   10




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##### Table of Contents



Stock OptionsWeighted-Number of
    
    
    average grant-shares
    
    
    date fair valueNonvested at September 30, 2005
    
    
    2,862,825
    
    
    $
    6.33Awards granted
    
    
    967,803
    
    
    $
    3.38Awards vested
    
    
    (641,104
    )
    
    $
    7.95Awards expired/forfeited
    
    
    (758,850
    )
    
    $
    5.47Nonvested at June 30, 2006
    
    
    2,430,674
    
    
    $
    5.46
 NOTE 2  NET INCOME (LOSS) PER SHARE
 Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (1,590
    )
    
    $
    (1,298
    )
    
    $
    (1,656
    )
    
    $
    (547
    )Weighted average shares outstanding, Basic
    
    
    22,384
    
    
    
    22,359
    
    
    
    22,393
    
    
    
    22,097Effect of potentially dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    22,384
    
    
    
    22,359
    
    
    
    22,393
    
    
    
    22,097Net loss per basic share
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.02
    )Net loss per diluted share
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.02
    )
   NOTE 3  COMPREHENSIVE INCOME (LOSS)
 Reporting Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (1,590
    )
    
    $
    (1,298
    )
    
    $
    (1,656
    )
    
    $
    (547
    )Foreign currency translation adjustments, net of tax
    
    
    (5
    )
    
    
    61
    
    
    
    (26
    )
    
    
    443Changes in unrealized gain (loss) on investments, net of tax
    
    
    14
    
    
    
    40
    
    
    
    40
    
    
    
    (67
    )Comprehensive loss, net of tax
    
    $
    (1,581
    )
    
    $
    (1,197
    )
    
    $
    (1,642
    )
    
    $
    (171
    )
 11




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NOTE 4  SEGMENT INFORMATION
     Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total Revenue by GeographyUnited States
    
    $
    5,605
    
    
    $
    4,432
    
    
    $
    16,016
    
    
    $
    13,229Canada
    
    
    908
    
    
    
    225
    
    
    
    2,623
    
    
    
    1,502Japan
    
    
    817
    
    
    
    820
    
    
    
    2,698
    
    
    
    3,616Taiwan
    
    
    4,367
    
    
    
    3,457
    
    
    
    11,363
    
    
    
    9,052Europe, Middle East and Africa (EMEA)
    
    
    2,344
    
    
    
    2,116
    
    
    
    6,177
    
    
    
    7,253Other Asia (China, Malaysia, Korea and Singapore)
    
    
    1,305
    
    
    
    904
    
    
    
    5,390
    
    
    
    5,945Total
    
    $
    15,346
    
    
    $
    11,954
    
    
    $
    44,267
    
    
    $
    40,597
  Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Total License Revenue by Process Node65 Nanometer technology
    
    
    12
    %
    
    
    8
    %
    
    
    9
    %
    
    
    6
    %90 Nanometer technology
    
    
    40
    
    
    
    44
    
    
    
    41
    
    
    
    330.13 Micron technology
    
    
    38
    
    
    
    28
    
    
    
    34
    
    
    
    420.18 Micron technology
    
    
    8
    
    
    
    12
    
    
    
    13
    
    
    
    12Other
    
    
    2
    
    
    
    8
    
    
    
    3
    
    
    
    7Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   NOTE 5  RECENT ACCOUNTING PRONOUNCEMENTS
   12




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NOTE 6  COMMITMENTS AND CONTINGENCIES
 Indemnifications
 Warranties
 NOTE 7  RELATED PARTY TRANSACTIONS
  13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
 Business Environment
      14




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Sources of Revenues
  
    
    embedded memory, logic and I/O elements;
    
    standard and custom memory compilers; and
    
    memory test processor and fuse box components for embedded test and repair of defective memory cells.
       Critical Accounting Policies and Estimates
 
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
    
    stock-based compensation;
    
    revenue recognition;
    
    valuation of accounts receivable;
    
    valuation of purchased intangibles, including goodwill; and
    
    income taxes.
 Stock-based compensation
       16




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##### Table of Contents



Revenue Recognition
 Software Revenue Recognition Accounting for Performance of Construction-Type
and Certain Production-Type Contracts
    17




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Valuation of Accounts Receivable
  Valuation of Purchased Intangibles, Including Goodwill
  Income taxes
   18




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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005
 Revenues
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    Revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeRevenues:License
    
    $
    11,084
    
    
    
    72.2
    %
    
    $
    9,253
    
    
    
    77.4
    %
    
    $
    1,831
    
    
    
    19.8
    %Royalties
    
    
    4,262
    
    
    
    27.8
    %
    
    
    2,701
    
    
    
    22.6
    %
    
    
    1,561
    
    
    
    57.8
    %Total revenues
    
    $
    15,346
    
    
    
    100.0
    %
    
    $
    11,954
    
    
    
    100.0
    %
    
    $
    3,392
    
    
    
    28.4
    %
 Nine Months Ended
    
    
    Nine Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeRevenues:License
    
    $
    31,852
    
    
    
    72.0
    %
    
    $
    32,424
    
    
    
    79.9
    %
    
    
    ($572
    )
    
    
    (1.8
    %)Royalties
    
    
    12,415
    
    
    
    28.0
    %
    
    
    8,173
    
    
    
    20.1
    %
    
    
    4,242
    
    
    
    51.9
    %Total revenues
    
    $
    44,267
    
    
    
    100.0
    %
    
    $
    40,597
    
    
    
    100.0
    %
    
    $
    3,670
    
    
    
    9.0
    %
    Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Total License Revenue by Process Node:65 Nanometer technology
    
    
    12
    %
    
    
    8
    %
    
    
    9
    %
    
    
    6
    %90 Nanometer technology
    
    
    40
    
    
    
    44
    
    
    
    41
    
    
    
    330.13 Micron technology
    
    
    38
    
    
    
    28
    
    
    
    34
    
    
    
    420.18 Micron technology
    
    
    8
    
    
    
    12
    
    
    
    13
    
    
    
    12Other
    
    
    2
    
    
    
    8
    
    
    
    3
    
    
    
    7Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  19




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Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total Revenue by GeographyUnited States
    
    $
    5,605
    
    
    $
    4,432
    
    
    $
    16,016
    
    
    $
    13,229Canada
    
    
    908
    
    
    
    225
    
    
    
    2,623
    
    
    
    1,502Japan
    
    
    817
    
    
    
    820
    
    
    
    2,698
    
    
    
    3,616Taiwan
    
    
    4,367
    
    
    
    3,457
    
    
    
    11,363
    
    
    
    9,052Europe, Middle East and Africa (EMEA)
    
    
    2,344
    
    
    
    2,116
    
    
    
    6,177
    
    
    
    7,253Other Asia (China, Malaysia, Korea and Singapore)
    
    
    1,305
    
    
    
    904
    
    
    
    5,390
    
    
    
    5,945Total
    
    $
    15,346
    
    
    $
    11,954
    
    
    $
    44,267
    
    
    $
    40,597
  Cost and Expenses
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    Revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeCost and expenses:Cost of revenues
    
    $
    4,151
    
    
    
    27.0
    %
    
    $
    3,373
    
    
    
    28.2
    %
    
    $
    778
    
    
    
    23.1
    %Research and development
    
    
    5,473
    
    
    
    35.7
    %
    
    
    5,366
    
    
    
    44.9
    %
    
    
    107
    
    
    
    2.0
    %Sales and marketing
    
    
    4,027
    
    
    
    26.3
    %
    
    
    3,794
    
    
    
    31.7
    %
    
    
    233
    
    
    
    6.1
    %General and administrative
    
    
    2,150
    
    
    
    14.0
    %
    
    
    2,235
    
    
    
    18.7
    %
    
    
    (85
    )
    
    
    (3.8
    %)Total cost and expenses
    
    $
    15,801
    
    
    
    103.0
    %
    
    $
    14,768
    
    
    
    123.5
    %
    
    $
    1,033
    
    
    
    7.0
    %
 Nine Months Ended
    
    
    Nine Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeCost and expenses:Cost of revenues
    
    $
    11,367
    
    
    
    25.7
    %
    
    $
    9,512
    
    
    
    23.4
    %
    
    $
    1,855
    
    
    
    19.5
    %Research and development
    
    
    16,429
    
    
    
    37.1
    %
    
    
    15,228
    
    
    
    37.5
    %
    
    
    1,201
    
    
    
    7.9
    %Sales and marketing
    
    
    12,585
    
    
    
    28.4
    %
    
    
    12,116
    
    
    
    29.8
    %
    
    
    469
    
    
    
    3.9
    %General and administrative
    
    
    7,615
    
    
    
    17.2
    %
    
    
    6,278
    
    
    
    15.5
    %
    
    
    1,337
    
    
    
    21.3
    %Total cost and expenses
    
    $
    47,996
    
    
    
    108.4
    %
    
    $
    43,134
    
    
    
    106.2
    %
    
    $
    4,862
    
    
    
    11.3
    %
 Cost of Revenues
 
 20




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Research and Development Expenses
   Sales and Marketing Expenses
   General and Administrative Expenses
 
 21




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Interest Income and Other Income (Expenses), net
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeInterest income and other income (expenses), net:Interest income
    
    $
    776
    
    
    
    5.0
    %
    
    $
    456
    
    
    
    3.8
    %
    
    $
    320
    
    
    
    70.2
    %Other income (expenses), net
    
    
    148
    
    
    
    1.0
    %
    
    
    (23
    )
    
    
    (0.2
    %)
    
    
    171
    
    
    
    743.5
    %Total interest income and other income (expenses), net
    
    $
    924
    
    
    
    6.0
    %
    
    $
    433
    
    
    
    3.6
    %
    
    $
    491
    
    
    
    113.4
    %
 Nine Months Ended
    
    
    Nine Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeInterest income and other income (expenses), net:Interest income
    
    $
    2,067
    
    
    
    4.7
    %
    
    $
    1,200
    
    
    
    3.0
    %
    
    $
    867
    
    
    
    72.3
    %Other income (expenses), net
    
    
    141
    
    
    
    0.3
    %
    
    
    (29
    )
    
    
    (0.1
    %)
    
    
    170
    
    
    
    586.2
    %Total interest income and other income (expenses), net
    
    $
    2,208
    
    
    
    5.0
    %
    
    $
    1,171
    
    
    
    2.9
    %
    
    $
    1,037
    
    
    
    88.6
    %
  Income Tax Provision
 Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeIncome tax provision (benefit)
    
    $
    2,059
    
    
    
    13.4
    %
    
    $
    (1,083
    )
    
    
    (9.1
    %)
    
    $
    3,142
    
    
    
    290.1
    %
 Nine Months Ended
    
    
    Nine Months EndedJune 30, 2006
    
    
    June 30, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeIncome tax provision (benefit)
    
    $
    135
    
    
    
    (0.3
    %)
    
    $
    (819
    )
    
    
    (2.0
    %)
    
    $
    954
    
    
    
    116.5
    %
  22




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LIQUIDITY AND CAPITAL RESOURCES
 June 30,
    
    
    September 30,2006
    
    
    2005
    
    
    ChangeCash and cash equivalents
    
    $
    36,833
    
    
    $
    26,841
    
    
    $
    9,992Short-term and long-term investments
    
    
    40,981
    
    
    
    40,997
    
    
    
    (16
    )Total cash, cash equivalents and marketable debt securities
    
    $
    77,814
    
    
    $
    67,838
    
    
    $
    9,976
  Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    ChangeCash provided by (used in) operating activities
    
    $
    8,849
    
    
    $
    (853
    )
    
    $
    9,702Cash used in investing activities
    
    
    (1,119
    )
    
    
    (6,043
    )
    
    
    4,924Cash provided by financing activities
    
    
    2,416
    
    
    
    5,058
    
    
    
    (2,642
    )Effect of exchange rates on cash
    
    
    (154
    )
    
    
    82
    
    
    
    (236
    )Net increase (decrease) in cash and cash equivalents
    
    $
    9,992
    
    
    $
    (1,756
    )
    
    $
    11,748
    
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Contractual
    
    
    
    
    
    Less Than
    
    
    1-3
    
    
    4-5
    
    
    AfterObligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating lease obligations
    
    $
    3,172
    
    
    $
    463
    
    
    $
    2,202
    
    
    $
    507
    
    
    $
    Purchase obligations
    
    
    6,079
    (1)
    
    
    403
    
    
    
    5,676
    
    
    
    
    
    
    
    Total operating lease and purchase obligations
    
    $
    9,251
    
    
    $
    866
    
    
    $
    7,878
    
    
    $
    507
    
    
    $
    
 
 (1)
    
    Reflects amounts payable under contracts primarily for product development software licenses
and maintenance. We have no off-balance-sheet financing arrangements other than operating
leases as defined in regulation S-K Item 303 (a)(4). 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
 ITEM 4. CONTROLS AND PROCEDURES
    24




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##### Table of Contents



:
 
    
    Hiring of additional personnel, permitting enhanced segregation of duties and additional review;
    
    Additional training of staff;
    
    Identification of procedural improvements in our accounting processes;
    
    Enhancement of standardized control procedures and independent recalculations from
Softrax, the Companys ERP system, for foreign exchange translation, and implementation of
redundant review controls related to the translation of foreign currencies which are
performed by an individual independent of the preparer and initial reviewer;
    
    Engagement of another third-party firm to review the income tax provision; and
    
    Expansion of standardized control procedure and checklists for quarterly control
procedures related to the preparation and review of the statements of cash flows
preparation.
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Risks Related to Our Business
 Inability or delayed execution on our strategy to be a leading provider of semiconductor IP
platforms could adversely affect our revenues and profitability.
  
    
    Difficulty convincing customers of our memory products to purchase other products from us;
    
    Competition resulting in minority market share; and
    
    Difficulties and delays in expanding our logic and I/O product offerings.
 Our quarterly operating results may fluctuate significantly and any failure to meet financial
expectations for any fiscal quarter may cause our stock price to decline.
  
    
    large orders unevenly spaced over time and timing of our sales cycle;
    
    establishment or loss of strategic relationships with third-party semiconductor foundries;
    
    pace of adoption of new technologies by customers;
    
    timing of new technologies and technology enhancements by us and our competitors;
    
    fluctuations in the demand for products that incorporate our IP;
    
    constrained or deferred spending decisions by customers;
    
    inability to collect trade receivables;
    
    the timing and completion of milestones under customer agreements;
    
    operational issues in fulfilling existing orders;
    
    the impact of competition on license revenues or royalty rates;
    
    the cyclical nature of the semiconductor industry and the general economic environment;
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##### Table of Contents




    
    difficulties in forecasting royalty revenues because of factors out of our control, such
as the timing of manufacturing of semiconductors subject to royalty obligations, the number
of such semiconductors actually manufactured and the timing and results of audits of royalty
reports received from our customers;
    
    changes in development schedules, research and development expenditure levels and product
support by us and our customers; and
    
    recording a significant portion of our quarterly revenues in the last month of a quarter.
This is the result of closing more product orders, and therefore, a higher percentage of
product shipments, in the last month of a quarter than in the first months of a quarter.
Some customers believe they can enhance their bargaining power by waiting until the end of
the quarter to finalize negotiations.
  If we are unable to continue establishing relationships on favorable contractual terms with
semiconductor companies to license our IP, our business will be harmed.
   
    
    the lengthy and expensive process of building a relationship with a potential licensee;
    
    competition with the customers internal design teams and other providers of
semiconductor IP, as our customers may evaluate these alternatives for each design; and
    
    the need to persuade potential licensees to rely on us for critical technology.
  If we are unable to maintain existing relationships and/or develop new relationships with
third-party semiconductor manufacturers, or foundries, we will be unable to verify our technologies
on their processes and license our IP to them or their customers and our business will be harmed.
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We may be unable to deliver our customized memory, logic and I/O products in the time-frame
demanded by our customers, which could damage our reputation and future sales.
  If we are unsuccessful in increasing our royalty revenues, our revenues and profitability may not
be as large as we anticipate.
  It is difficult for us to verify royalty amounts owed to us under our licensing arrangements, and
this may cause us to lose revenues or inaccurately report revenues.
  Products that do not meet customer specifications or contain defects that harm our customers could
damage our reputation and cause us to lose customers and revenue.
  As advanced process nodes become more complex we may have difficulty in delivering product
specifications in similar timeframes and at comparable costs to older process nodes.
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Our international operations may be adversely affected by conditions in the countries in which we
operate.
  
    
    changes in the political or economic conditions in Armenia and changes in the economic
conditions in India and the surrounding region, such as fluctuations in exchange rates,
changes in laws protecting IP, the imposition of currency transfer restrictions or
limitations, or the adoption of burdensome trade or tax policies, procedures, rules,
regulations or tariffs, changes in the demand for technical personnel could adversely affect
our ability to develop new products, to take advantage of the cost savings associated with
operations in Armenia and India, and to otherwise conduct business effectively in Armenia
and India;
    
    our ability to continue conducting business in Israel and other countries in the normal
course may be adversely affected by increased risk of social and political instability and
our employees working and visiting in Israel may be affected by terrorist attacks; and
    
    our Israeli customers demand for our products may be adversely affected because of
negative economic consequences associated with reduced levels of safety and security in
Israel.
 Problems associated with international business operations could affect our ability to license our
IP.
  
    
    managing foreign distributors and sales partners and sharing revenues with such third parties;
    
    staffing and managing foreign branch offices and subsidiaries;
    
    political and economic instability;
    
    greater difficulty in collecting account receivables resulting in longer collection periods;
    
    foreign currency exchange fluctuations;
    
    changes in tax laws and tariffs;
    
    compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory
environments with which we are not familiar;
    
    timing and availability of export licenses;
    
    inadequate protection of IP rights in some countries; and
    
    obtaining governmental approvals for certain technologies.
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We have a long and unpredictable sales cycle, which can result in uncertainty and delays in
generating additional revenues.
  We rely on a small number of customers for a substantial portion of our revenues and our accounts
receivables are concentrated among a small number of customers.
  We may have difficulty sustaining profitability and may experience additional losses in the future.
  We may be unable to attract and retain key personnel who are critical to the success of our
business.
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We may need additional capital that may not be available to us and, if raised, may dilute our
stockholders ownership interest in us.
  If we are unable to effectively manage our growth, our business may be harmed.
   Risks Related to Our Industry
 If demand for our products that incorporate complex semiconductors and semiconductor IP platforms
does not increase, our business may be harmed.
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The market for semiconductor IP platforms can be highly competitive and dynamic. We may lose market
share to larger competitors with greater resources and/or our customer base may choose to develop
semiconductor IP platforms using their own internal design teams.
   The technology used in the semiconductor industry is rapidly changing and if we are unable to
develop new technologies and adapt our existing IP to new processes, we will be unable to attract
or retain customers.
   
    
    our ability to anticipate and respond in a timely manner to changes in the requirements
of semiconductor companies;
    
    the emergence of new semiconductor manufacturing processes and our ability to enter into
strategic relationships with third-party semiconductor foundries to develop and test
technologies for these new processes and provide customer referrals;
    
    the significant research and development investment that we may be required to make
before market acceptance, if any, of a particular technology;
    
    the possibility that the industry may not accept a new technology or may delay use of a
new technology after we have invested a significant amount of resources to develop it; and
    
    new technologies introduced by our competitors.
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General economic conditions and future terrorist attacks may reduce our revenues and harm our
business.
  Risk Related to Our Intellectual Property Rights
 If we are not able to protect our IP adequately, we will have less proprietary technology to
license, which will reduce our revenues and profits.
   Third parties may claim we are infringing or assisting others to infringe their IP rights, and we
could suffer significant litigation or licensing expenses or be prevented from licensing our
technology.
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##### Table of Contents



Risks Related to Our Stock
 Our stock price may be volatile and could decline substantially.
  
    
    variations between our operating results and the published expectations of securities analysts;
    
    changes in financial estimates or investment recommendations by securities analysts following our business;
    
    announcements by us or our competitors of significant contracts, new products or
services, acquisitions, or other significant transactions;
    
    sale of our common stock or other securities in the future;
    
    the inclusion or exclusion of our stock in various indices or investment categories,
especially as compared to the investment profiles of our stockholders at a given time;
    
    changes in economic and capital market conditions;
    
    changes in business regulatory conditions; and
    
    the trading volume of our common stock.
 We determined that we had material weaknesses in our internal control over financial reporting as
of September 30, 2005. These material weaknesses could result in a loss of investor confidence in
our financial reports and have an adverse impact on our stock price.
    Changes in financial accounting standards related to stock-based compensation are expected to
continue to have a significant effect on our reported results.
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Our certificate of incorporation and bylaws as well as Delaware law contain provisions that could
discourage transactions resulting in a change in control, which may negatively affect the market
price of our common stock.
  
    
    our board of directors is authorized, without prior stockholder approval, to create and
issue preferred stock, commonly referred to as blank check preferred stock, with rights
senior to those of common stock;
    
    our board of directors is staggered into three classes, only one of which is elected at each annual meeting;
    
    stockholder action by written consent is prohibited;
    
    nominations for election to our board of directors and the submission of matters to be
acted upon by stockholders at a meeting are subject to advance notice requirements;
    
    certain provisions in our bylaws and certificate may only be amended with the approval of
stockholders holding 80% of our outstanding voting stock;
    
    the ability of our stockholders to call special meetings of stockholders is prohibited; and
    
    our board of directors is expressly authorized to make, alter or repeal our bylaws.
  Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  
 ITEM 5. OTHER INFORMATION
  35




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Exhibits31.1
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act
as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act
as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.3
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act
as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.3
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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##### Table of Contents



SIGNATURES
  Date: August 9, 2006
    VIRAGE LOGIC CORPORATION/s/ Adam A. KablanianADAM A. KABLANIANPresident and Chief Executive Officer
(Co-Principal Executive Officer) /s/ Christine RussellCHRISTINE RUSSELLChief Financial Officer
(Principal Accounting Officer and Principal Financial Officer) 37




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##### Table of Contents



EXHIBIT INDEX
 31.1
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and
Exchange Act as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and
Exchange Act as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.3
    
    Certification Pursuant to Rule 13(a)-14(a) of the Securities and
Exchange Act as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.3
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 38