VIRAGE LOGIC CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)


[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ending March 31, 2003


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

Commission file number 000-31089

VIRAGE LOGIC CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes [X] No [ ]

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

As of April 30, 2003 there were 20,968,079 shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS


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

VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX


		Page

PART I - Financial Information
ITEM 1 - Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and September 30, 2002		3
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2003 and 2002		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2003 and 2002		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk			32
ITEM 4 - Controls and Procedures			32
PART II - Other Information
ITEM 1 - Legal Proceedings			34
ITEM 2 - Changes in Securities and Use of Proceeds			34
ITEM 3 - Defaults upon Senior Securities			34
ITEM 4 - Submission of Matters to a Vote of Security Holders			34
ITEM 5 - Other Information			35
ITEM 6 - Exhibits and Reports on Form 8-K			35
Signatures			36
Exhibit Index			41

PART I - FINANCIAL INFORMATION

VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


				March 31,			September 30,
				2003			2002

ASSETS
Current assets:
	Cash and cash equivalents			$	38,854		$	35,422
	Short-term investments				20,090			5,008
	Accounts receivable, net				11,596			15,688
	Costs in excess of related billings on in process contracts				608			820
	Prepaid expenses and other current assets				2,515			2,512
	Taxes receivable				148			—

			Total current assets		73,811			59,450
	Long-term investments				—			19,029
	Property and equipment, net				7,185			5,708
	Goodwill				9,782			9,782
	Intangible assets, net				3,341			3,533
	Deferred tax assets				2,442			2,442
	Other assets				413			410

			Total assets	$	96,974		$	100,354

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	318		$	438
	Accrued expenses				4,216			4,240
	Deferred revenue				2,630			2,936
	Capital lease obligations, current				38			96
	Income taxes payable				—			2,049

			Total current liabilities		7,202			9,759
Deferred tax liabilities					1,343			1,343
Other					500			1,000

			Total liabilities		9,045			12,102
Stockholders’ equity:
	Common stock, $.001 par value:
		Authorized shares – 150,000 at December 31, 2002 and September 30, 2002,
		Issued and outstanding shares – 20,962 and 20,928 at March 31, 2003 and September 30, 2002, respectively			21			20
	Additional paid-in capital				109,172			110,530
	Accumulated other comprehensive income				5			28
	Deferred stock-based compensation				(319	)		(3,326	)
	Accumulated deficit				(20,950	)		(19,000	)

			Total stockholders’ equity		87,929			88,252

			Total liabilities and stockholders’ equity	$	96,974		$	100,354

See accompanying notes to unaudited condensed consolidated financial statements.

VIRAGE LOGIC CORPORATION

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


				Three Months Ended					Six Months Ended
				March 31,					March 31,

				2003			2002		2003			2002

Revenue:
	License			$	9,046		$	10,239	$	20,096		$	19,533
	Royalties				579			408		1,094			761

Revenues					9,625			10,647		21,190			20,294
Cost and expenses:
		Cost of revenues (exclusive of amortization of deferred stock compensation of $86, $172, $218 and $367, respectively)			2,239			2,175		4,890			4,099
		Research and development (exclusive of amortization of deferred stock compensation of $193, $239, $423 and $526, respectively)			5,021			3,028		9,650			5,868
		Sales and marketing (exclusive of amortization of deferred stock compensation of $112, $214, $266 and $468, respectively)			2,930			2,716		6,013			5,225
		General and administrative (exclusive of amortization of deferred stock compensation of $50, $87, $109 and $191, respectively)			1,309			1,105		2,494			2,130
		Stock-based compensation			441			712		1,016			1,552

			Total cost and expenses		11,940			9,736		24,063			18,874

Operating income (loss)					(2,315	)		911		(2,873	)		1,420
Interest income and other expense, net					139			260		388			698

Income (loss) before taxes					(2,176	)		1,171		(2,485	)		2,118
Income tax provision (benefit)					(611	)		659		(535	)		1,274

Net income (loss)				$	(1,565	)	$	512	$	(1,950	)	$	844

Basic net income (loss) per share				$	(0.08	)	$	0.03	$	(0.09	)	$	0.04

Diluted net income (loss) per share				$	(0.08	)	$	0.02	$	(0.09	)	$	0.04

Shares used in computing per share amounts:
		Basic			20,729			19,624		20,649			19,475
		Diluted			20,729			21,194		20,649			20,872

See accompanying notes to unaudited condensed consolidated financial statements.

VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)


				Six Months Ended
				March 31,

				2003			2002

Operating activities
	Net income (loss)			$	(1,950	)	$	844
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Provision for doubtful accounts		29			139
			Depreciation and amortization		1,677			1,685
			Amortization of intangible assets		192			108
			Consulting expense related to options granted		—			34
			Amortization of stock-based compensation		1,016			1,552
		Changes in operating assets and liabilities:
			Accounts receivable		4,063			(3,432	)
			Costs in excess of related billings on in process contracts		212			(1	)
			Prepaid expenses and other current assets		(3	)		265
			Taxes receivable		(148	)		872
			Deferred tax assets		—			(87	)
			Other assets		(3	)		(58	)
			Accounts payable		(120	)		135
			Accrued expenses		(24	)		260
			Deferred revenue		(306	)		850
			Income taxes payable		(2,049	)		2

	Net cash provided by operating activities				2,586			3,168
Investing activities
	Purchase of property and equipment				(3,154	)		(2,656	)
	Purchase of investments				(24,023	)		(17,222	)
	Proceeds from maturities of investments				27,947			24,950
	Payment of merger related obligation				(500	)		—

	Net cash provided by investing activities				270			5,072
Financing activities
	Net proceeds from issuance of common stock				634			870
	Repayment of stockholder notes				—			950
	Principal payments on capital lease obligations				(58	)		(90	)

	Net cash provided by financing activities				576			1,730
Net increase in cash and cash equivalents					3,432			9,970
Cash and cash equivalents at beginning of period					35,422			27,868

Cash and cash equivalents at end of the period				$	38,854		$	37,838

See accompanying notes to unaudited condensed consolidated financial statements.

VIRAGE LOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Organization and Summary of Significant Policies

Description of Business

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

Use of Estimates

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

Principles of Consolidation and Basis of Presentation

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

Certain reclassifications have been made to conform with current period presentation.

Note 2. Net Income (Loss) Per Share

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

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


		Three Months Ended						Six Months Ended
		March 31,						March 31,

		2003			2002			2003			2002

Net income (loss)		$	(1,565	)	$	512		$	(1,950	)	$	844

Basic:
	Weighted average shares of common stock outstanding		20,965			20,228			20,915			20,158
	Less weighted average shares subject to repurchase		(236	)		(604	)		(266	)		(683	)

Shares used in computing basic net income (loss) per share			20,729			19,624			20,649			19,475

Diluted:
Employee stock options and unvested common stock outstanding			—			1,520			—			1,345
Unexercised warrants			—			38			—			36
Employee stock purchase plan			—			12			—			16

Shares used in computing diluted net income per share			20,729			21,194			20,649			20,872

Net income (loss) per share:
	Basic	$	(0.08	)	$	0.03		$	(0.09	)	$	0.04

	Diluted	$	(0.08	)	$	0.02		$	(0.09	)	$	0.04

The weighted average diluted potential shares that were anti-dilutive and excluded from the calculation of diluted net income per share are approximately 209,000 and 448,000 shares for the three and six months ended March 31, 2003, respectively.

Note 3. Comprehensive Income (Loss)

The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130) established standards for the reporting and display of comprehensive income (loss) and its related components. Total comprehensive income (loss) related primarily to the change in unrealized gains and losses on investments made by the Company. Total comprehensive income (loss) did not differ materially from net income (loss) reported for the three and six months ended March 31, 2003 and 2002.

Note 4. Segment Information

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

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

Information regarding revenues for the three and six months ended March 31, 2003 and 2002 are as follows (in thousands):


			Three Months Ended				Six Months Ended
			March 31,				March 31,

			2003		2002		2003		2002

Revenues:
	United States		$	4,382	$	5,612	$	9,073	$	9,802
	Canada			195		626		890		2,717
	Japan			1,042		129		2,693		592
	Taiwan			1,222		1,025		3,418		2,370
	EMEA			1,624		3,221		3,876		4,679
	Other			1,160		34		1,240		134

		Total	$	9,625	$	10,647	$	21,190	$	20,294

EMEA is defined as Europe, Middle East and Africa. The allocation of revenues by geographic region in the table above is based on the location of our customer’s operations. Sales to Singapore were $1.1 million and $1.2 million for the three and six months ended March 31, 2003, respectively. As the majority of the Company’s long-lived assets are located primarily in the United States no separate disclosure of the long-lived assets by geographic location is considered meaningful.

Note 5. Stock-based Compensation

The Company accounts for stock-based compensation arrangements in accordance with the provision of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations in accounting for its employee stock options and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had recognized compensation expense based upon the fair value of stock options awards at the grant date consistent with the guidelines set forth under SFAS 123, the proforma amounts for net income (loss) and net income (loss) per share would be presented as indicated below (in thousands):


		Three Months Ended						Six Months Ended
		March 31,						March 31,

		2003			2002			2003			2002

Net income (loss), as reported		$	(1,565	)	$	512		$	(1,950	)	$	844
Add: Stock-based compensation expense included in reported net income (loss)			441			712			1,016			1,552
Deduct: Total stock-based compensation expense determined under fair value based method for all awards			(3,103	)		(3,571	)		(5,215	)		(5,873	)

Proforma net loss		$	(4,227	)	$	(2,347	)	$	(6,149	)	$	(3,477	)

Shares used in computing per share amounts:
	Basic		20,729			19,624			20,649			19,475
	Diluted		20,729			21,194			20,649			20,872
Net income (loss) per share - as reported
	Basic	$	(0.08	)	$	0.03		$	(0.09	)	$	0.04

	Diluted	$	(0.08	)	$	0.02		$	(0.09	)	$	0.04

Net loss per share - proforma
	Basic and diluted	$	(0.20	)	$	(0.12	)	$	(0.30	)	$	(0.18	)

Note 6. Commitments and Contingencies

Indemnifications. The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these agreements is generally perpetual. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company estimates the fair value of its indemnification obligations as insignificant, based upon its history. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of March 31, 2003.

Warranties. The Company offers to its customers warranties on its software products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of March 31, 2003. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that a warranty reserve will not become necessary in the future.

Note 7. Recently Issued Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Exit or Disposal Activities’” (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated

with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 is applied prospectively on adoption and, as a result, does not have any impact on the Company’s current financial position or results of operations.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes, and if this division is required, how the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has assessed the impact of EITF 00-21 and believes its current accounting policies are in compliance. Therefore the Company does not expect the adoption of EITF 00-21 to have a material impact on its financial statements.

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

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

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain

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

ITEM 2.

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

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

Overview

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

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

• embedded memories, logic elements and I/Os;

• standard and custom memory compilers;

• memory test processor and fuse box components for embedded test and repair of defective memory cells;

• software development tools.

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

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

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

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

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

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

We derive our royalty revenues from third-party foundries that manufacture chips incorporating our Area, Speed and Power (ASAP) memory products for our fabless customers. In addition, we have entered into agreements that provide for the payment of royalties for our CUSTOM-TOUCH® STAR Memory System™, NetCAM™ and NOVeA™ technologies directly by our customers, as well as from third-party foundries that manufacture chips incorporating these technologies. Royalty payments are in addition to the license fees we collect from our customers, and are calculated based on production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement.

Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry. Time delays for receiving royalty revenues are due to the typical length of time required for the customer to implement our semiconductor IP into their design, and then to manufacture and bring to market a product incorporating our products.

Currently, license fees represent substantially all of our revenues. Royalty revenues for the three months ended March 31, 2003 and 2002 were $579,000 and $408,000, respectively. Royalty revenues for the six months ended March 31, 2003 and 2002 were $1.1 million and $761,000, respectively.

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

We have been dependent on a limited number of customers for a substantial portion of our annual revenues, although that dependence continues to decrease. The composition of our top ten customers has changed from time to time. For the three months ended March 31, 2003, Agere Systems and Chartered Semiconductor each accounted for 12% of our revenues and NEC Electronics Corporation accounted for 10% of our revenues. For the three months ended March 31, 2002, Toshiba and Tower Semiconductor accounted for 10% and 17% of revenues, respectively.

Critical Accounting Policies

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

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

• revenue recognition

• accounts receivable

• valuation of long-lived assets and investments

• purchased intangibles, including goodwill

• accounting for stock options

• income taxes.

Revenue recognition

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

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

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

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

Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry, and are calculated based on production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust customers’ credit limits based upon payment history and the customer’s current credit worthiness, as

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

Valuation of Long-Lived Assets and Investments

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

Purchased Intangibles, Including Goodwill

We will evaluate purchased intangibles, including goodwill, for impairment. An assessment of goodwill is subjective by nature, and significant management judgment is required to forecast future operating results, projected cash flows and current period market capitalization levels. If our estimates or related assumptions change in the future, these changes in conditions could require material write-downs of net intangible assets, including impairment charges for goodwill. In connection with the acquisition of In-Chip, the valuation of intangible assets was based on management’s estimates. Such estimates include cash flow projections, discount rates and estimated life of technology, which management believes are reasonable under the circumstances. Use of other estimates or assumptions may have resulted in a different valuation for such intangible assets acquired. Intangible assets with finite useful lives will continue to be amortized over the estimated life of each asset.

Accounting for Stock Options

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

The Company accounts for stock options or warrants granted to non-employees, excluding non-employee directors, under SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under SFAS 123,” or EITF 96-18. We record the expense of such services based upon the estimated fair value of the equity instrument using the Black-Scholes pricing model. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees. We charge the value of the equity instrument to earnings over the term of the service agreement. At the time all non-employee options and warrants were valued, the instruments were immediately exercisable and there were no ongoing obligations from the holders. Expenses for the three months ended March 31, 2003 and 2002 were $35,000 and $171,000, respectively and $755,000 and $206,000 for the six months ended March 31, 2003 and 2002, respectively.

Income taxes

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets. These differences result in deferred tax assets and liabilities. The carrying value of the company’s net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and

assumptions. Management evaluates the recoverability of the deferred tax assets and assesses the need, if any, for additional valuation allowances.

Results of Operations

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


			Three Months Ended						Six Months Ended
			March 31,						March 31,

			2003			2002			2003			2002

Revenue:
		License		94.0	%		96.2	%		94.8	%		96.3	%
		Royalties		6.0			3.8			5.2			3.7

Revenues				100.0			100.0			100.0			100.0

Cost and expenses:
		Cost of revenues		23.3			20.4			23.1			20.2
		Research and development		52.2			28.4			45.5			28.9
		Sales and marketing		30.4			25.5			28.4			25.7
		General and administrative		13.6			10.4			11.8			10.5
		Stock-based compensation		4.6			6.7			4.8			7.7

Total cost and expenses				124.1			91.4			113.6			93.0

	Operating income (loss)			(24.1	)		8.6			(13.6	)		7.0
Interest and other expenses				1.5			2.4			1.9			3.4
Income tax (provision) benefit				6.3			(6.2	)		2.5			(6.2	)

Net income (loss)				(16.3	)%		4.8	%		(9.2	)%		4.2	%

Three and Six Months Ended March 31, 2003 and 2002

Revenues. Revenues decreased by 10% to $9.6 million from $10.6 million for the three months ended March 31, 2003 and 2002, respectively. Revenues increased by 4% to $21.2 million from $20.3 million for the six months ended March 31, 2003 and 2002, respectively. The decrease in revenues for the three months ended March 31, 2003 compared to the first quarter is primarily due to a delay of purchases by our customers and slow-down in industry adoption of 90-nanometer process technology.

For the three and six months ended March 31, 2003 and 2002, sales by geography and geometry are as follows:


			Three Months Ended						Six Months Ended
			March 31,						March 31,

			2003			2002			2003			2002

By geography:
	United States		$	4,382		$	5,612		$	9,073		$	9,802
	Canada			195			626			890			2,717
	Japan			1,042			129			2,693			592
	Taiwan			1,222			1,025			3,418			2,370
	EMEA			1,624			3,221			3,876			4,679
	Other			1,160			34			1,240			134

		Total	$	9,625		$	10,647		$	21,190		$	20,294

By geometry:
	0.18 micron technology			11	%		32	%		15	%		26	%
	0.13 micron technology			73			52			62			57
	90 nanometer technology			7			6			14			6
	Other			9			10			9			11

EMEA is defined as Europe, Middle East and Africa. We have experienced increased revenues from Asia for the three and six months ended March 31, 2003 over the same period last fiscal year. These results are attributable to our further enhancement of customer relationships in these regions. Sales to EMEA are lower as compared to the same period last year due to the continued effect of the semiconductor industry downturn. Sales for our 0.13 micron technology as a percentage of total revenues has increased over the prior quarter as more customers continue to migrate toward that process geometry, while postponing purchasing decisions on the 90-nanometer technology. During the quarter, we entered into two key royalty-bearing contracts with Chartered Semiconductors and NEC Electronics Corporation on the 0.13 micron technology. Revenue comprised of sales to 26 existing and eight new customers. Royalty revenues totaled $1.1 million for the six months ended March 31, 2003, up from $761,000 the same period last fiscal year. Royalty revenues totaled $579,000 for the three months ended March 31, 2003, up from $408,000 for the same period last fiscal year. During the quarter, we signed four new direct royalty agreements for the STAR Memory System, bringing the total number of STAR Memory System licensees to over 45.

Cost of Revenues. Cost of revenues consists primarily of personnel expenses and the allocation of facilities and equipment expenses. Cost of revenues remained fairly flat at $2.2 million for the three months ended March 31, 2003 and 2002. Cost of revenues increased 19% to $4.9 million for the six months ended March 31, 2003 from $4.1 million for the same period last fiscal year. This increase is primarily due to the lower than expected sales volume and certain fixed costs. Continuing efforts are being made to redeploy engineering capacity to certain research and development activities to offset the impact of lower than expected sales. The Company believes cost of revenues will continue to fluctuate in the future, both in absolute dollars and as a percentage of revenues, as sales volume levels continue to fluctuate relative to the engineering capacity. Cost of revenues excludes $86,000 and $172,000 of amortization of stock-based compensation for three months ended March 31, 2003 and 2002, respectively, and $218,000 and $367,000 for the six months ended March 31, 2003 and 2002, respectively.

Research and Development Expense. Research and development expense primarily includes personnel expense, software license and maintenance fees, and depreciation related to capital spending. Research and development expense increased 66% to $5.0

million for the three months ended March 31, 2003 from $3.0 million for the same period last fiscal year. Research and development expense increased 64% to $9.7 million for the six months ended March 31, 2003 from $5.9 million for the same period last fiscal year. The increase in research and development expense was primarily due to the increase in the number of employees involved in research and development for the 90-nanometer technology, continued efforts to add product variations for the 0.13 micron technology, NOVeA embedded memory technologies, and ASAP Logic™ product offerings. Research and development expense as a percentage of revenues increased to 52% for the three months ended March 31, 2003, as compared to 28% for the same period last fiscal year. Research and development expense as a percentage of revenues increased to 46% for the six months ended March 31, 2003, as compared to 29% for the same period last fiscal year. This increase is due to the redeployment of engineering capacity from cost of revenue activities to research and development, increases in headcount and related expenses of $1.1 million and increases in software license and maintenance fees of $409,000 for software technology used in the development of our products. Research and development expense excludes $193,000 and $239,000 of amortization of stock-based compensation for the three months ended March 31, 2003 and 2002, respectively, and $423,000 and $526,000 for the six months ended March 31, 2003 and 2002, respectively.

Sales and Marketing Expense. Sales and marketing expense consists primarily of personnel expenses, commissions, advertising and promotion related costs. Sales and marketing expense increased 8% to $2.9 million for the three months ended March 31, 2003 from $2.7 million for the same period last fiscal year. Sales and marketing expense increased 15% to $6.0 million for the six months ended March 31, 2003 from $5.2 million for the same period last fiscal year. Sales and marketing expense as a percentage of revenues increased to 30% for the three months ended March 31, 2003, as compared to 26% for the same period last fiscal year. Sales and marketing expense as a percentage of revenues increased to 28% for the six months ended March 31, 2003, as compared to 26% for the same period last fiscal year. The increase in sales and marketing expense was due to the increase in headcount and related expenses of $211,000. We anticipate that sales and marketing expense will continue to increase as we expand our product lines and target new customers and markets for our technologies. Sales and marketing expense excludes $112,000 and $214,000 of amortization of stock-based compensation for the three months ended March 31, 2003 and 2002, respectively, and $266,000 and $468,000 for the six months ended March 31, 2003 and 2002, respectively

General and Administrative Expense. General and administrative expense consists primarily of personnel and other costs associated with the management of our business. General and administrative expense increased by 18% to $1.3 million for the three months ended March 31, 2003 from $1.1 million for the same period last fiscal year. General and administrative expense increased by 17% to $2.5 million for the six months ended March 31, 2003 from $2.1 million for the same period last fiscal year. General and administrative expense as a percentage of revenues increased to 14% for the three months ended March 31, 2003, as compared to 10% for the same period last fiscal year. General and administrative expense as a percentage of revenues increased to 12% for the six months ended March 31, 2003, as compared to 11% for the same period last fiscal year. The increase in general and administrative expense was primarily due to increased professional service costs of $190,000, principally for legal advisory and accounting services and increased patent amortization costs of $42,000. General and administrative expense

excludes $50,000 and $87,000 of amortization of stock-based compensation for the three months ended March 31, 2003 and 2002, respectively, and $109,000 and $191,000 for the six months ended March 31, 2003 and 2002.

Stock-Based Compensation. With respect to the grant of stock options and restricted stock to employees, the Company has aggregated deferred stock-based compensation of approximately $319,000 for the period ended March 31, 2003 and $3.3 million for the period ended September 30, 2002. The amount of deferred stock-based compensation is presented as a reduction of stockholders’ equity and is being amortized over the vesting period of the applicable options or stock, generally four years. The deferred stock-based compensation balance decreased $3.0 million primarily due to the cancellation of unvested shares associated with the resignation of Tushar Gheewala and amortization of other stock based awards. The Company amortized, net of cancellations, $1.0 million and $1.6 million during the six months ended March 31, 2003 and 2002, respectively.

Interest Income and Other Expenses. Interest income and other, net decreased $121,000 or 47%, to $139,000 for the three months ended March 31, 2003 as compared to $260,000 for three months ended March 31, 2002. For the six months ended March 31, 2003, interest income and other, net decreased $310,000, or 44%, to $388,000 as compared to $698,000 for the six months ended March 31, 2003. This decrease was due to a continuing decline in interest rates.

Income Tax Provision. An income tax benefit of $611,000 was recorded on a pre-tax loss of $2.2 million, yielding an effective tax rate of (28%) for the three months ended March 31, 2003. An income tax provision of $659,000 was recorded on a pre-tax income of $1.2 million, yielding an effective tax rate of 56% for the three months ended March 31, 2002. An income tax benefit of $535,000 was recorded on a pre-tax loss of $2.5 million, yielding an effective tax rate of (22%) for the six months ended March 31, 2003. An income tax provision of $1,274,000 was recorded on a pre-tax income of $2.1 million, yielding an effective income tax rate of 60% for the six months ended March 31, 2002. The effective tax rates differed from U.S. statutory rates due primarily to stock-based compensation related charges that are non-deductible for tax purposes. The change in effective tax rates from a tax provision of approximately 60% for the periods ended March 31, 2002 to a tax benefit of approximately 25% for the periods ended March 31, 2003 is due primarily to the shift from a pre-tax profit to a loss position and also to the reduced amount of stock-based compensation recorded in the 2003 periods consistent with the graded-vesting method of amortization.

Liquidity and Capital Resources

As of March 31, 2003, the Company had $58.9 million in cash, cash equivalents and government security investments, as compared with $59.5 million at September 30, 2002. We believe that our cash, cash equivalents and investments will be sufficient to meet our operating and capital needs for at least the next 12 months.

Net cash provided by operating activities was $2.6 million for the first six months of fiscal 2003. Net cash provided by operating activities resulted from a decrease in accounts receivable of $4.1 million resulting from lower revenues and improved collections, non-cash charges associated with the amortization of stock-based compensation of $1.0 million and depreciation and amortization of $1.7 million, offset by a net loss of $2.0 million and a decrease in income taxes payable of $2.0 million due to the current taxable net loss position.

Net cash provided by investing activities was $270,000 for the first six months of fiscal 2003. Net cash provided by investing activities was due to the maturity of government security investments of $27.9 million, offset by the purchase of government security investments of $24.0 million, acquisitions of property and equipment or $3.2 million and payout of merger related obligations of $500,000, which is the first of three equal annual installments as set forth in the In-Chip Systems acquisition agreement dated May 4, 2002.

Net cash provided by financing activities was $576,000 for the first six months of fiscal 2003. Net cash provided by financing activities was due to proceeds from the issuance of common stock of $634,000 offset by principal payments on capital lease obligations of $58,000.

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

The Company has outstanding obligations under capital lease lines, with payments due through June 2003. At March 31, 2003, $38,000 was outstanding under these lines. There is no remaining availability under these capital lease lines.

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

Payments Due by Period (in thousands)


			Less than		2-3		4-5		After 5
Contractual obligations	Total		1 Year		Years		Years		Years

Operating lease obligations	$	4,524	$	482	$	1,759	$	1,756	$	527
Capital lease obligations		38		38		—		—		—
Building purchase		351		351		—		—		—
Other contractual obligations		1,000		500		500		—		—

Total contractual obligations	$	5,913	$	1,371	$	2,259	$	1,756	$	527

In July 2002, the Company signed an initial contract to purchase a building in the Republic of Armenia. The total cost of the building and certain renovations is approximately $1.7 million of which the Company has paid approximately $1.4 million to date. The Company plans to use the building as office space for its engineering and design center based in Yerevan.

Risk Factors

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

The semiconductor industry has been characterized by an increasingly rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater speed and

functionality. Our future success depends on our ability to develop new technologies and introduce new products to the marketplace in a timely manner, and to adapt our existing intellectual property to satisfy the requirements of new processes and our customers. If our development efforts are not successful or are significantly delayed, or if the enhancements or new generations of our products do not achieve market acceptance, we may be unable to attract or retain customers and our operating results could be harmed.

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

• our ability to anticipate and respond in a timely manner to changes in the requirements of semiconductor companies;

• the emergence of new semiconductor manufacturing processes and our ability to enter into strategic relationships with third-party semiconductor foundries to develop and test technologies for these new processes and provide customer referrals;

• the significant research and development investment that we may be required to make before market acceptance, if any, of a particular technology;

• the possibility that the industry may not accept a new technology after we have invested a significant amount of resources to develop it; and

• new technologies introduced by our competitors.

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

In addition, research and development requires a significant expense and resource commitment. Since we have a limited operating history, we are unable to predict our future resources. As a result, we may not have the financial and other resources necessary to develop the technologies demanded in the future and may be unable to attract or retain customers.

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

Our quarterly operating results were lower than expected in the first and second quarters of fiscal 2003 and are likely to fluctuate in the future due to a variety of factors, many of which are outside of Virage Logic’s control. Factors that could cause our revenues and operating results to vary from quarter to quarter include:

• large orders unevenly spaced over time;

• establishment or loss of strategic relationships with third-party semiconductor foundries;

• pace of adoption of new technologies by customers;

• timing of new technologies and technology enhancements by us and our competitors;

• shifts in demand for products that incorporate our intellectual property;

• constrained or deferred spending decisions by customers;

• the timing and completion of milestones under customer agreements;

• the impact of competition on license revenues or royalty rates;

• the cyclical nature of the semiconductor industry and the general economic environment;

• difficulties in forecasting royalty revenues because of factors out of our control, like timing of manufacturing of semiconductors subject to royalty obligations and the number of such semiconductors actually produced (manufactured);

• changes in development schedules, research and development expenditure levels and product support by us and our customers;

• recording a significant portion of our quarterly revenues in the last month of a quarter. This is the result of closing more product orders, and therefore, a higher percentage of product shipments, in the last month of a quarter than in the first months of a quarter. Some customers believe they can enhance their bargaining power by waiting until the end of the quarter to finalize negotiations; and

• costs associated with merger and acquisition plans that are not pursued.

As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and you should not rely on these comparisons as indications of future performance. These factors, together with the fact that our expenses are primarily fixed and independent of revenues in any particular period, make it difficult for us to accurately predict our revenues and operating results and may cause them to be below market analysts’ expectations in some future quarters, which could cause the market price of our stock to decline significantly, as happened in connection with our operating results for the first quarter of fiscal 2003.

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

We currently have subsidiaries in Israel, Germany and Japan, and we expect to continue expanding our direct sales force in those countries. In addition, a growing portion of our intellectual property is being developed in development centers located in the Republic of Armenia and India. Israel continues to face an increased level of violence and terror and Armenia, only independent since 1991, has suffered significant political and economic

instability. Accordingly, continued and heightened unrest in areas of the world in which we operate may adversely affect our business in a number of ways, including the following:

• changes in the political or economic conditions in Armenia and India and the surrounding region, such as fluctuations in exchange rates, changes in laws protecting intellectual property, the imposition of currency transfer restrictions or limitations, or the adoption of burdensome trade or tax policies, procedures, rules, regulations or tariffs, could adversely affect our ability to develop new products, to take advantage of the cost savings associated with operations in Armenia and India, and to otherwise conduct business effectively in Armenia and India

• our ability to continue conducting business in Israel and other countries in the normal course may be adversely affected by increased risk of social and political instability and our employees working and visiting in Israel may be affected by terrorist attacks;

• our Israeli customers’ demand for our products may be adversely affected because of negative economic consequences associated with reduced levels of safety and security in Israel.

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

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

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

Our ability to verify our technologies for new manufacturing processes depends on entering into development agreements with third-party foundries to provide us with access to these processes. In addition, we rely on third-party foundries to manufacture our silicon test chips and to provide referrals to their customer base. We currently have agreements with Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Corporation (UMC), Chartered Semiconductor Manufacturing (Chartered), and Tower Semiconductor (Tower). If we are unable to maintain our existing relationships with these foundries or enter into new agreements with other foundries, we will be unable to verify

our technologies for their manufacturing processes. We would then be unable to license our intellectual property to fabless semiconductor companies that use these foundries to manufacture their silicon chips, which is a significant source of our revenues.

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

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

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

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

Sales to customers located outside North America accounted for 52% of our revenues for the six month period ended March 31, 2003, and 44%, 42%, and 35% of our revenues in fiscal 2002, 2001, and 2000, respectively. We anticipate that sales to customers located outside North America will increase and will continue to represent a significant portion of our total revenues in future periods. In addition, most of our customers that do not own their own fabrication plants rely on third-party foundries that may be outside of North America. Accordingly, our operations and revenues are subject to a number of risks associated with doing business in international markets, including the following:

• managing foreign distributors and sales partners and sharing revenues with such third parties;

• staffing and managing foreign branch offices and subsidiaries;

• political and economic instability;

• greater difficulty in collecting account receivables resulting in longer collection periods;

• foreign currency exchange fluctuations;

• changes in tax laws and tariffs;

• compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar;

• timing and availability of export licenses;

• inadequate protection of intellectual property rights in some countries; and

• obtaining governmental approvals for certain technologies.

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

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

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

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

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

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

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

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

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

We have historically generated revenues almost entirely from license fees. We have agreements with certain third-party semiconductor foundries to pay us royalties on their sales of silicon chips they manufacture for our fabless customers. Beginning with our CUSTOM-TOUCH STAR Memory System, CAM technologies and more recently with the introduction of our NOVeA technology, in addition to collecting royalties from third-party semiconductor foundries, we intend to increase our royalty base by collecting royalties directly from our integrated device manufacturer and fabless customers. For the quarters ended March 31, 2003 and 2002, we recorded approximately $579,000 and $408,000, respectively, of royalty revenues. For the six months ended March 31, 2003 and 2002, we recorded approximately $1.1 million and $761,000, respectively, of royalty revenues. The continued growth of our revenues depends in part on increasing our royalty revenues, but we may not be successful in convincing all customers to agree to pay us royalties. Additionally, these royalty arrangements may not provide us with the anticipated benefits as sales of products incorporating our intellectual property may not offset lower license fees. Although we have the right to audit the records of semiconductor manufacturers and fabless semiconductor companies, we face risks relating to the accuracy and completeness of the royalty collection process, due to our limited experience and systems in place to conduct reviews of the accuracy of royalty reports we receive from our customers. In addition, many factors beyond our control, such as fluctuating sales volumes of products that incorporate our intellectual property, potential slow down for manufacturing of certain newer process technology, foundry rate adjustments, the cyclical nature of the semiconductor industry that affect the number of designs, commercial acceptance of these products, accuracy of revenue reports and difficulties in the royalty collection process, limit our ability to forecast our royalty revenues.

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

Historically, because of the complexity of our products, it can take a significant amount of time and effort to explain the benefits of our products and to negotiate a sale. For example, it generally takes at least three to nine months after our first contact with a prospective customer before we start licensing our intellectual property to that customer. In addition, purchase of our products is usually made in connection with new design starts, which are out of our control. Accordingly, we may be unable to predict accurately the timing of any significant future sales of our products. We may also spend substantial time and management attention on potential license agreements that are not consummated, thereby foregoing other opportunities.

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

We have been dependent on a limited number of customers for a substantial portion of our annual revenues in each fiscal year, although the customers comprising this group have changed from time to time. For the three months ended March 31, 2003, Agere Systems and Chartered Semiconductor each accounted for 12% of our revenues, and NEC

Electronics Corporation accounted for 10% of our revenues. For the six months ended March 31, 2003, no single customer generated more than 10% of our revenues. In fiscal 2002, no single customer generated more than 10% of our revenues. We expect a small number of companies in the aggregate to represent between 20% to 40% of our revenues for the foreseeable future. The license agreements we enter into with our customers do not obligate them to license future generations of our intellectual property and, as a result, we cannot predict the length of our relationship with any of our significant customers. As a result of this customer concentration, we could experience a dramatic reduction in our revenues if we lose one or more of our significant customers and are unable to replace them. In addition, since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of our accounts receivables and our future operating results.

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

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

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

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

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

circumstances, start-up companies can offer more attractive stock option packages than we offer. As a result, we may experience significant employee turnover. Failure to attract and retain personnel, particularly sales and technical personnel, would make it difficult for us to develop and market our technologies.

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

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

A portion of our contracts require us to provide customized products to our customers within a specified delivery timetable. While we have experienced delays in delivering product to our customers, the duration of these delays was sufficiently short in length so as to not materially damage our relationship with our customers. Furthermore, these delays did not result in a material impact on our operations. However, any failure to meet significant customer milestones could damage our reputation in our industry and harm our ability to attract new customers.

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

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

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

During the quarter ended March 31, 2003, we recorded a net loss of $1.6 million. For the six months ended March 31, 2003, we recorded a net loss of $2.0 million. In fiscal year 2002, we recorded our first profitable year of operations. The two most recent quarters’ loss was due principally to below target revenues recorded after certain customers deferred purchasing decisions. In order to achieve profitability again, we will need to continue to generate new sales while controlling our costs. As we plan on continuing the growth of our business while implementing cost control measures, we may not be able to successfully

generate enough revenues to remain profitable with this growth. Any failure to increase our revenues and control costs as we pursue our planned growth would harm our profitability and would likely negatively affect the market price of our stock.

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

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

We have continued to grow our headcount from 284 full-time employees at September 30, 2002 to 301 full-time employees at March 31, 2003. We have continued to increase our international presence, have increased substantially the number of our customers and acquired In-Chip Systems, Inc. in May 2002. This growth has placed, and is expected to continue to place, significant strain on our managerial and financial resources as well as our limited financial and management controls, reporting systems and procedures. Although some new controls, systems and procedures have been implemented, our future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls. Since our growth has occurred over such a limited time period, we do not have sufficient experience managing the current size of our business to be able to fully assess our ability to continue to manage its growth in the future. Our inability to manage any future growth effectively would be harmful to our revenues and profitability.

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

We acquired In-Chip Systems, Inc. in May 2002, and we may continue to acquire businesses or technologies that we believe are a strategic fit with our business. The In-Chip acquisition as well as other future acquisitions may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. In addition, the integration of the business of In-Chip and of other acquisition targets may prove to be more difficult than expected, and we may be unsuccessful in maintaining and developing relations with the employees, customers and business partners of In-Chip and other acquisition targets. Since we will not be able to accurately predict these difficulties and expenditures, it is possible that these costs may outweigh the value we realize from a future acquisition. Future acquisitions could result in issuances of equity securities that would reduce our stockholders’ ownership interest, the incurrence of debt, contingent liabilities, deferred stock based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs.

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

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

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

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

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

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

or develop our intellectual property, which may result in significant expenditures. We may not be able to obtain such agreements on terms acceptable to us or at all, and thus, may be prevented from licensing or developing our technology.

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

We maintain an investment portfolio of various issuers, types and maturities. These securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. Our investments primarily consist of short-term money market mutual funds, United States government obligations and mortgage-backed securities and commercial paper. At March 31, 2003, we maintained $38.9 million in cash or short-term money market mutual funds and held $20.1 million of United States agency securities with maturities of less than one year. Due to the short-term nature of our investment portfolio and our intent to hold these investments to maturity, we do not believe our investment balance is materially exposed to interest rate risk.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days before the filing date of this quarterly report. Based

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

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

None

ITEM 2. Changes in Securities and Use of Proceeds

Use of Proceeds From Registered Securities

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

ITEM 3. Defaults upon Senior Securities

None

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

We held our Annual Meeting of Stockholders on February 25, 2003. Out of 20,981,759 shares of Common Stock (as of the record date of January 8, 2003) entitled to vote at the meeting, a total of 18,509,368 shares were represented at the Annual Meeting. The stockholders approved the following proposals:

(a) Election of Adam Kablanian, Richard Elkus, Jr. and Michael L. Hackworth as Class III directors until the 2006 Annual Meeting of Stockholders and until their successors are elected. The vote for nominated directors was as follows:


Nominee	In Favor		Withheld

Adam Kablanian		18,076,676		432,692
Richard Elkus, Jr.		17,905,486		603,882
Michael L. Hackworth		17,908,586		600,782

(b) Approve the amendment to the Virage Logic Corporation 2002 Equity Incentive Plan to increase the number of shares reserved under the plan by 950,000 shares. There were 11,542,670 votes in favor, 6,951,871 votes against, 14,827 abstentions and no broker non-votes.

(c) Ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending September 30, 2003. There were 18,040,015 votes in favor, 465,253 votes against, 4,100 abstentions and no broker non-votes.

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

(b) Reports on Form 8-K

The registrant filed a Current Report on a Form 8-K on February 18, 2003 in connection with the filing by Virage Logic of a registration statement on Form S-3 for the resale of 77,500 shares of Common Stock and in order to comply with Article 11 of Regulation S-X.

The registrant furnished a Current Report on Form 8-K on April 3, 2003 to report its revised outlook for the second fiscal quarter of fiscal 2003.

The registrant furnished a Current Report on Form 8-K on April 16, 2003 to provide its earning release for the second fiscal quarter of fiscal 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: May 15, 2003		VIRAGE LOGIC CORPORATION


		/s/ Adam A. Kablanian

		ADAM A. KABLANIAN
		President, Chief Executive Officer
		and Chairman of the Board

		/s/ James R. Pekarsky

		JAMES R. PEKARSKY
		Vice President, Finance and Chief
		Financial Officer
		(Principal Financial and Accounting
		Officer)

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

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

1. I have reviewed this quarterly report on Form 10-Q of Virage Logic Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: May 15, 2003


	/s/ Adam A. Kablanian

	Adam A. Kablanian
	President and Chief Executive Officer

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

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

Date: May 15, 2003


		/s/ James R. Pekarsky

		James R. Pekarsky
		Vice President of Finance and Chief
		Financial Officer

EXHIBIT INDEX


Exhibit No.		Descriptions
99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

	•		embedded memories, logic elements and I/Os;

	•		standard and custom memory compilers;

	•		memory test processor and fuse box components for embedded test and repair of defective memory cells;

	•		software development tools.

	•		revenue recognition

	•		accounts receivable

	•		valuation of long-lived assets and investments

	•		purchased intangibles, including goodwill

	•		accounting for stock options

	•		income taxes.

	•		our ability to anticipate and respond in a timely manner to changes in the requirements of semiconductor companies;

	•		the emergence of new semiconductor manufacturing processes and our ability to enter into strategic relationships with third-party semiconductor foundries to develop and test technologies for these new processes and provide customer referrals;

	•		the significant research and development investment that we may be required to make before market acceptance, if any, of a particular technology;

	•		the possibility that the industry may not accept a new technology after we have invested a significant amount of resources to develop it; and

	•		new technologies introduced by our competitors.

	•		large orders unevenly spaced over time;

	•		establishment or loss of strategic relationships with third-party semiconductor foundries;

	•		pace of adoption of new technologies by customers;

	•		timing of new technologies and technology enhancements by us and our competitors;

	•		shifts in demand for products that incorporate our intellectual property;

	•		constrained or deferred spending decisions by customers;

	•		the timing and completion of milestones under customer agreements;

	•		the impact of competition on license revenues or royalty rates;

	•		the cyclical nature of the semiconductor industry and the general economic environment;

	•		difficulties in forecasting royalty revenues because of factors out of our control, like timing of manufacturing of semiconductors subject to royalty obligations and the number of such semiconductors actually produced (manufactured);

	•		changes in development schedules, research and development expenditure levels and product support by us and our customers;

	•		recording a significant portion of our quarterly revenues in the last month of a quarter. This is the result of closing more product orders, and therefore, a higher percentage of product shipments, in the last month of a quarter than in the first months of a quarter. Some customers believe they can enhance their bargaining power by waiting until the end of the quarter to finalize negotiations; and

	•		costs associated with merger and acquisition plans that are not pursued.

	•		changes in the political or economic conditions in Armenia and India and the surrounding region, such as fluctuations in exchange rates, changes in laws protecting intellectual property, the imposition of currency transfer restrictions or limitations, or the adoption of burdensome trade or tax policies, procedures, rules, regulations or tariffs, could adversely affect our ability to develop new products, to take advantage of the cost savings associated with operations in Armenia and India, and to otherwise conduct business effectively in Armenia and India

	•		our ability to continue conducting business in Israel and other countries in the normal course may be adversely affected by increased risk of social and political instability and our employees working and visiting in Israel may be affected by terrorist attacks;

	•		our Israeli customers’ demand for our products may be adversely affected because of negative economic consequences associated with reduced levels of safety and security in Israel.

	•		managing foreign distributors and sales partners and sharing revenues with such third parties;

	•		staffing and managing foreign branch offices and subsidiaries;

	•		political and economic instability;

	•		greater difficulty in collecting account receivables resulting in longer collection periods;

	•		foreign currency exchange fluctuations;

	•		changes in tax laws and tariffs;

	•		compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar;

	•		timing and availability of export licenses;

	•		inadequate protection of intellectual property rights in some countries; and

	•		obtaining governmental approvals for certain technologies.

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

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

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

		The registrant filed a Current Report on a Form 8-K on February 18, 2003 in connection with the filing by Virage Logic of a registration statement on Form S-3 for the resale of 77,500 shares of Common Stock and in order to comply with Article 11 of Regulation S-X.

		The registrant furnished a Current Report on Form 8-K on April 3, 2003 to report its revised outlook for the second fiscal quarter of fiscal 2003.

		The registrant furnished a Current Report on Form 8-K on April 16, 2003 to provide its earning release for the second fiscal quarter of fiscal 2003.

1.		I have reviewed this quarterly report on Form 10-Q of Virage Logic Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)		such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;