##### 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 MARCH 31, 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
    
    77-0416232(STATE OR OTHER JURISDICTION OF
    
    (I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)
    
    IDENTIFICATION NO.)
 
 VIRAGE LOGIC CORPORATION
47100 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(510) 360-8000
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer 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 March 31, 2006 and September 30, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2006 and March 31, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2006, and March 31, 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
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    26Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    37SignaturesExhibit IndexEXHIBIT 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)
 March 31,
    
    
    September 30,2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    28,225
    
    
    $
    26,841Short-term investments
    
    
    38,747
    
    
    
    34,410Accounts receivable, net
    
    
    16,814
    
    
    
    14,201Costs in excess of related billings on uncompleted contracts
    
    
    760
    
    
    
    896Prepaid expenses and other current assets
    
    
    3,943
    
    
    
    4,517Taxes receivable
    
    
    430
    
    
    
    493Total current assets
    
    
    88,919
    
    
    
    81,358Property, equipment and leasehold improvements, net
    
    
    4,366
    
    
    
    5,093Goodwill
    
    
    9,782
    
    
    
    9,782Other intangible assets, net
    
    
    2,183
    
    
    
    2,375Deferred tax assets
    
    
    10,788
    
    
    
    8,604Long-term investments
    
    
    4,681
    
    
    
    6,587Other long-term assets
    
    
    254
    
    
    
    695Total assets
    
    $
    120,973
    
    
    $
    114,494LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,111
    
    
    $
    770Accrued expenses
    
    
    4,402
    
    
    
    3,623Deferred revenue
    
    
    8,422
    
    
    
    8,440Income taxes payable
    
    
    1,373
    
    
    
    1,441Total current liabilities
    
    
    15,308
    
    
    
    14,274Deferred tax liabilities
    
    
    852
    
    
    
    852Total liabilities
    
    
    16,160
    
    
    
    15,126Stockholders equity:Common stock, $.001 par value; Authorized shares - 150,000,000;
issued and outstanding shares - 22,828,003 and 22,547,504 at March 31,
2006 and September 30, 2005, respectively
    
    
    23
    
    
    
    23Additional paid-in capital
    
    
    126,053
    
    
    
    120,548Accumulated other comprehensive income
    
    
    58
    
    
    
    52Accumulated deficit
    
    
    (21,321
    )
    
    
    (21,255
    )Total stockholders equity
    
    
    104,813
    
    
    
    99,368Total liabilities and stockholders equity
    
    $
    120,973
    
    
    $
    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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:License
    
    $
    10,358
    
    
    $
    10,109
    
    
    $
    20,768
    
    
    $
    23,171Royalties
    
    
    4,838
    
    
    
    2,675
    
    
    
    8,153
    
    
    
    5,472Total revenues
    
    
    15,196
    
    
    
    12,784
    
    
    
    28,921
    
    
    
    28,643Cost and expenses:Cost of revenues
    
    
    3,500
    
    
    
    3,102
    
    
    
    7,215
    
    
    
    6,139Research and development
    
    
    5,328
    
    
    
    5,089
    
    
    
    10,956
    
    
    
    9,862Sales and marketing
    
    
    4,299
    
    
    
    4,509
    
    
    
    8,559
    
    
    
    8,322General and administrative
    
    
    2,709
    
    
    
    2,109
    
    
    
    5,465
    
    
    
    4,043Total cost and expenses
    
    
    15,836
    
    
    
    14,809
    
    
    
    32,195
    
    
    
    28,366Operating income (loss)
    
    
    (640
    )
    
    
    (2,025
    )
    
    
    (3,274
    )
    
    
    277Interest income and other income (expenses), net
    
    
    665
    
    
    
    444
    
    
    
    1,284
    
    
    
    738Income (loss) before income taxes
    
    
    25
    
    
    
    (1,581
    )
    
    
    (1,990
    )
    
    
    1,015Income tax provision (benefit)
    
    
    (151
    )
    
    
    (593
    )
    
    
    (1,924
    )
    
    
    264Net income (loss)
    
    $
    176
    
    
    $
    (988
    )
    
    $
    (66
    )
    
    $
    751Net income (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    0.03Diluted
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    0.03Weighted average shares used in computing per share amounts:Basic
    
    
    22,302
    
    
    
    22,140
    
    
    
    22,314
    
    
    
    21,959Diluted
    
    
    23,011
    
    
    
    22,140
    
    
    
    22,314
    
    
    
    23,252
  4




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##### Table of Contents



VIRAGE LOGIC CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (66
    )
    
    $
    751Adjustment to reconcile net income (loss) to net cash provided by operating activities:Provision for doubtful accounts
    
    
    
    
    
    
    159Depreciation and amortization
    
    
    970
    
    
    
    1,178Amortization of intangible assets
    
    
    193
    
    
    
    194Stock-based compensation
    
    
    3,749
    
    
    
    339Loss on disposal of fixed assets
    
    
    10
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,613
    )
    
    
    2,546Costs in excess of related billings on uncompleted contracts
    
    
    154
    
    
    
    (399
    )Prepaid expenses and other assets
    
    
    574
    
    
    
    (1,700
    )Taxes receivable
    
    
    62
    
    
    
    987Deferred tax assets
    
    
    (2,183
    )
    
    
    Other long-term assets
    
    
    441
    
    
    
    Accounts payable and accrued liabilities
    
    
    1,122
    
    
    
    726Deferred revenue
    
    
    (18
    )
    
    
    (1,001
    )Income tax payable
    
    
    (69
    )
    
    
    (1,219
    )Net cash provided by operating activities
    
    
    2,326
    
    
    
    2,561CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (297
    )
    
    
    (2,207
    )Purchase of investments
    
    
    (16,967
    )
    
    
    (23,089
    )Proceeds from maturities of investments
    
    
    14,577
    
    
    
    21,458Payment of merger-related liabilities
    
    
    
    
    
    
    (500
    )Net cash used in investing activities
    
    
    (2,687
    )
    
    
    (4,338
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    1,738
    
    
    
    4,817Net cash provided by financing activities
    
    
    1,738
    
    
    
    4,817Effect of exchange rates on cash
    
    
    7
    
    
    
    91Net increase in cash and cash equivalents
    
    
    1,384
    
    
    
    3,131Cash and cash equivalents at beginning of period
    
    
    26,841
    
    
    
    28,746Cash and cash equivalents at end of period
    
    $
    28,225
    
    
    $
    31,877
  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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Stock-Based Compensation
    8




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2005
    
    
    2005Net income (loss) as reported
    
    $
    (988
    )
    
    $
    751Add: Stock-based compensation expense included in reported net income (loss), net of tax
    
    
    207
    
    
    
    207Less:Fair value of stock-based compensation expense for all awards, net of tax
    
    
    (2,121
    )
    
    
    (2,605
    )Proforma net loss
    
    $
    (2,902
    )
    
    $
    (1,647
    )Basic net income (loss) per share:As reported
    
    $
    (0.04
    )
    
    $
    0.03Proforma
    
    $
    (0.13
    )
    
    $
    (0.08
    )Diluted net income (loss) per share:As reported
    
    $
    (0.04
    )
    
    $
    0.03Proforma
    
    $
    (0.13
    )
    
    $
    (0.08
    )Weighted average shares used in computing per share amounts:Basic
    
    
    22,140
    
    
    
    21,959Diluted
    
    
    22,140
    
    
    
    23,252
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2006Cost of revenues
    
    $
    374
    
    
    $
    637Research and development
    
    
    426
    
    
    
    1,006Sales and marketing
    
    
    452
    
    
    
    955General and administrative
    
    
    768
    
    
    
    1,151Stock-based compensation expense
    
    
    2,020
    
    
    
    3,749Related income tax benefits
    
    
    (441
    )
    
    
    (758
    )Stock-based compensation expense, net of taxes benefits
    
    $
    1,579
    
    
    $
    2,991Net stock-based compensation expense, per common share:Basic
    
    $
    0.07
    
    
    $
    0.13Diluted
    
    $
    0.07
    
    
    $
    0.13
  9




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Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Volatility
    
    
    70
    %
    
    
    79
    %
    
    
    70
    %
    
    
    79
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.3
    %
    
    
    4.6
    %
    
    
    3.3
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    4.3 years
    
    3  4 years
    
    4.3 years
    
    4  5 years
  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
    
    
    (868,139
    )
    
    
    868,139
    
    
    $
    9.35Options exercised
    
    
    
    
    
    
    (268,687
    )
    
    $
    5.99Options
expired/forfeited
    
    
    331,276
    
    
    
    (331,276
    )
    
    $
    11.53Balance at March 31, 2006
    
    
    1,451,669
    
    
    
    5,972,846
    
    
    $
    10.12
 10




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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
    
    
    909,883
    
    
    
    5.65
    
    
    $
    3.81
    
    
    $
    6,352
    
    
    
    690,326
    
    
    
    5.19
    
    
    $
    3.27
    
    
    $
    5,200$5.62 - $7.81
    
    
    924,456
    
    
    
    9.28
    
    
    $
    7.54
    
    
    $
    3,003
    
    
    
    89,685
    
    
    
    6.25
    
    
    $
    6.47
    
    
    $
    397$7.84 - $8.95
    
    
    651,657
    
    
    
    8.40
    
    
    $
    8.63
    
    
    $
    1,407
    
    
    
    240,783
    
    
    
    8.08
    
    
    $
    8.71
    
    
    $
    636$9.00 - $10.05
    
    
    875,045
    
    
    
    8.64
    
    
    $
    9.57
    
    
    $
    1,065
    
    
    
    228,756
    
    
    
    7.43
    
    
    $
    9.49
    
    
    $
    307$10.06 - $10.90
    
    
    605,210
    
    
    
    8.70
    
    
    $
    10.40
    
    
    $
    238
    
    
    
    243,270
    
    
    
    7.60
    
    
    $
    10.38
    
    
    $
    102$10.91 - $14.00
    
    
    728,893
    
    
    
    6.92
    
    
    $
    12.52
    
    
    $
    
    
    
    
    502,992
    
    
    
    6.22
    
    
    $
    12.97
    
    
    $
    $14.03 - $16.11
    
    
    938,652
    
    
    
    6.28
    
    
    $
    15.73
    
    
    $
    
    
    
    
    834,734
    
    
    
    6.05
    
    
    $
    15.77
    
    
    $
    $16.56 - $20.19
    
    
    338,550
    
    
    
    6.62
    
    
    $
    17.13
    
    
    $
    
    
    
    
    276,734
    
    
    
    6.12
    
    
    $
    17.14
    
    
    $
    $22.37 - $22.37
    
    
    250
    
    
    
    6.03
    
    
    $
    22.37
    
    
    $
    
    
    
    
    208
    
    
    
    6.03
    
    
    $
    22.37
    
    
    $
    $22.81 - $22.81
    
    
    250
    
    
    
    6.04
    
    
    $
    22.81
    
    
    $
    
    
    
    
    208
    
    
    
    6.04
    
    
    $
    22.81
    
    
    $
    Total
    
    
    5,972,846
    
    
    
    7.57
    
    
    $
    10.12
    
    
    $
    12,065
    
    
    
    3,107,696
    
    
    
    6.33
    
    
    $
    10.96
    
    
    $
    6,642
    Stock OptionsWeighted-Number of
    
    average grant-shares
    
    date fair valueNonvested at September 30, 2005
    
    
    2,862,825
    
    
    $
    6.33Awards granted
    
    
    868,139
    
    
    $
    2.70Awards vested
    
    
    (402,539
    )
    
    $
    4.39Awards expired/forfeited
    
    
    (331,276
    )
    
    $
    2.29Nonvested at March 31, 2006
    
    
    2,997,149
    
    
    $
    5.60
 11




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##### Table of Contents



NOTE 2  NET INCOME (LOSS) PER SHARE
 Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    176
    
    
    $
    (988
    )
    
    $
    (66
    )
    
    $
    751Weighted average shares outstanding  Basic
    
    
    22,302
    
    
    
    22,140
    
    
    
    22,314
    
    
    
    21,959Effect of potentially dilutive securities
    
    
    709
    
    
    
    
    
    
    
    
    
    
    
    1,293Weighted average shares outstanding  Diluted
    
    
    23,011
    
    
    
    22,140
    
    
    
    22,314
    
    
    
    23,252Net income (loss) per basic share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    0.03Net income (loss) per diluted share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    0.03
   NOTE 3  COMPREHENSIVE INCOME (LOSS)
 Reporting Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    176
    
    
    $
    (988
    )
    
    $
    (66
    )
    
    $
    751Foreign currency translation adjustments, net of tax
    
    
    12
    
    
    
    321
    
    
    
    (21
    )
    
    
    382Changes in unrealized gain (loss) on investments, net of tax
    
    
    17
    
    
    
    (83
    )
    
    
    26
    
    
    
    (107
    )Comprehensive income (loss), net of tax
    
    $
    205
    
    
    $
    (750
    )
    
    $
    (61
    )
    
    $
    1,026
 NOTE 4  SEGMENT INFORMATION
  12




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Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Total Revenue by GeographyUnited States
    
    $
    5,137
    
    
    $
    4,287
    
    
    $
    10,411
    
    
    $
    9,015Canada
    
    
    909
    
    
    
    592
    
    
    
    1,715
    
    
    
    1,058Japan
    
    
    960
    
    
    
    1,058
    
    
    
    1,881
    
    
    
    2,796Taiwan
    
    
    3,998
    
    
    
    2,592
    
    
    
    6,996
    
    
    
    5,595Europe, Middle East and Africa (EMEA)
    
    
    2,452
    
    
    
    2,081
    
    
    
    3,833
    
    
    
    5,138Other Asia (China, Malaysia, Korea and Singapore)
    
    
    1,740
    
    
    
    2,174
    
    
    
    4,085
    
    
    
    5,041Total
    
    $
    15,196
    
    
    $
    12,784
    
    
    $
    28,921
    
    
    $
    28,643
  Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Total License Revenue by Process Node65 Nanometer technology
    
    
    9
    %
    
    
    7
    %
    
    
    8
    %
    
    
    5
    %90 Nanometer technology
    
    
    40
    
    
    
    32
    
    
    
    42
    
    
    
    280.13 Micron technology
    
    
    34
    
    
    
    44
    
    
    
    31
    
    
    
    480.18 Micron technology
    
    
    14
    
    
    
    12
    
    
    
    16
    
    
    
    12Other
    
    
    3
    
    
    
    5
    
    
    
    3
    
    
    
    7Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   NOTE 5  RECENT ACCOUNTING PRONOUNCEMENTS
   13




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NOTE 6  COMMITMENTS AND CONTINGENCIES
 Indemnifications
 Warranties
 NOTE 7  RELATED PARTY TRANSACTIONS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  14




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##### Table of Contents



Overview
 Business Environment
      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.
   15




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Critical Accounting Policies and Estimates
   
    
    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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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
  18




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Valuation of Purchased Intangibles, Including Goodwill
  Income taxes
     19




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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005
 Revenues
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    Revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeRevenues:License
    
    $
    10,358
    
    
    
    68.2
    %
    
    $
    10,109
    
    
    
    79.1
    %
    
    $
    249
    
    
    
    2.5
    %Royalties
    
    
    4,838
    
    
    
    31.8
    %
    
    
    2,675
    
    
    
    20.9
    %
    
    
    2,163
    
    
    
    80.9
    %Total revenues
    
    $
    15,196
    
    
    
    100.0
    %
    
    $
    12,784
    
    
    
    100.0
    %
    
    $
    2,412
    
    
    
    18.9
    %Six Months Ended
    
    
    Six Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeRevenues:License
    
    $
    20,768
    
    
    
    71.8
    %
    
    $
    23,171
    
    
    
    80.9
    %
    
    
    ($2,403
    )
    
    
    (10.4
    %)Royalties
    
    
    8,153
    
    
    
    28.2
    %
    
    
    5,472
    
    
    
    19.1
    %
    
    
    2,681
    
    
    
    49.0
    %Total revenues
    
    $
    28,921
    
    
    
    100.0
    %
    
    $
    28,643
    
    
    
    100.0
    %
    
    $
    278
    
    
    
    1.0
    %
    Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Total License Revenue by Process Node:65 Nanometer technology
    
    
    9
    %
    
    
    7
    %
    
    
    8
    %
    
    
    5
    %90 Nanometer technology
    
    
    40
    
    
    
    32
    
    
    
    42
    
    
    
    280.13 Micron technology
    
    
    34
    
    
    
    44
    
    
    
    31
    
    
    
    480.18 Micron technology
    
    
    14
    
    
    
    12
    
    
    
    16
    
    
    
    12Other
    
    
    3
    
    
    
    5
    
    
    
    3
    
    
    
    7Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   20




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Total Revenue by GeographyUnited States
    
    $
    5,137
    
    
    $
    4,287
    
    
    $
    10,411
    
    
    $
    9,015Canada
    
    
    909
    
    
    
    592
    
    
    
    1,715
    
    
    
    1,058Japan
    
    
    960
    
    
    
    1,058
    
    
    
    1,881
    
    
    
    2,796Taiwan
    
    
    3,998
    
    
    
    2,592
    
    
    
    6,996
    
    
    
    5,595Europe, Middle East and Africa (EMEA)
    
    
    2,452
    
    
    
    2,081
    
    
    
    3,833
    
    
    
    5,138Other Asia (China, Malaysia, Korea and Singapore)
    
    
    1,740
    
    
    
    2,174
    
    
    
    4,085
    
    
    
    5,041Total
    
    $
    15,196
    
    
    $
    12,784
    
    
    $
    28,921
    
    
    $
    28,643
  Cost and Expenses
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    Revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeCost and expenses:Cost of revenues
    
    $
    3,500
    
    
    
    23.0
    %
    
    $
    3,102
    
    
    
    24.2
    %
    
    $
    398
    
    
    
    12.8
    %Research and development
    
    
    5,328
    
    
    
    35.1
    %
    
    
    5,089
    
    
    
    39.8
    %
    
    
    239
    
    
    
    4.7
    %Sales and marketing
    
    
    4,299
    
    
    
    28.3
    %
    
    
    4,509
    
    
    
    35.3
    %
    
    
    (210
    )
    
    
    (4.7
    %)General and administrative
    
    
    2,709
    
    
    
    17.8
    %
    
    
    2,109
    
    
    
    16.5
    %
    
    
    600
    
    
    
    28.4
    %Total cost and expenses
    
    $
    15,836
    
    
    
    104.2
    %
    
    $
    14,809
    
    
    
    115.8
    %
    
    $
    1,027
    
    
    
    6.9
    %
 Six Months Ended
    
    
    Six Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeCost and expenses:Cost of revenues
    
    $
    7,215
    
    
    
    24.9
    %
    
    $
    6,139
    
    
    
    21.4
    %
    
    $
    1,076
    
    
    
    17.5
    %Research and development
    
    
    10,956
    
    
    
    37.9
    %
    
    
    9,862
    
    
    
    34.4
    %
    
    
    1,094
    
    
    
    11.1
    %Sales and marketing
    
    
    8,559
    
    
    
    29.6
    %
    
    
    8,322
    
    
    
    29.1
    %
    
    
    237
    
    
    
    2.8
    %General and administrative
    
    
    5,465
    
    
    
    18.9
    %
    
    
    4,043
    
    
    
    14.1
    %
    
    
    1,422
    
    
    
    35.2
    %Total cost and expenses
    
    $
    32,195
    
    
    
    111.3
    %
    
    $
    28,366
    
    
    
    99.0
    %
    
    $
    3,829
    
    
    
    13.5
    %
 21




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##### Table of Contents



Cost of Revenues
   Research and Development Expenses
   Sales and Marketing Expenses
   General and Administrative Expenses
  22




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##### Table of Contents



Interest Income and Other Income (Expenses), net
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeInterest income and
other income (expenses),
net:Interest income
    
    $
    668
    
    
    
    4.4
    %
    
    $
    426
    
    
    
    3.3
    %
    
    $
    242
    
    
    
    56.8
    %Other income (expenses), net
    
    
    (3
    )
    
    
    (0.0
    %)
    
    
    18
    
    
    
    0.2
    %
    
    
    (21
    )
    
    
    (116.7
    %)Total interest income
and other income
(expenses), net
    
    $
    665
    
    
    
    4.4
    %
    
    $
    444
    
    
    
    3.5
    %
    
    $
    221
    
    
    
    49.8
    %
 Six Months Ended
    
    
    Six Months EndedMarch 31, 2006
    
    
    March 31, 2005% of total
    
    
    
    
    
    
    % of totalAmount
    
    
    revenues
    
    
    Amount
    
    
    revenues
    
    
    Year-Over-Year ChangeInterest income and
other income (expenses),
net:Interest income
    
    $
    1,291
    
    
    
    4.5
    %
    
    $
    746
    
    
    
    2.6
    %
    
    $
    545
    
    
    
    73.1
    %Other income (expenses), net
    
    
    (7
    )
    
    
    (0.1
    %)
    
    
    (8
    )
    
    
    0.0
    %
    
    
    1
    
    
    
    (12.5
    %)Total interest income
and other income
(expenses), net
    
    $
    1,284
    
    
    
    4.4
    %
    
    $
    738
    
    
    
    2.6
    %
    
    $
    546
    
    
    
    74.0
    %
  23




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Income Tax Provision
 Three Months Ended
    
    Three Months EndedMarch 31, 2006
    
    March 31, 2005% of total
    
    
    
    
    
    % of totalAmount
    
    revenues
    
    Amount
    
    revenues
    
    Year-Over-Year ChangeIncome tax provision (benefit)
    
    $
    (151
    )
    
    
    (1.0
    %)
    
    $
    (593
    )
    
    
    (4.6
    %)
    
    $
    442
    
    
    
    (74.5
    %)
 Six Months Ended
    
    Six Months EndedMarch 31, 2006
    
    March 31, 2005% of total
    
    
    
    
    
    % of totalAmount
    
    revenues
    
    Amount
    
    revenues
    
    Year-Over-Year ChangeIncome tax provision (benefit)
    
    $
    (1,924
    )
    
    
    (6.7
    %)
    
    $
    264
    
    
    
    0.9
    %
    
    $
    (2,188
    )
    
    
    (828.9
    %)
  LIQUIDITY AND CAPITAL RESOURCES
 March 31,
    
    
    September 30,2006
    
    
    2005
    
    
    ChangeCash and cash equivalents
    
    $
    28,225
    
    
    $
    26,841
    
    
    $
    1,384Short-term and long-term investments
    
    
    43,428
    
    
    
    40,997
    
    
    
    2,431Total cash, cash equivalents and marketable debt securities
    
    $
    71,653
    
    
    $
    67,838
    
    
    $
    3,815
  24




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Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    ChangeCash provided by operating activities
    
    $
    2,326
    
    
    $
    2,561
    
    
    $
    (235
    )Cash used in investing activities
    
    
    (2,687
    )
    
    
    (4,338
    )
    
    
    1,651Cash provided by financing activities
    
    
    1,738
    
    
    
    4,817
    
    
    
    (3,079
    )Effect of exchange rates on cash
    
    
    7
    
    
    
    91
    
    
    
    (84
    )Net increase in cash and cash equivalents
    
    $
    1,384
    
    
    $
    3,131
    
    
    $
    (1,747
    )
     CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Less Than
    
    1-3
    
    4-5
    
    AfterContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating lease obligations
    
    $
    3,924
    (1)
    
    $
    909
    
    
    $
    2,354
    
    
    $
    647
    
    
    $
    14Purchase obligations
    
    
    6,941
    (2)
    
    
    2,111
    
    
    
    4,830
    
    
    
    
    
    
    
    Total operating lease and purchase obligations
    
    $
    10,865
    
    
    $
    3,020
    
    
    $
    7,184
    
    
    $
    647
    
    
    $
    14
 
 (1)
    
    Includes $0.8 million payable under the lease agreement for our corporate office lease in
Fremont, California, which was extended through fiscal year 2006.(2)
    
    Reflects amounts payable under contracts primarily for product development software licenses
and maintenance. The Company has no off-balance-sheet financing arrangements other than
operating leases. 25




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
 ITEM 4. CONTROLS AND PROCEDURES
      :
 
    
    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 the
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.
 26




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##### Table of Contents



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;
    
    Inability to migrate technologies to manufacturing processes at new foundries due to less design experience;
    
    Limited experience in sales and marketing of the platform strategy and limited knowledge of the market; 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;
 27




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##### Table of Contents




    
    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;
    
    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;
    
    recording a significant portion of our quarterly revenues in the last month of a quarter.
This is the result of closing more product orders, and therefore, a higher percentage of
product shipments, in the last month of a quarter than in the first months of a quarter.
Some customers believe they can enhance their bargaining power by waiting until the end of
the quarter to finalize negotiations; and
    
    costs associated with merger and acquisition plans that are not pursued.
  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.
  28




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##### Table of Contents



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.
  29




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##### Table of Contents



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.
  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.
  30




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##### Table of Contents



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.
  31




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##### Table of Contents



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.
   32




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##### Table of Contents



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.
   General economic conditions and future terrorist attacks may reduce our revenues and harm our
business.
  33




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##### Table of Contents



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.
   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.
 34




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##### Table of Contents



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.
  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.
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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
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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  1.
    
    Election of two Class III Directors to serve for a three year term until the annual meeting
of stockholders in 2009 and until their successors are elected and qualified.
 Nominee
    
    For
    
    WithheldAdam Kablanian
    
    
    21,638,277
    
    
    
    220,210Michael Hackworth
    
    
    17,287,397
    
    
    
    4,571,090
  2.
    
    To approve the amendment of the Virage Logic Corporation 2002 Equity Incentive Plan: (a) to
eliminate the requirement that restricted share grants have a minimum purchase price equal to
85% of fair market value, (b) to clarify that restricted stock units, or RSUs, may be awarded,
and (c) to provide for the grant of stock appreciation rights, or SARs, by permitting any
legal exercise method permitted by the Administrator, including delivery of the net shares
equal to the value of any appreciation and removing automatic right to exercise with cash.
 Broker Non-For
    
    Against
    
    Abstain
    
    Votes17,870,573
    
    
    496,691
    
    
    
    3,847
    
    
    
    3,487,376
 3.
    
    To ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent
registered public accounting firm for the fiscal year ending September 30, 2006.
 Broker Non-For
    
    Against
    
    Abstain
    
    Votes21,844,179
    
    
    10,462
    
    
    
    3,846
    
    
    
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Exhibits31.1
    
    Certification Pursuant to Rule 15d-14 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 15d-14 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 15d-14 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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SIGNATURES
  Date: May 10, 2006
    
    VIRAGE LOGIC CORPORATION/s/ Adam A. KablanianADAM A. KABLANIANPresident and Chief Executive
Officer
(Co-Principal Executive Officer)/s/ Jens MeyerhoffJENS MEYERHOFFChief Financial Officer(Principal Accounting Officer
and Principal Financial Officer)
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EXHIBIT INDEX
 31.1
    
    Certification Pursuant to Rule 15d-14 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 15d-14 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 15d-14 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
 39