VIRAGE LOGIC CORP, 10-K405, 2000-12-26

VIRAGE LOGIC CORP
10-K405, 2000-12-26

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM _________ TO _________ .

COMMISSION FILE NUMBER 000-31089

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VIRAGE LOGIC CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 77-0416232
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

46501 LANDING PARKWAY, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)

Registrants' telephone number, including area code: (510) 360-8000

Securities registered pursuant to section 12(b) of the Act:
NONE

Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)

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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. [X]

Aggregate market value of the registrant's common stock held by
non-affiliates of the Registrant as of December 6, 2000 was approximately $102
million based upon the closing price reported for such date on the Nasdaq
National market. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of common stock and
shares held by officers and directors of the Registrant have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

The number of shares of the registrant's Common Stock outstanding as of
December 6, 2000 was 19,898,814.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement for its 2000 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Annual
Report on Form 10-K.

<PAGE> 2

PART I

ITEM 1. BUSINESS

GENERAL

Virage Logic provides semiconductor intellectual property for the memory
elements of electronic systems-on-a-chip. Our semiconductor intellectual
property consists of (1) embedded memories, (2) compilers that allow chip
designers to configure our memories into different sizes and shapes on a single
silicon chip and (3) software development tools that can be used to build memory
compilers. We also provide custom memory design services. Systems-on-a-chip are
critical components of communications equipment and many electronic devices,
including cellular and digital phones, pagers, digital cameras, DVD players,
switches and modems. Our customers include leading communications semiconductor
companies such as Broadcom, Conexant, Level One and PMC-Sierra and leading
integrated device manufacturers such as IBM, National Semiconductor, Philips and
Toshiba.

We develop our memories and compilers to comply with the manufacturing
processes used to create the silicon chips for our customers' products. For our
integrated device manufacturer customers, we develop our products to comply with
the processes used by their internal manufacturing facilities. For our fabless
semiconductor company customers, we develop our products to comply with the
processes of the third-party semiconductor manufacturing facilities, or
foundries, these companies rely on to manufacture the silicon chips for their
products. We also pre-test our products before their release on the market by
having actual chips containing our memories produced by third party foundries,
so that we can provide our customers with test data and assurance that chips
produced using our intellectual property will be manufacturable. As a result,
our customers can use our intellectual property to shorten the design time of
new product development. Our products are certified for production by several of
the leading third-party foundries used by fabless semiconductor companies, such
as Taiwan Semiconductor Manufacturing Company, or TSMC, United Microelectronics
Company, or UMC, and Chartered Semiconductor Manufacturing, or Chartered.

INDUSTRY BACKGROUND

The growth of the Internet and the development of optical and wireless
communications infrastructure are creating demand for communications equipment
and digital appliances that can utilize the increase in available bandwidth. The
system designers of these products are seeking technologies that will permit
them to decrease the size and enhance the performance of their products. In
response to this demand, semiconductor companies have developed technologies
that permit entire electronic systems, including the microprocessor,
communications, logic, graphics and memory elements, to be contained on a single
silicon chip, called a system-on-a-chip, rather than on a circuit board.
According to a report entitled "Status 2000" by Integrated Circuit Engineering,
an independent market research firm, the system-on-a-chip (SOC) market is
expected to grow from $2.9 billion in 1999 to $17.5 billion by 2004.

System-on-a-chip design depends upon the reliable integration of the
various components of the chip. Each component must comply with the
manufacturing standards of the manufacturing facility that will produce the
chip. Since different technical expertise and intellectual property is required
for each component of a system-on-a-chip, it is difficult for many companies to
develop the intellectual property needed for these components internally. The
designers of products that use systems-on-a-chip are facing increased market
pressure to rapidly introduce new products, which shortens the time available
for research and development. Accordingly, many semiconductor companies are
increasingly relying on external sources for the technical expertise and
intellectual property for various components of their system-on-a-chip designs.
The use of proven third-party intellectual property components allows
semiconductor companies to meet market pressures while continuing to focus on
the components of the system-on-a-chip that constitute their core competencies.

The demand for high-performance computing and communications
applications and the availability of increased bandwidth for Internet
applications has made memory critical to the operation of systems-on-a-chip used
for these applications. Historically, integrated circuit designs were dominated
by the logic function, while memory storage was usually provided in separate,
external devices. In order to achieve increased speeds, chip designs now require
closer physical proximity between the logic and memory functions and require
more customized memory functions.

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The need for this proximity, as well as advances in semiconductor technology and
the ability to customize the size and configuration of memory functions within a
system-on-a-chip, are creating increased demand for embedded memory. It is now
common for a system-on-a-chip to contain many memories with different functions
configured in different sizes and shapes to optimize the area of the chip.
Management estimates that memory functions typically comprise between 30-50% of
the chip area in a system-on-a-chip design and believes that this percentage
will increase with the growth of memory-intensive applications.

Semiconductor companies face significant challenges designing
high-performance memories for their system-on-a-chip devices. Due to continuing
advancements in the semiconductor manufacturing processes, new designs have
generally been required every one to two years. The internal design teams of
semiconductor companies typically lack the dedicated resources necessary to keep
pace with rapidly evolving memory designs. Suppliers of stand-alone memories for
personal computers and other devices that include memory as a separate element
on a circuit board often lack the design expertise and software tools necessary
to provide custom high-performance memory for system-on-a-chip designs.
Similarly, suppliers of the other components of systems-on-a-chip generally lack
the focus and expertise necessary to provide high-performance memories. These
factors have created a market need for third-party providers of highly reliable,
high performance memory intellectual property for system-on-a-chip design.

THE VIRAGE LOGIC SOLUTION

We provide intellectual property for high-performance memories used in
systems-on-a-chip, as well as software development tools and custom memory
design services. We offer customers embedded memories that are optimized for
area, low power consumption and speed and that are available for the
manufacturing processes of leading third party semiconductor foundries. Key
benefits of our solution include:

- Memory Design Expertise. Our memory design expertise allows us
to provide our customers with leading-edge memory technologies
for advanced manufacturing processes. We have assembled a global
team of over 100 engineers focused exclusively on memory design.
This team includes senior level engineers with significant
expertise in various types of memory design, including SRAM,
DRAM, flash and EPROM.

- Broad Product Line. We offer multiple types of memory and
compilers for 0.35 micron, 0.25 micron, 0.18 micron and 0.15
micron processes and are currently introducing embedded memories
on the 0.13 micron process. Our compilers allow our customers to
generate the exact configuration of embedded memory needed for
their system-on-a-chip designs.

- Manufacturing-Tested Solutions. Each of our embedded memories
has been customized, verified and tested for a particular
manufacturing process on a silicon chip, or silicon-proven,
before being delivered to a customer. This verification
substantially reduces the risk that the memory element will be
defective and the costly development delays customers might
experience from using in-house or other third-party designs that
are not silicon-proven. Our memories have been implemented by
over 75 customers and in foundries that comprise over 90% of the
third-party foundry market.

- Significant Design-Time Advantages. We offer silicon-proven
memories that comply with the standards for specific
manufacturing processes. Our memories and software tools can be
easily integrated into our customers' system-on-a-chip design
processes. By eliminating the need to design specific embedded
memories, our customers can shorten the design time for their
systems-on-a-chip.

- High-Density, High-Performance and Ultra-Low Power Consumption
Embedded Memories. We have recently introduced our ASAP, or
area, speed and power, embedded memory compilers that enable the
generation of high-density, high-performance and ultra-low power
consumption embedded memories in multiple configurations. These
technologies have been developed using custom memory design
techniques to achieve industry-leading results in area, speed
and power consumption.

- Ease of Integration. We provide a complete set of software
development tools to facilitate the integration of our memories
with the other elements of a system-on-a-chip design.

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THE VIRAGE LOGIC STRATEGY

Our objective is to be the leading supplier of embedded memory
intellectual property, software development tools and memory design service
support to semiconductor companies for their complex system-on-a-chip designs.
Key elements of our strategy include the following:

- Utilize and Develop Endorsements of Leading Third-Party
Semiconductor Manufacturers for Our Memories. We work with
leading third-party foundries to qualify our memories for
high-volume production in their manufacturing processes. In this
manner, we are in a position to provide embedded memories and
compilers that are silicon-proven for a specific foundry's
manufacturing process directly to that foundry's entire customer
base.

- Become a Preferred Supplier to the Leading Fabless Semiconductor
Companies. Fabless semiconductor companies, or semiconductor
companies that do not manufacture their own silicon chips, spend
substantial sums of money purchasing memory elements to
incorporate in their chips. Since these companies lack the time
and resources to internally develop embedded memories, which are
outside of their core competencies, they license memory
intellectual property from us. To date, we have licensed our
intellectual property to many fabless semiconductor companies
including ATI Technologies, Broadcom, Level One, Lockheed
Martin, Macronix, MMC Networks, PMC-Sierra, TranSwitch and
Vitesse. Because we receive royalty payments based on levels of
production from the foundries that manufacture chips for our
fabless customers, we intend to continue to target the fabless
semiconductor companies that produce the largest number of
chips.

- Increase our Base of Integrated Device Manufacturer Customers.
Integrated device manufacturers produce the largest number of
integrated circuits and face significant cost and product
differentiation challenges. The internal memory design teams of
these companies are facing difficulties keeping pace with the
increasing demand for, and proliferation of, embedded memory
technologies and the rapid innovation of these technologies for
advanced manufacturing processes. To date, we have licensed our
intellectual property to many leading integrated device
manufacturers including AMD, Conexant, Fujitsu, Hitachi,
Hyundai, IBM, Matsushita, Motorola, National Semiconductor, OKI,
Philips and Toshiba. We intend to build upon our ability to
reduce these customers' design time to further attract
integrated device manufacturer customers.

- Continue to Innovate Existing Technologies for Advanced
Manufacturing Processes. As the semiconductor manufacturers
develop advanced manufacturing processes that enable increasing
density and speed as well as lower power consumption, we intend
to lead the market for embedded memories designed for those
processes. We have achieved the critical mass of memory
designers necessary to be first to market with embedded memories
for advanced manufacturing processes. We have designed embedded
memories for the 0.35 micron, 0.25 micron, 0.18 micron and 0.15
micron processes and are currently introducing embedded memories
on the 0.13 micron process.

- Expand our Research and Development Efforts. We intend to work
with our development partners to define the focus of our
research and development activities to best address the needs of
our customers. Our development partners include TSMC, UMC, and
Chartered. We also intend to focus on developing new memory
architectures to support the convergence between computers,
consumer products and communications markets.

- Expand Distribution Channels. We intend to expand our existing
distribution channels by hiring a direct sales force in Europe
and increasing our direct sales force in the United States. We
also intend to continue to develop partnerships with value added
resellers, or VARs, and other distributors of intellectual
property and leverage their extensive U.S. and international
sales organizations.

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OUR PRODUCTS

We offer a wide range of memory intellectual property to semiconductor
companies including:

- embedded memories;

- compilers that can generate multiple configurations of a single
type of embedded memory in a system design;

- software development tools that can be used to build memory
compilers; and

- custom design services.

Our Embedded Memories. We provide embedded memories in predetermined
shapes, sizes and types that can be incorporated by semiconductor designers into
their system-on-a-chip designs. We deliver our memories to our customers through
downloads from secure servers or on computer disks in a form that can be
integrated directly into the design of the system-on-a-chip.

Our Embedded Memory Compilers. A compiler is a software program that
allows semiconductor designers to configure memories to the desired
specifications for their system-on-a-chip designs. Our compiler products
include:

- Custom-Touch ASAP. These compilers are optimized for high
density, high performance and low-power consumption and can
generate memories up to 512 kilobits in size. ASAP is available
in as many as nine different memory types including single- or
dual-port register file, single- or dual-port SRAM, synchronous
or asynchronous SRAM and ROM.

- Custom-Touch CAM. Our content-addressable memory, or CAM,
compilers can be used in routers, switches and other
high-bandwidth Internet infrastructure equipment to accelerate
hardware-based searches.

- Custom-Touch STAR. These compilers are optimized for area,
incorporate self-test and repair capabilities and can generate
up to four megabits of embedded memory. This technology is
currently being released to fabless semiconductor customers. We
have entered into an agreement with TSMC with respect to the
development of these compilers. See "Research and Development."

- Custom-Touch 1T-SRAM. These compilers use very dense memory
cells and can generate up to eight megabits of embedded memory.
They also incorporate self-test and repair capabilities. We
expect to release this technology by late December 2000. We have
entered into certain agreements with Mosys and TSMC with respect
to the development of these compilers. See "Research and
Development."

Software Development Tools. Our primary software development tool is
Embed-It! Architect which allows semiconductor design companies to develop their
own compilers. We also provide a software tool called Embed-It! Integrator with
each of our compilers to facilitate the design of multiple memory configurations
within a system-on-a-chip. We may also license Embed-It! Integrator with
Embed-It! Architect.

Our Custom Design Services. We offer custom memory design services for
companies that require special configurations or functionality not supported by
our compilers. This has led to a number of innovations and new technologies such
as our Custom Touch CAM technology.

MARKETS AND APPLICATIONS

We target markets that utilize system-on-a-chip technologies with large
memory requirements and high-performance, low-power architectures. Examples of
the markets and applications in which our memories are implemented include:

- Communications and Internet Infrastructure. Communications
systems-on-a-chip are used throughout the Internet, including in
routers, switches, DSL modems, gigabit ethernet equipment and
high-bandwidth set-top boxes.

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- Digital Appliances. Digital appliances increasingly require more
functionality, Internet connectivity and low-power consumption.
Our memories can be found in video game players, mobile phones,
pagers, digital cameras, high-definition televisions, cable
set-top boxes and DVD players.

- Computers. Computation equipment such as personal computers,
workstations and servers require more complex chip sets and
embedded memory to achieve new features such as advanced 3D
graphics and digital signal processing, or DSP.

RESEARCH AND DEVELOPMENT

We believe that our future success will depend in large part on our
ability to continue developing new products and innovating our existing products
for advanced manufacturing processes. To this end, we have assembled a team of
engineers with significant experience in the design and development of embedded
memories. Currently, we are focusing our research and development efforts on
developing memories that support the latest manufacturing processes: 0.13
micron. We are also developing new memory architectures to support the emerging
communications markets and the convergence between these markets and the
computer and consumer products markets.

We have entered into a memorandum of understanding with Mosys for the
joint development of our Custom-Touch 1T-SRAM compiler that is based on Mosys'
proprietary circuit technology. This memorandum of understanding provides that
we and Mosys will each have the right to license and sell the resulting compiler
and will share equally in the licensing revenues. In connection with this
memorandum of understanding, we have also entered into an agreement with Mosys
and TSMC in which we and Mosys have agreed to develop the Custom-Touch 1T-SRAM
compiler for TSMC's 0.18 micron and 0.15 micron processes. In addition, all
parties have agreed to jointly market this technology.

We have also entered into a memorandum of understanding with Netlogic
Systems related to the development of a memory compiler based on Netlogic's CAM
technology. This CAM compiler will complement our existing CAM memories by
allowing semiconductor companies to design a complete search engine for use in
specific applications such as voice-over Internet protocol, or VoIP. This should
allow proliferation of our CAM memories into new applications. The pricing model
and allocation of revenues between the parties for the developed technologies
will be determined in a subsequent formal agreement.

We have a license agreement with Credence and its wholly-owned
subsidiary, Fluence Technology, under which we license from Fluence memory
built-in self test logic for integration into our compilers. In exchange for
this license, we have granted warrants to purchase 50,000 shares of common stock
to Credence and its affiliates. In addition, we will pay Fluence Technology
royalties on sales of our products that incorporate their technology.

We have entered into agreements with TSMC, UMC and Chartered relating to
the development and license of our memories and compilers for each of these
foundry's design rules.

Under our agreements with TSMC, we will develop memory compilers for
certain TSMC manufacturing processes, including the Custom Touch STAR Compiler
for TSMC's 0.18 micron process. Each party will own its own intellectual
property, and both parties will jointly own any jointly-developed intellectual
property. Following development, we will license the developed technologies to
third parties that manufacture their silicon chips at TSMC. In exchange for our
development, TSMC pays us licensing fees, as well as royalties based on silicon
chips manufactured at TSMC using our memories. In addition, both we and TSMC
agree to promote these technologies.

Our agreement with UMC is similar to our agreement with TSMC. UMC does
not pay us a development fee under this agreement but pays us royalties based on
revenues from third parties that manufacture silicon chips containing our
memories at UMC.

Our agreement with Chartered relates to the establishment of a joint
marketing and test chip and silicon verification program for memories developed
for Chartered's design rules. Under this agreement, Chartered agrees to provide
us with test chip layout, test plans and test rules to assist in our design of
test chips and silicon verification for their manufacturing processes. Chartered
pays us royalties based on silicon chips manufactured at Chartered using our
memories. Currently, these royalties have not been material and we do not expect
them to be

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material in the near future. In addition, both parties agree to provide
technical, marketing and sales support and to introduce customers as
appropriate.

Our research and development costs were $6.7 million, $2.7 million and
$924,000 in fiscal 2000, 1999, and 1998. We expect that these costs will
increase in the future in order to maintain a leading position as a third-party
provider of semiconductor intellectual property in the embedded memory market.
At September 30, 2000, we had 41 employees engaged in research and development.
We expect to identify and hire additional technical personnel in fiscal year
2001 to staff our anticipated research and development activities.

SALES AND MARKETING

We focus our sales efforts through direct sales in North America and
Europe. In Japan and the rest of Asia, we use both indirect sales through
distributors, as well as direct sales through sales representatives.

Direct Sales. We maintain a network of direct sales representatives and
field application engineers serving the United States, Asia, Canada and Europe.
Substantially all of our direct sales representatives and field application
engineers are located in the United States and serve our customers in the United
States and Canada. The sales force is distributed throughout the United States
with employees in the following locations: Fremont, Boston, Los Angeles, Austin,
Phoenix and West Palm Beach. We are building a direct sales organization in
Europe and plan to add a sales force in Asia within the next year, to further
expand our international sales. In Japan and the rest of Asia, we use both
indirect sales through distributors, as well as direct sales through sales
representatives. Our sales force's primary responsibility is to secure and
maintain direct account relationships with fabless semiconductor companies and
integrated device manufacturers for the license of our memories. Developing a
license relationship typically involves a three to six month sales cycle. In
addition, we have approximately 100 customers with which the sales force
maintains existing relationships.

We enter into license agreements with our customers for a range of
embedded memory technologies. New license agreements are required for each new
process technology generation. For our ASAP products, in addition to collecting
up-front license fees from the customers, we receive royalties from third-party
foundries that manufacture chips for our fabless customers. For our Custom-Touch
STAR megabit and CAM technologies, we expect to receive both license and royalty
fees from customers, as well as royalties from third-party foundries. Our
license agreements contain limited warranties and eliminate our liability for
consequential damages.

We have developed relationships with the following types of companies
that provide us with customer referrals.

- Foundries. We have entered into marketing and technology
relationships with several third-party foundries including TSMC,
UMC and Chartered. These relationships provide us with early
access to new process technologies and endorsements from their
direct sales force to our mutual customer base.

- Standard-Cell Library Companies. We have entered into joint
marketing and development relationships with library companies
that sell standard cells and input/output cells such as Avant!
Corporation.

- EDA Vendors. We have entered into joint marketing relationships
with major electronic design automation, or EDA vendors
including Cadence. These relationships allow us to validate our
interoperability with these EDA vendors' software design tools.

Indirect Sales. In addition to the direct sales force, we also sell our
technologies through distributors in Japan and the rest of Asia. In Japan, we
have entered into a distributor agreement with Seiko Instruments to sell and
support our products. We have also entered into sales representative agreements
with Maojet Technology Corporation in Taiwan and Aralion Technology in Korea.
All of these indirect sales organizations have expertise in selling
semiconductor intellectual property and software design tools. None of these
relationships is exclusive.

CUSTOMERS

We have developed a strong customer base of semiconductor companies that
use our embedded memories to design complex system-on-a-chip devices. Purchasers
of our embedded memories include both fabless semiconductor companies and
integrated device manufacturers. For fabless semiconductor customers, we license

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our embedded memories on either a single- or multiple- project basis. For
integrated device manufacturers, we license our embedded memories on a
multiple-project basis and offer our Embed-It! Architect software as an option
to develop and maintain their own memory intellectual property on the same
software platform.

The following chart provides a representative list of our major
customers by customer type.

<TABLE>
<S> <C>
Fabless Semiconductor Companies ATI Technologies*, Broadcom, Level One*, Macronix,
MMC Networks, PMC-Sierra*, TranSwitch, Vitesse*

Integrated Device Manufacturers AMD, Conexant*, Hyundai, IBM*, Matsushita,
National Semiconductor*, OKI, Philips*, Toshiba*

Embed-It! Architect Licensees Hitachi, Hyundai, Macronix, National Semiconductor, SIS, TSMC*
</TABLE>

* Indicates the ten customers that generated the highest level of
revenues for us in fiscal 2000

We have been dependent on a small number of customers for a substantial
portion of our annual revenues in each fiscal year, although the customers
comprising this group have changed from time to time. In fiscal 2000, no single
customer generated 10% or more of our revenues. In fiscal 1999, ATI
Technologies, MMC Networks, National Semiconductor and Toshiba each generated
between 10% and 18% of our revenues. In fiscal 1998, MMC Networks, National
Semiconductor, PMC-Sierra, Silicon Dynamics and TeraLogic, each generated more
than 10% of our revenues. We expect a small number of companies to collectively
represent between 20% and 40% of our revenues for the next few years. As our
customer base grows and the number of fabless semiconductor companies increases,
we expect our dependence on any one customer for revenues to decline. However,
as our sales to fabless semiconductor companies grow, we will become more
dependent on the availability of new manufacturing process technologies and
capacity from third party foundries to manufacture our customers' products.

PROPRIETARY AND INTELLECTUAL PROPERTY

We rely primarily on a combination of nondisclosure agreements and other
contractual provisions, as well as patent, trademark, trade secret and copyright
law to protect our proprietary rights. Our general policy has been to seek
patent protection for those inventions and improvements likely to be
incorporated in our technologies or otherwise expected to be of value. We have
an active program to protect our proprietary technology through the filing of
patents.

At December 6, 2000, we have five U.S. patents issued, eleven U.S.
patent applications on file and four draft applications being prepared for
filing with the USPTO. We expect that once granted, the duration of these
patents will be 20 years from the effective date of filing of the application.
These patents will allow us to prevent others from infringing on some of our
core technologies. We intend to continue to file patent applications as
appropriate in the future. We cannot be sure, however, that our pending patent
applications will be allowed, that any issued patents will protect our
intellectual property or will not be challenged by third parties, or that the
patents of others will not seriously harm our ability to do business. In
addition, others may independently develop similar or competing technology or
design around any of our patents.

In addition, at December 6, 2000, we had two pending U.S. trademark
applications on file with the USPTO. If the applications mature to
registrations, these registrations would allow us to prevent others from using
other similar marks on similar goods and services in the U.S. We cannot be sure,
however, that the USPTO will issue trademark registrations for any of our
pending applications. Further, any trademark rights we hold or may hold in the
future may be challenged or may not be of sufficient scope to provide meaningful
protection.

We protect the source code of our technologies as both trade secrets and
unpublished copyrighted works. We license the object code to our customers for
limited uses and maintain contractual controls over the use of our software.
Wide dissemination of our software makes protection of our proprietary rights
difficult, particularly outside the United States.

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We protect our trade secrets and other proprietary information through
nondisclosure agreements with our employees and customers and other security
measures, although others may still gain access to our trade secrets or discover
them independently.

Although we believe that our technologies do not infringe on any
copyright or other proprietary rights of third parties, from time to time, third
parties, including our competitors, may assert patent, copyright and other
intellectual property rights to technologies that are important to us.

COMPETITION

The embedded memory industry is very competitive and is characterized by
constant technological change, rapid rates of technology obsolescence and the
emergence of new suppliers. Our primary competition comes from the internal
development groups of large integrated device manufacturers that develop
embedded memories for their own use. In addition, we face competition from other
third-party providers of embedded memories, such as Artisan Components and
Avant!

As we introduce new technologies, we will face competition from both
existing semiconductor intellectual property suppliers and new ones entering the
market. We may also face competition from semiconductor companies that currently
offer stand-alone memory technologies, such as Cypress, Hyundai, IDT, Micron
Technology and Samsung, if these companies were to make their technologies
available in embedded form. In addition, third-party foundries may decide in the
future to distribute embedded memories themselves, in addition to manufacturing
chips containing third-party embedded memories.

We believe that important competitive factors in our market include
performance, functionality, customization, length of development cycle, price,
compatibility with prevailing design methodologies, interoperability with other
devices or subsystems, ease of use, reputation for successful designs and
installed base, technical service and support, technical training,
configurability of technologies for specific designs, and regional sales and
technical support.

EMPLOYEES

At September 30, 2000, we had 138 employees, including 19 in sales and
marketing, 41 in research and development, 68 in engineering operations and 10
in general and administrative functions. Forty-five of our engineers and other
significant employees are located outside of the United States. We believe that
our future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. None of our employees is represented by a labor
union and we believe our employee relations are good.

ITEM 2. PROPERTIES

FACILITIES

Our principal administrative, sales, marketing and research and
development facility occupies approximately 20,169 square feet in a building
located in Fremont, California. This facility is leased through September 2002.
We also lease additional offices in Bellevue, Washington and Clinton, New Jersey
that are occupied mainly by research and development and engineering operations
personnel. The Bellevue office, which occupies approximately 2,318 square feet,
is leased through March 2004. The Clinton office, which occupies approximately
10,921 square feet, is leased through August 2003. In addition, we have
development centers in the Republic of Armenia and India. The development center
in the Republic of Armenia is located in Yerevan and occupies approximately
4,300 square feet in a building leased through July 2005. The development center
in India is located in Noida and occupies approximately 2,500 square feet in a
building leased through April 2002.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any pending litigation.

9
<PAGE> 10

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Pursuant to an action by written consent, our stockholders approved the
following in July 2000:

1. Approval of our reincorporation in Delaware and 1-for-2 reverse split of
our Common Stock.

2. Adoption of our Amended and Restated Articles of Incorporation to be
effective immediately prior to the closing of our initial public
offering.

3. Approval of certain amendments to our 1997 Equity Incentive Plan.

4. Adoption of our 2000 Employee Stock Purchase Plan.

Each of the foregoing was approved by the stockholders as follows:

<TABLE>
<CAPTION>
CLASS OR SERIES SHARES APPROVING SHARES OUTSTANDING
------------------------ ---------------- ------------------
<S> <C> <C>
Common Stock 5,290,000 8,038,937
Series A Preferred Stock 1,318,212(1) 1,531,062(1)
Series B Preferred Stock 975,000(1) 1,448,037(1)
Series C Preferred Stock 4,197,753(2) 5,455,255(2)
</TABLE>

(1) Each share of our Series A Preferred Stock and Series B
Preferred Stock was converted into 1.5 shares of our Common
Stock immediately prior to the closing of our initial public
offering.

(2) Each share of our Series C Preferred Stock was converted into
0.5 shares of our Common Stock immediately prior to the closing
of our initial public offering.

Pursuant to an action by written consent, the holders of our Preferred
Stock consented in July 2000 to the conversion of the Preferred Stock into
Common Stock immediately prior to the closing of our initial public offering.
Such consent was given by the stockholders as follows:

<TABLE>
<CAPTION>
CLASS OR SERIES SHARES APPROVING SHARES OUTSTANDING
------------------------ ---------------- ------------------
<S> <C> <C>
Series A Preferred Stock 1,318,212(1) 1,531,062(1)
Series B Preferred Stock 975,000(1) 1,448,037(1)
Series C Preferred Stock 4,197,753(2) 5,455,255(2)
</TABLE>

(1) Each share of our Series A Preferred Stock and Series B
Preferred Stock was converted into 1.5 shares of our Common
Stock immediately prior to the closing of our initial public
offering.

(2) Each share of our Series C Preferred Stock was converted into
0.5 shares of our Common Stock immediately prior to the closing
of our initial public offering.

10
<PAGE> 11

EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of our existing executive officers and significant
employees at December 6, 2000 are set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION(s)
---- --- -----------
<S> <C>
Adam A. Kablanian* ........... 41 President, Chief Executive Officer and Chairman of the Board
Alexander Shubat* ............ 39 Vice President of Engineering, Chief Technical Officer and Director
James R. Pekarsky* ........... 41 Vice President of Finance and Chief Financial Officer
Vincent F. Ratford* .......... 49 Vice President of Marketing and Business Development
Raymond T. Leung* ............ 42 Vice President of Engineering Operations
Yervant Zorian* .............. 44 Vice President and Chief Scientist and Director
Roger A. Bitter .............. 56 Vice President of Worldwide Sales
Kenneth V. Rousseau .......... 43 Vice President of Software Development
William J. Palumbo ........... 42 Vice President and General Manager of New Jersey Operations
Alok Singh ................... 40 Vice President and General Manager of India Operations
</TABLE>
----------
(*) Executive officer for purposes of Section 16(a) of the Securities
Exchange Act of 1934.

Adam A. Kablanian co-founded Virage Logic and has served as our
President, Chief Executive Officer and as a Director since January 1996. Before
founding Virage Logic, Mr. Kablanian was a Department Manager for LSI Logic, a
semiconductor integrated device manufacturer, from August 1994 to December 1995
where he was responsible for the embedded memory design division. Before he
joined LSI Logic, Mr. Kablanian managed multi-foundry technology transfer
programs as an engineering manager at Waferscale Integration, a designer of
programmable system devices, from April 1990 to January 1994. Mr. Kablanian
holds a B.A. in Physics from the University of California at Berkeley and an
M.S. in Electrical Engineering from Santa Clara University.

Alexander Shubat co-founded Virage Logic and has served as our Vice
President of Engineering and Chief Technical Officer and as a director since
January 1996. Before founding Virage Logic, Dr. Shubat served as Director of
Engineering at Waferscale Integration from November 1985 to December 1995, where
he managed various groups, including design, application-specific integrated
circuit and high-speed memory. He holds seven patents and has contributed to
more than 25 publications. Dr. Shubat holds a B.S. and an M.S. in Electrical
Engineering from the University of Toronto, Canada and a Ph.D in Electrical
Engineering from Santa Clara University.

James R. Pekarsky has served as our Vice President of Finance and Chief
Financial Officer since May 1999. Before joining Virage Logic, Mr. Pekarsky
served as Director, General Manager in several divisions at Mentor Graphics,
where he worked from May 1997 to May 1999, including Mentor Graphics' Emulation
Division in Paris, France and Embedded Software Division in San Jose,
California. Before joining Mentor Graphics, Mr. Pekarsky served as the Director
of Operations of Advanced Molecular Systems, a genetics research company, from
December 1995 to May 1997. Before that, he held senior management positions in
finance and operations at Sclavo Diagnostics, a clinical diagnostic company in
Milan, Italy, and Bio-Rad Laboratories, a life science research company. Mr.
Pekarsky holds a B.S. in Accounting from Indiana University of Pennsylvania and
an M.B.A. in Finance from Golden Gate University.

Vincent F. Ratford has served as our Vice President of Marketing and
Business Development since July 2000 and previously as our Vice President of
Sales and Marketing since February 1998. Before joining Virage Logic, Mr.
Ratford served as Chief Operating Officer of the Microtec Division of Mentor
Graphics, a provider of hardware and software design solutions to semiconductor
companies, from October 1995 to December 1997. Before joining the Microtec
Division, he was Director of Marketing for Mentor Graphics' System Design
Division from May 1993 to October 1995. Mr. Ratford holds a B.S. in Electrical
Engineering from Northeastern University.

11
<PAGE> 12

Raymond T. Leung has served as our Vice President of Engineering
Operations since August 1998. Before joining Virage Logic, Mr. Leung was Senior
Director of Mixed Signal Development at LSI Logic where he worked from June 1989
to August 1998. He also managed the embedded memory development group at LSI
Logic and holds two patents on memory design techniques. Mr. Leung holds a B.S.
in Electrical Engineering from Columbia University and an M.S. in Electrical
Engineering from Stanford University.

Yervant Zorian has served as a Director since November 1997 and joined
our management team as Vice President and Chief Scientist in May 2000. Since
November 1996, Dr. Zorian has served as Chief Technical Advisor of LogicVision.
Before that he served as a Distinguished Member of the Technical Staff at Lucent
Technologies, Bell Laboratories. Dr. Zorian holds a B.S. in Electrical
Engineering from the University of Aleppo, an M.Sc. in Computer Engineering from
the University of Southern California and a Ph.D in Electrical Engineering from
McGill University.

Roger A. Bitter has served as our Vice President of Worldwide Sales
since July 2000. Before joining Virage Logic, Mr. Bitter was Vice
President--North America Sales at Magma Design Automation, an EDA company, from
August 1999. Before joining Magma Design Automation, he was President and CEO of
Sycon Design, Inc. from February 1998 to June 1999. Before that, he held several
positions, between January 1994 and January 1998, at TSSI, Inc., which was
subsequently purchased by Credence, including President and CEO, General Manager
of the TSSI Division of Summit Design and Vice President, Far East Operations of
Summit Design. Mr. Bitter holds a B.S. in Electronics Engineering, an M.S. in
Management Science and an M.B.A. in Finance from West Coast University.

Kenneth V. Rousseau has served as our Vice President of Software
Development since February 2000. Before joining Virage Logic, Dr. Rousseau was
Director of New Product Management at Synopsys, a supplier of electronic design
automation tools. Before joining Synopsys, he held various positions at Cascade
Design Automation, another supplier of electronic design automation tools,
including Chief Technologist from August 1996 to December 1996, Vice President,
Engineering from August 1994 to August 1996, Manager, Design Technologies from
June 1993 to August 1994 and Engineering Fellow from January 1993 to June 1993.
He also worked in the aerospace industry at Hughes Aircraft and TRW Electronics
and Defense, as well as several semiconductor companies including GigaBit Logic
and Vitesse. Dr. Rousseau holds a B.S. in Physics and Literature and an M.S. in
Applied Physics from California Institute of Technology and a Ph.D in Electrical
Engineering from UCLA.

William J. Palumbo has served as our Vice President and General Manager
of New Jersey Operations since July 1999. Before joining Virage Logic, Mr.
Palumbo served as Director of the Physical Library Division for Mentor Graphics
from October 1990 to July 1999. Before joining Mentor Graphics, he worked in
various management positions at RCA, General Electric and Harris Semiconductor
from December 1983 to September 1990. He holds one U.S. patent and has published
numerous articles in technical and business forums. Mr. Palumbo holds a B.S. in
Electrical Engineering from Rutgers University.

Alok Singh has served as our Vice President and General Manager of India
Operations since September 1997. Before joining Virage Logic, Mr. Singh served
as Director of Design Automation from November 1996 to August 1997 and Manager,
Design Automation from April 1990 to October 1996 at Waferscale Integration. Mr.
Singh holds a B.S. in Electrical Engineering from the University of Glasgow,
Scotland.

12
<PAGE> 13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock has been quoted on the Nasdaq National Market under the
symbol "VIRL" since our initial public offering on August 1, 2000. Prior to such
time, there was no public market for our common stock. The following table sets
forth, for the periods indicated the high and low reported last sale prices per
share of our common stock on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year 2000

Fourth Quarter: $ 20.75 $ 10.00
August 1 -- September 30, 2000
</TABLE>

As of December 6, 2000, there were approximately 140 stockholders of
record of our Common stock.

We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The selected consolidated financial data set forth below should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto included elsewhere in this filing. The consolidated statement of
operations data for the fiscal years ended September 30, 2000 and 1999 and the
consolidated balance sheet data at September 30, 2000 and 1999 have been derived
from our audited consolidated financial statements included elsewhere in this
filing, which have been audited by Ernst & Young LLP, independent auditors The
consolidated statement of operations data for each of the fiscal years ended
September 30, 1998 and 1997 and the consolidated balance sheet data at September
30, 1998 and 1997 have been derived from our audited consolidated financial
statements, not included herein, which have been audited by Mohler, Nixon &
Williams Accountancy Corporation, independent auditors. The consolidated
statement of operations data for the period from November 27, 1995 (inception)
through September 30, 1996 and the summary consolidated balance sheet data at
September 30, 1996 are derived from our unaudited consolidated financial
statements and include all adjustments consisting only of normal, recurring
adjustments that we consider necessary for a fair presentation of our financial
position and results of operations for these periods. The historical financial
information may not be an accurate indicator of our future performance.

13
<PAGE> 14

PERIOD FROM
NOVEMBER 27, 1995
YEAR ENDED SEPTEMBER 30, (INCEPTION)
----------------------------------------------------- TO SEPTEMBER 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 19,666 $ 9,589 $ 1,970 $ 369 $ 324
Cost of revenues
(exclusive of amortization of deferred stock
compensation of $1,307 and $90 in 2000 and
1999, respectively) ........................ 4,903 2,562 853 207 86
-------- -------- -------- -------- --------
Gross profit ................................... 14,763 7,027 1,117 162 238
Operating expenses:
Research and development
(exclusive of amortization of deferred stock
compensation of $2,408 and $222 in 2000 and
1999, respectively) ........................ 6,737 2,709 924 256 166
Sales and marketing
(exclusive of amortization of deferred stock
compensation of $1,393 and $294 in 2000 and
1999, respectively) ........................ 4,790 2,378 622 120 24
General and administrative
(exclusive of amortization of deferred stock
compensation of $1,690 and $95 in 2000 and
1999, respectively) ........................ 2,402 1,202 411 152 43
Stock-based compensation ..................... 6,798 701 -- -- --
-------- -------- -------- -------- --------
Total operating expenses ................... 20,727 6,990 1,957 528 233
-------- -------- -------- -------- --------
Operating income (loss) ........................ (5,964) 37 (840) (366) 5
Interest income ................................ 850 42 16 -- --
Interest expense ............................... (255) (91) (27) (4) --
Other income (expense) ......................... -- (20) -- (3) 1
-------- -------- -------- -------- --------
Income (loss) before taxes ..................... (5,369) (32) (851) (373) 6
Income tax provision ........................... (293) (154) -- -- --
-------- -------- -------- -------- --------
Net income (loss) .............................. (5,662) (186) (851) (373) 6
Deemed dividend on Series C redeemable
convertible preferred stock ................... (10,104) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
stockholders ................................. $(15,766) $ (186) $ (851) $ (373) $ 6
======== ======== ======== ======== ========
Net income (loss) per share applicable to common
stockholders
Basic ........................................ $ (1.98) $ (0.04) $ (0.19) $ (0.85) $ 0.06
======== ======== ======== ======== ========
Diluted ...................................... $ (1.98) $ (0.04) $ (0.19) $ (0.85) $ 0.02
======== ======== ======== ======== ========
Shares used in computing net income (loss) per
share
Basic ........................................ 7,952 5,301 4,379 438 94
======== ======== ======== ======== ========
Diluted ...................................... 7,952 5,301 4,379 438 376
======== ======== ======== ======== ========
</TABLE>

September 30,
-------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 58,596 $ 1,513 $ 1,972 $ 87 $ 57
Working capital ................................ 61,285 1,554 2,368 (173) 102
Total assets ................................... 72,121 9,050 3,265 273 361
Long-term debt obligations, less current
portion ....................................... 273 454 64 23 --
Retained earnings (accumulated deficit) ........ (17,171) (1,405) (1,219) (367) 6
Total stockholders' equity ..................... 66,922 3,323 2,743 (15) 359
</TABLE>

14
<PAGE> 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

The following discussion of our financial condition and results of
operations should be read together with the consolidated financial statements
and the notes thereto included elsewhere in this filing. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks described in
"Risk Factors" and elsewhere in this filing.

OVERVIEW

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

Revenues consist of license fees for our memories, standard and custom
memory compilers and software development tools. Licensing of our intellectual
property involves a sales cycle of three to six months. Our memories and
compilers can be customized for our customers' specific manufacturing processes
and requirements. A custom contract would typically call for milestone payments
that are defined in the statement of work and program schedule that accompany a
master license agreement. Milestone deliveries generally occur over three to six
months.

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

Support revenues related to standard and custom memory compilers are not
deferred over the life of the license agreement but rather an estimated cost of
support is accrued at the time license revenues are recognized. Our experience
to date indicates that the level of resource commitment for support is not
significant. In the event that support becomes a significant cost, our revenue
recognition policy would be modified to reflect the change.

Currently, license fees represent substantially all of our revenues. We
have agreements with certain third-party semiconductor foundries to pay us
royalties on their sales of silicon chips manufactured for our fabless
customers. Royalty revenues from these agreements through the year ended
September 30, 2000 were $88,000. The time delays for receiving royalty revenues
are due to the typical length of time required for the customer to implement our
embedded memories into their design and manufacture and bring to market a
product incorporating our memories. Beginning with our Custom-Touch STAR megabit
and CAM technologies, in addition to collecting royalties from the third-party
semiconductor foundries, we intend to increase our royalty base by collecting
royalties directly from our integrated device manufacturer customers and fabless
customers. To date, we have entered into several agreements implementing the new
royalty structure.

Sales to customers located outside the United States accounted for 50%
of our revenues in fiscal 2000, 44% of our revenues in fiscal 1999, and 48% of
our revenues in fiscal 1998. Substantially all of our direct sales
representatives and field application engineers are located in the United States
and serve our customers in the United

15
<PAGE> 16
States and Canada. We are building a direct sales organization in Europe. In
Japan and the rest of Asia, we use both indirect sales through distributors, as
well as direct sales through sales representatives. We anticipate that the sales
mix in the near future will change as our customer base outside of the United
States expands. All revenues to date have been denominated in U.S. dollars.

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

We have incurred, and will incur in future periods, substantial
amortization of stock-based compensation, which represents non-cash charges
incurred as a result of the issuance of stock options to employees at less than
fair value. These charges are recorded based on the difference between the
deemed fair value of the common stock and the option exercise price of such
options at the date of grant. The deferred stock-based compensation balance at
September 30, 2000 was $10 million. This amount is presented as a reduction of
stockholders' equity and is being amortized using the graded-vesting method over
the vesting period of the applicable options, generally four years. The
amortization of stock-based compensation for options granted through September
30, 2000 was approximately $6.8 million for fiscal 2000, and is estimated to be
$6.3 million in 2001, $2.6 million in 2002 and an aggregate of $1.2 million in
the years following.

RESULTS OF OPERATION -- YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999 1998
----- ----- -------
<S> <C> <C> <C>
Revenues ............................. 100.0% 100.0% 100.0%
Cost of revenues ..................... 24.9 26.7 43.3
----- ----- -------
Gross profit ......................... 75.1 73.3 56.7
Operating expenses:
Research and development ........... 34.2 28.3 46.9
Sales and marketing ................ 24.4 24.8 31.6
General and administrative ......... 12.2 12.5 20.8
Stock-based compensation ........... 34.6 7.3 --
----- ----- -------
Total operating expenses ............. 105.4 72.9 99.3
----- ----- -------
Operating income (loss) .............. (30.3) 0.4 (42.6)
Interest and other expense ........... (1.3) (1.1) (1.4)
Interest income ...................... 4.3 0.4 0.8
Income tax provision ................. (1.5) (1.6) --
----- ----- -------
Net income (loss) .................... (28.8)% 1.9% (43.2)%
===== ===== =======
</TABLE>

Our total revenues in fiscal 2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
FISCAL YEAR TOTAL REVENUES
----------- --------------
<S> <C>
2000 $ 19.7 million
1999 9.6 million
1998 2.0 million
</TABLE>

Revenue grew $10.1 million from 1999 to 2000 and $7.6 million from 1998
to 1999. The 2000 increase in revenues was primarily due to the expansion of our
product lines to include the Custom-Touch CAM and STAR products and from the
full year impact of sales of our 0.18 and 0.15 micron embedded memory
technologies. The 1999 revenue growth primarily reflected an approximate $3.0
million increase in license fees from our 0.25 micron embedded memory
technologies, as well as approximately $2.7 million from the initial shipments
of our 0.18 micron technologies, to both fabless semiconductor companies and
integrated device manufacturers.

16
<PAGE> 17

Our gross profits in fiscal 2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
FISCAL YEAR GROSS PROFIT
----------- --------------
<S> <C>
2000 $ 14.8 million
1999 7.0 million
1998 1.1 million
</TABLE>

Gross profit represented 75.1%, 73.3% and 56.7% of revenues for those
periods, respectively. The increases in gross profit and gross profit percentage
between 2000 and 1999 and between 1999 and 1998 were attributable to increased
sales volume and increased license fees from fabless semiconductor companies for
standard products that require no customization. Cost of revenues excludes $1.3
million and $90,000 of amortization of stock-based compensation for the years
ended September 30, 2000 and 1999 and no such amortization for the year ended
September 30, 1998.

Research and Development expenses in fiscal 2000, 1999 and 1998 were as
follows:

<TABLE>
<CAPTION>
RESEARCH AND
FISCAL YEAR DEVELOPMENT EXPENSES
----------- --------------------
<S> <C>
2000 $ 6.7 million
1999 2.7 million
1998 0.9 million
</TABLE>

Research and development expense represented an increase of 149% from
1999 to 2000. Research and development expense excludes $2.4 million and
$222,000 of amortization of stock-based compensation for the years ended
September 30, 2000 and 1999, respectively and no such amortization for the year
ended September 30, 1998. The increases in research and development expense
between 1999 and 2000 and between 1998 and 1999 were primarily due to increases
in the number of employees involved in research and development as we expanded
into three new product lines and the development of the 0.13 micron embedded
memory technology. Research and development expense as a percentage of revenues
was 34% in fiscal 2000, up from 28% in fiscal 1999.

Sales and Marketing expenses in fiscal 2000, 1999 and 1998 were as
follows:

<TABLE>
<CAPTION>
SALES AND
FISCAL YEAR MARKETING EXPENSES
----------- ------------------
<S> <C>
2000 $ 4.8 million
1999 2.4 million
1998 0.6 million
</TABLE>

Sales and marketing expense represented an increase of 101% from 1999 to
2000 and an increase of 282% from 1998 to 1999. Sales and marketing expense
excludes $1.4 million and $294,000 of amortization of stock-based compensation
for the years ended September 30, 2000 and 1999 and no such amortization for the
year ended September 30, 1998. The increase in sales and marketing expense
between 2000 and 1999 was primarily due to increased personnel, and increased
expenditures on tradeshows and advertising. The increase in sales and marketing
expense between 1998 and 1999 was due to approximately $1.1 million of increased
expenses associated with hiring additional personnel and increased salaries and
benefits resulting from increased sales and approximately $700,000 of increased
expenses associated with expanded sales and marketing activities.

17
<PAGE> 18

General and Administrative expenses in fiscal 2000, 1999 and 1998 were
as follows:

<TABLE>
<CAPTION>
GENERAL AND
FISCAL YEAR ADMINISTRATIVE EXPENSES
----------- -----------------------
<S> <C>
2000 $ 2.4 million
1999 1.2 million
1998 0.4 million
</TABLE>

General and administrative expense represented an increase of 100% from
1999 to 2000 and an increase of 192% from 1998 to 1999. General and
administrative expense excludes $1.7 million and $95,000 of amortization of
stock-based compensation for the years ended September 30, 2000 and 1999 and no
such amortization for the year ended September 30, 1998. The increases in
general and administrative expense between 1999 and 2000 were the result of
additional hiring and expenditures related to expanding the Finance, Human
Resources, and Legal departments in anticipation of the Company going public.
Between 1998 and 1999 the increase was the result of expanded personnel and
professional fees.

Stock-Based Compensation. With respect to the grant of stock options to
employees, we recorded stock-based compensation of approximately $14.6 million
and $2.9 million for the years ended September 30, 2000 and 1999 of which $6.8
million and $701,000 was amortized in those periods, respectively. The amount of
stock-based compensation is presented as a reduction of stockholders' equity and
is being amortized using the graded-vesting method over the vesting period of
the applicable options, generally four years.

Interest Income. Interest income was $850,000, $42,000 and $16,000 for
fiscal 2000, 1999 and 1998, respectively, principally due to higher average cash
balances following the sale of Series C redeemable convertible preferred stock
in December 1999 and our initial public offering in August 2000.

Interest Expense. Interest expense was $255,000, $91,000 and $27,000 for
fiscal 2000, 1999 and 1998, respectively. These increases were the result of
increases each year in our average outstanding debt and increases in fixed
assets held under capital leases.

Income Tax Provision. Although we reported losses for fiscal 2000 and
1999, we recorded income tax provisions of $293,000 and $154,000, which
consisted primarily of foreign and state taxes due to our ability to recognize
only federal deferred taxes, as state current taxes paid are not refundable. No
provision for income taxes was recorded for fiscal 1998, as we incurred net
losses in that year.

Deemed Dividend. In connection with the sale of Series C redeemable
convertible preferred stock in December 1999, we recorded a non-cash charge of
$10.1 million for the year ended September 30, 2000 to accrete the value of the
Series C redeemable convertible preferred stock to its deemed fair value under
applicable accounting rules. This non-cash charge was recorded as an increase in
accumulated deficit with a corresponding credit to additional paid-in capital
and was recognized at the date of issuance, which was the period in which the
shares became eligible for conversion.

QUARTERLY RESULTS OF OPERATIONS

The following tables contain unaudited consolidated statement of
operations data for our eight most recent quarters. The first table contains
revenue and expense data expressed in dollars, while the second table contains
the same data expressed as a percentage of our revenues for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in our opinion, include all adjustments necessary for a fair
presentation of the information. Our quarterly results have been in the past,
and in the future may be, subject to fluctuations. As a result, we believe that
results of operations for the interim periods may not be an accurate indicator
of results for any future period.

18
<PAGE> 19

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
2000 2000 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $ 5,718 $ 5,142 $ 4,619 $ 4,187
Cost of revenues
(exclusive of amortization of deferred
stock compensation of $599, $432,
$341, $109, $61 and $29 for the three
months ended, September 30, June 30,
March 31, 2000, December 31, September
30, June 30 and March 31, 1999 and
December 31, 1998, respectively) ............. 1,363 1,260 1,210 1,070
---------- ---------- ---------- ----------
Gross profit .................................... 4,355 3,882 3,409 3,117
Operating expenses:
Research and development
(exclusive of amortization of deferred stock
compensation of $894, $683, $535,
$306, $120 and $102 for the three
months ended, September 30, June 30,
March 31, 2000, December 31, September 30,
June 30 and March 31, 1999 and December 31,
1998, respectively) ........................... 2,035 1,669 1,596 1,437
Sales and marketing
(exclusive of amortization of deferred stock
compensation of $530, $373, $377, $232, $154
and $140 for the three months ended,
September 30, June 30, March 31, 2000,
December 31, September 30, June 30 and
March 31, 1999 and December 31, 1998,
respectively).................................. 1,206 1,481 1,131 972
General and administrative
(exclusive of amortization of deferred stock
compensation of $325, $727, $236, $99, $92 and
$3 for the three months ended, September 30,
June 30, March 31, 2000, December 31,
September 30, June 30 and March 31, 1999 and
December 31, 1998, respectively) .............. 768 488 474 672
Stock-based compensation ...................... 2,348 2,215 1,489 746
---------- ---------- ---------- ----------
Total operating expenses ........................ 6,357 5,853 4,690 3,827
---------- ---------- ---------- ----------
Operating income (loss) ......................... (2,002) (1,971) (1,281) (710)
Interest expense ................................ (37) (60) (84) (74)
Interest income ................................. 638 98 94 20
Other income (expense) .......................... -- -- -- --
---------- ---------- ---------- ----------
Income (loss) before taxes ...................... (1,401) (1,933) (1,271) (764)
Income tax (provision )benefit .................. (87) (93) (83) (30)
---------- ---------- ---------- ----------
Net income (loss) ............................... (1,488) (2,026) (1,354) (794)
Deemed dividend on Series C redeemable
convertible preferred stock ................... -- -- -- (10,104)
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stockholders .................................. $ (1,488) $ (2,026) $ (1,354) $ (10,898)
========== ========== ========== ==========
Basic net income (loss) per share
applicable to common stockholders ............. $ (0.10) $ (0.32) $ (0.24) $ (2.00)
========== ========== ========== ==========
Diluted net income (loss) per share ............. $ (0.10) $ (0.32) $ (0.24) $ (2.00)
========== ========== ========== ==========

AS A PERCENTAGE OF REVENUES:

Revenues ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................ 23.8 24.5 26.2 25.6
---------- ---------- ---------- ----------
Gross profit .................................... 76.2 75.5 73.8 74.4
Operating expenses:
Research and development ...................... 35.6 32.5 34.6 34.3
Sales and marketing ........................... 21.1 28.8 24.5 23.2
General and administrative .................... 13.4 9.5 10.3 16.1
Stock-based compensation ...................... 41.1 43.1 32.2 17.8
---------- ---------- ---------- ----------
Total operating expenses ........................ 111.2 113.9 101.6 91.4
---------- ---------- ---------- ----------
Operating income (loss) ......................... (35.0) (38.4) (27.8) (17.0)
Interest expense ................................ (0.6) (1.2) (1.8) (1.8)
Interest income ................................. 11.2 1.9 2.0 0.5
Other income (expense) .......................... -- -- -- --
---------- ---------- ---------- ----------
Income (loss) before taxes ...................... (24.4) (37.7) (27.6) (18.3)
Income tax provision ............................ (1.5) (1.8) (1.8) (0.7)
---------- ---------- ---------- ----------
Net income (loss) ............................... (25.9)% (39.5)% (29.4)% (19.0)%
========== ========== ========== ==========

QUARTER ENDED
-------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
1999 1999 1999 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $ 3,655 $ 2,459 $ 1,982 $ 1,492
Cost of revenues
(exclusive of amortization of deferred
stock compensation of $599, $432,
$341, $109, $61 and $29 for the three
months ended, September 30, June 30,
March 31, 2000, December 31, September
30, June 30 and March 31, 1999 and
December 31, 1998, respectively) ............. 843 640 579 500
---------- ---------- ---------- ----------
Gross profit .................................... 2,812 1,819 1,403 992
Operating expenses:
Research and development
(exclusive of amortization of deferred stock
compensation of $894, $683, $535,
$306, $120 and $102 for the three
months ended, September 30, June 30,
March 31, 2000, December 31, September 30,
June 30 and March 31, 1999 and December 31,
1998, respectively) ........................... 1,050 694 557 408
Sales and marketing
(exclusive of amortization of deferred stock
compensation of $530, $373, $377, $232, $154
and $140 for the three months ended,
September 30, June 30, March 31, 2000,
December 31, September 30, June 30 and
March 31, 1999 and December 31,
1998, respectively) ........................... 958 709 467 244
General and administrative
(exclusive of amortization of deferred stock
compensation of $325, $727, $236, $99, $92 and
$3 for the three months ended, September 30,
June 30, March 31, 2000, December 31,
September 30, June 30 and March 31, 1999 and
December 31, 1998, respectively) .............. 577 258 217 149
Stock-based compensation ...................... 427 274 -- --
---------- ---------- ---------- ----------
Total operating expenses ........................ 3,012 1,935 1,241 801
---------- ---------- ---------- ----------
Operating income (loss) ......................... (200) (116) 162 191
Interest expense ................................ (64) (12) (9) (7)
Interest income ................................. 11 6 14 11
Other income (expense) .......................... (19) -- -- --
---------- ---------- ---------- ----------
Income (loss) before taxes ...................... (272) (122) 167 195
Income tax (provision )benefit .................. 2 (18) (65) (73)
---------- ---------- ---------- ----------
Net income (loss) ............................... (270) (140) 102 122
Deemed dividend on Series C redeemable
convertible preferred stock ................... -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stockholders .................................. $ (270) $ (140) $ 102 $ 122
========== ========== ========== ==========
Basic net income (loss) per share
applicable to common stockholders ............. $ (0.05) $ (0.03) $ 0.02 $ 0.03
========== ========== ========== ==========
Diluted net income (loss) per share ............. $ (0.05) $ (0.03) $ 0.01 $ 0.01
========== ========== ========== ==========

AS A PERCENTAGE OF REVENUES:

Revenues ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................ 23.1 26.0 29.2 33.5
---------- ---------- ---------- ----------
Gross profit .................................... 76.9 74.0 70.8 66.5
Operating expenses:
Research and development ...................... 28.7 28.2 28.1 27.3
Sales and marketing ........................... 26.2 28.8 23.6 16.4
General and administrative .................... 15.8 10.5 10.9 10.0
Stock-based compensation ...................... 11.7 11.2 -- --
---------- ---------- ---------- ----------
Total operating expenses ........................ 82.4 78.7 62.6 53.7
---------- ---------- ---------- ----------
Operating income (loss) ......................... (5.5) (4.7) 8.2 12.8
Interest expense ................................ (1.8) (0.5) (0.5) (0.4)
Interest income ................................. 0.3 0.2 0.7 0.7
Other income (expense) .......................... (0.5) -- -- --
---------- ---------- ---------- ----------
Income (loss) before taxes ...................... (7.5) (5.0) 8.4 13.1
Income tax provision ............................ 0.1 (0.7) (3.3) (4.9)
---------- ---------- ---------- ----------
Net income (loss) ............................... (7.4)% (5.7)% 5.1% 8.2%
========== ========== ========== ==========
</TABLE>

19
<PAGE> 20

Gross profit as a percentage of revenues increased from 74.4% for the
quarter ended December 31, 1999 to 76.2% for the quarter ended September 30,
2000. This increase in gross profit as a percentage of revenues over the six
quarters presented was primarily due to increased licensing of higher margin
embedded memory technologies to fabless semiconductor companies that required no
additional customization.

Over the last four quarters, research and development expenses increased
from $1.4 million to $2.0 million as we developed new technologies and added
personnel. Sales and marketing expenses have grown over this period from
$972,000 to $1.2 million, while general and administrative expenses grew from
$672,000 to $768,000. General and administrative expenses were higher in the
first quarter of 2000 due to expenses of litigation that was settled in the
first quarter of 2000. Since the quarter ended June 30, 1999, we have recorded
amortization of stock-based compensation from the issuance of stock options. We
anticipate recording additional amortization of stock-based compensation in
future periods.

We have used all of our net operating loss carryforwards as we have
achieved eight successive quarters of profitability, excluding stock-based
compensation charges. We expect to pay income taxes on a going forward basis.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2000, we had $58.6 million in cash and cash
equivalents, an increase of $57.1 million from cash held at September 30, 1999.
The increase in cash balances at September 30, 2000 was primarily due to our
receipt of $9.8 million of cash proceeds from the sale of Series C redeemable
convertible preferred stock in the first quarter of fiscal 2000 and $50.7
million of cash proceeds from our August 2000 initial public offering. As of
September 30, 2000, we had an accumulated deficit of $17.2 million. We financed
our operating losses for fiscal 1998 and 1999 through the issuance of notes,
borrowing under capital leases and a line of credit, and the sale of preferred
stock.

During the fourth quarter of 2000, our revolving line of credit with
Silicon Valley Bank that allowed us to borrow up to $3.0 million expired. We
still have a line of credit of $1.1 million with an equipment leasing company.
At September 30, 2000, we had utilized $464,000 of this line and had an
available balance of $636,000. The outstanding obligations under the equipment
line are due over a three-year period. The interest rate on these borrowings is
variable and dependent upon market conditions at the time a new lease obligation
is executed.

Net cash provided by operating activities was $372,000 and $16,000 for
fiscal 2000 and 1999, respectively. In fiscal 1998, net cash used in operating
activities was $1.0 million. The generation of cash in 2000 is primarily due to
depreciation of $1.5 million and the non-cash impact of the amortization of $6.8
million of stock-based compensation. Continued increases in accounts receivable
and deferred tax assets and the reduction of income taxes payable partially
offset the net cash provided by operations. The generation of cash for 1999 was
due to depreciation of $507,000, the amortization of stock-based compensation of
$701,000 and increases in accrued payroll and related expenses, accrued expenses
related to software purchases and deferred revenues totaling $3.3 million. A
higher accounts receivable balance of $3.6 million, a result of a growing
customer base, offset the increase in cash for 1999. The usage of cash in fiscal
1998 was due to a net loss of $851,000 and by unfavorable changes in operating
assets and liabilities, primarily accounts receivable due to revenue growth of
our embedded memory technologies.

Net cash used for investing activities was $3.0 million, $1.4 million
and $358,000 for fiscal 2000, 1999 and 1998, respectively. The increase in
investing activities during each of these periods was due to acquisitions of
property and equipment, primarily computer software and hardware. A portion of
the fixed asset acquisitions was financed under equipment financing arrangements
in 1998. We intend to purchase approximately $3.5 million of additional capital
assets, primarily computer equipment and software, during fiscal 2001.

Net cash provided by financing activities was $59.7 million, $945,000
and $3.3 million and for fiscal 2000, 1999 and 1998, respectively. Net cash
provided by financing activities in 2000 reflects our receipt of $9.8 million in
cash proceeds from the issuance of Series C redeemable convertible preferred
stock and $50.7 million in cash proceeds from the initial public offering. Net
cash provided by financing activities in 1999 reflects borrowings under our
accounts receivable revolving line of credit of $1.0 million. Net cash provided
by financing activities in 1998 reflects the issuance of preferred stock for an
aggregate purchase price of $2.5 million and the issuance of convertible notes
in the aggregate principal amount of $772,000.

20
<PAGE> 21

Our future capital requirements will depend on many factors, including
the rate of sales growth, market acceptance of our existing and new
technologies, the amount and timing of research and development expenditures,
the timing of the introduction of new technologies, expansion of sales and
marketing efforts, potential acquisitions and working capital, primarily
accounts receivable. There can be no assurance that additional equity or debt
financing, if required, will be available on satisfactory terms. We believe that
the Company's current capital resources and cash generated from operations will
be sufficient to meet our needs for approximately the next two years, although
we may seek to raise additional capital during that period. However, there can
be no assurance that we will not require additional financing beyond this time
frame. Our capital and operating requirements will depend on many factors,
including the levels at which we maintain accounts receivable and increased
spending for operating expenses. Our forecast period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary materially.

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. Our
future success depends on our ability to develop new technologies, to adapt our
existing intellectual property to satisfy the requirements of new processes and
to introduce new products to the marketplace in a timely manner. 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. If our development efforts are not successful or are significantly
delayed, we may be unable to attract or retain customers.

Our ability to develop 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.
Research and development requires a significant expense and resource commitment.
Since we have a limited operating history and have only generated limited
profits, 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. In addition, since new technologies are being rapidly
introduced, the industry may not accept the enhancements or new generations of
the products that we develop and these new products may not generate revenues in
excess of the costs of development.

21
<PAGE> 22

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND ANY FAILURE TO
MEET FINANCIAL EXPECTATIONS FOR ANY FISCAL QUARTER MAY DISAPPOINT SECURITIES
ANALYSTS AND INVESTORS AND COULD CAUSE OUR STOCK PRICE TO DECLINE.

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

Factors that could cause our revenues and operating results to vary from
quarter to quarter include:

- large orders unevenly spaced over time;

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

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

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

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

- the cyclical nature of the semiconductor industry; and

- changes in development schedules, research and development
expenditure levels and product support by us and semiconductor
companies.

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 may cause our
operating results to be below market analysts' expectations in some future
quarters, which could cause the market price of our stock to decline.

IF WE ARE UNABLE TO MAINTAIN EXISTING RELATIONSHIPS AND DEVELOP NEW
RELATIONSHIPS WITH THIRD-PARTY SEMICONDUCTOR MANUFACTURERS, OR FOUNDRIES, WE
WILL BE UNABLE TO VERIFY OUR TECHNOLOGIES ON THEIR PROCESSES AND LICENSE OUR
INTELLECTUAL PROPERTY TO THEIR CUSTOMERS.

Our ability to verify our technologies for new manufacturing processes
depends on entering into development agreements with third-party foundries to
provide us with access to these processes. In addition, we rely on third-party
foundries to manufacture our silicon test chips and to provide referrals to
their customer base. We currently have agreements with Taiwan Semiconductor
Manufacturing Company, or TSMC, United Microelectronics Corporation, or UMC, and
Chartered Semiconductor Manufacturing, or Chartered. If we 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 SEMICONDUCTOR COMPANIES DO NOT ADOPT OUR INTELLECTUAL PROPERTY AND DEMAND FOR
THEIR PRODUCTS DOES NOT CONTINUE TO INCREASE, OUR REVENUES WILL DECLINE.

Our continued success depends on the adoption and continued use of our
intellectual property by semiconductor companies and an increasing demand for
products requiring complex semiconductors and embedded memories, such as
cellular and digital phones, pagers, digital cameras, DVD players, switches and
modems. The markets for third-party semiconductor intellectual property and
embedded memories have only recently begun to emerge. Our ability to achieve
sustained revenue growth and profitability in the future will depend on the
continued development of these markets and, to a large extent, on the demand for
complex semiconductors. However, 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. These types of fluctuations in the semiconductor industry may cause
us

22
<PAGE> 23

to experience substantial period-to-period fluctuations in our operating
results. Because of the cyclical nature of the semiconductor industry and the
recent emergence of the third-party semiconductor intellectual property and
embedded memory markets, these markets may not continue to develop or grow at a
rate sufficient to support our business. A downturn or slower than expected
growth in the semiconductor industry, a reduced number of design starts,
tightening of customers' operating budgets or continued consolidation among our
customers may seriously harm our revenues and profitability.

IF WE ARE UNABLE TO CONTINUE TO ESTABLISH RELATIONSHIPS WITH SEMICONDUCTOR
COMPANIES TO LICENSE OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL BE HARMED.

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. If we
are unable to maintain and establish these relationships, we will be unable to
generate license fees and our revenues will decrease. We do not obligate any of
our licensees to license new or future generations of our intellectual property.

IF WE ARE UNSUCCESSFUL IN INCREASING OUR ROYALTY-BASED REVENUES, OUR REVENUES
AND PROFITABILITY MAY NOT BE AS LARGE AS WE ANTICIPATE.

We have historically generated revenues almost entirely from license
fees. In addition, 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 megabit and CAM
technologies, in addition to collecting royalties from third-party semiconductor
foundries, we intend to increase our royalty base by collecting royalties
directly from our integrated device manufacturer and fabless customers. Even if
we are successful obtaining these agreements, they may not have the anticipated
benefits. For the year ended September 30, 2000, we recorded approximately
$88,000 of royalty revenues. The amount of royalties we receive in the future
may not be significant. In addition, many factors beyond our control, such as
fluctuating sales volumes of products that incorporate our intellectual
property, commercial acceptance of these products, accuracy of revenue reports
and difficulties in the royalty collection process, limit our ability to
forecast our royalty revenues.

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

We have been dependent on a relatively small number of customers for a
substantial portion of our annual revenues in each fiscal year, although the
customers comprising this group have changed from time to time. In fiscal 2000,
no single customer generated more than 10% of our revenues. In fiscal 1999, ATI
Technologies, MMC Networks, National Semiconductor and Toshiba each generated
between 10% and 18% of our revenues for a total of 56% of our revenues. In
fiscal 1998, MMC Networks, National Semiconductor, PMC-Sierra, Silicon Dynamics
and TeraLogic each generated more than 10% of our revenues for a total of 62% 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 significant customer. As
a result of this customer concentration, we could experience a dramatic
reduction in our revenues if we lose one or more of our major customers and are
unable to replace them. There are a relatively limited number of fabless
semiconductor companies and integrated device manufacturers to which we can
license our intellectual property. As a result of this limited universe of
potential customers, our future sales depend on these manufacturers continuing
to rely on third-party semiconductor intellectual property and adopting our
intellectual property for future product generations.

23
<PAGE> 24

THE MARKET FOR EMBEDDED MEMORY IS HIGHLY COMPETITIVE, AND WE MAY LOSE MARKET
SHARE TO LARGER COMPETITORS WITH GREATER RESOURCES AND TO COMPANIES THAT DEVELOP
THEIR OWN MEMORY TECHNOLOGIES USING INTERNAL DESIGN TEAMS.

We face competition from both existing suppliers of embedded memories
such as Artisan Components and Avant!, as well as new suppliers that may enter
the market. We also compete with the internal design teams of large, integrated
device manufacturers. Many of these internal design teams have substantial
programming and design resources and are part of larger organizations with
substantial financial and marketing resources. These internal teams may develop
technologies that compete directly with our technologies or may actively seek to
license their own technologies to third parties.

Many of our existing competitors have longer operating histories,
greater brand recognition and larger customer bases, as well as greater
financial and marketing resources, than we do. This may allow them to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. It may also allow them to devote greater resources than we can to
the development and promotion of their products.

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. If we are unable to increase our sales force with qualified
employees, we will be unable to expand our business. Our employees are "at will"
and may leave our employment at any time. Hiring qualified technical, sales and
management personnel is difficult due to the limited number of qualified
professionals and the intense competition in our industry for these types of
employees. We have in the past experienced difficulty in recruiting and
retaining qualified technical and sales personnel and believe that our employees
are recruited aggressively by our competitors and start-up companies. Under
certain circumstances, start-up companies can offer more attractive stock option
packages than we offer. As a result, we may experience significant employee
turnover. Failure to attract and retain personnel, particularly sales and
technical personnel, would make it difficult for us to develop and market our
technologies.

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

WE MAY BE UNABLE TO DELIVER OUR CUSTOMIZED MEMORY PRODUCTS IN THE TIME-FRAME
DEMANDED BY OUR CUSTOMERS, WHICH COULD DAMAGE OUR REPUTATION AND FUTURE SALES.

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

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.

From January 1999 to September 30, 2000, we grew from 38 to 138
full-time employees. 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,

24
<PAGE> 25

together with maintaining effective cost controls. Since our growth has occurred
over such a limited time period, we do not have sufficient experience managing
the current size of our business to be able to fully assess our ability to
continue to manage its growth in the future. Our inability to manage any future
growth effectively would be harmful to our revenues and profitability.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

We may attempt to acquire businesses or technologies that we believe are
a strategic fit with our business. We believe that future acquisitions may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Since we will not be able to accurately predict
these difficulties and expenditures, it is possible that these costs may
outweigh the value we realize from a future acquisition. Future acquisitions
could result in issuances of equity securities that would reduce our
stockholders' ownership interest, the incurrence of debt, contingent liabilities
or amortization of expenses related to 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 similar
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. In addition, the laws of foreign countries may not adequately
protect our intellectual property as well as the laws of the United States.

We use licensing agreements and employee and third-party 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. These royalty or license
agreements may result in significant expenditures. In addition, 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.

25
<PAGE> 26

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

Sales to customers located outside the United States accounted for 50%
of our revenues in fiscal 2000, 44% of our revenues in fiscal 1999 and 48% of
our revenues in fiscal 1998. We anticipate that sales to customers located
outside the United States will increase and will continue to represent a
significant portion of our total revenues in future periods. In addition, most
of our customers that do not own their own fabrication plants rely on
third-party foundries that may be outside of the United States. Accordingly, our
operations and revenues are subject to a number of risks associated with foreign
commerce, including the following:

- managing foreign distributors;

- staffing and managing foreign branch offices;

- political and economic instability;

- foreign currency exchange fluctuations;

- changes in tax laws and tariffs;

- 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 sales to international
customers, as well as those domestic customers that use foreign fabrication
plants, may decrease.

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," and SOP
98-4, "Deferral of the Effective Date of a Provision of 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." SOP
98-9 amends SOP 98-4 to extend the deferral of the application of certain
passages of SOP 97-2 with respect to the fair value of elements in
multiple-element arrangements. 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.

26
<PAGE> 27

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS.

We have limited exposure to financial market risks, including changes in
foreign currency exchange rates and interest rates. A significant portion of our
customers are located in Asia, Canada and Europe. However, to date our exposure
to foreign currency exchange fluctuations has been minimal because our license
agreements provide for payment in U.S. dollars.

Our interest income and interest expense are sensitive to changes in the
general level of U.S. interest rates. An increase or decrease in interest rates
would not significantly increase or decrease interest income on cash balances
due to our cash being primarily invested in commercial paper. Due to the
short-term nature of our investments and the immaterial amount of capital lease
obligations, we believe that there is no material exposure to interest rate
fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

27
<PAGE> 28

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Virage Logic Corporation

We have audited the accompanying consolidated balance sheets of Virage
Logic Corporation as of September 30, 2000 and 1999, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity (deficit), and cash flows for each of the two years in
the period ended September 30, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Virage Logic Corporation at September 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

San Jose, California
October 30, 2000

28
<PAGE> 29

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
and Stockholders of
Virage Logic Corporation

We have audited the accompanying consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows of Virage Logic Corporation for the year ended September 30, 1998.
Our audit also included the financial statement schedule listed in the Index at
Item 14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of the
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows of Virage Logic Corporation for the year ended
September 30, 1998, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

/s/ MOHLER, NIXON & WILLIAMS
Accountancy Corporation

Campbell, California
February 18, 2000

29
<PAGE> 30

VIRAGE LOGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 58,596 $ 1,513
Accounts receivable, net ............................................................... 6,123 4,263
Costs in excess of related billings on uncompleted contracts ........................... 264 332
Prepaid expenses and other ............................................................. 936 719
Taxes receivable ....................................................................... 292 --
-------- --------
Total current assets ................................................................. 66,211 6,827
Property, equipment and leasehold improvements, net ...................................... 4,163 1,963
Intangible assets, net of amortization of $162 at September 30, 2000 ..................... 486 --
Deferred tax assets ...................................................................... 846 260
Other long term assets ................................................................... 415 --
-------- --------
Total assets ......................................................................... $ 72,121 $ 9,050
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 424 $ 261
Accrued payroll and related expenses ................................................... 1,204 605
Accrued expenses ....................................................................... 1,210 1,069
Credit line payable .................................................................... -- 1,000
Current portion of capital lease obligations ........................................... 283 179
Deferred revenue ....................................................................... 1,805 1,835
Income taxes payable ................................................................... -- 324
-------- --------
Total current liabilities ............................................................ 4,926 5,273
Long-term portion of capital lease obligations ........................................... 273 454
-------- --------
Total liabilities .................................................................... 5,199 5,727
Stockholders' equity:
Convertible preferred stock, $.001 par value 3,711,063 shares
authorized at September 30, 1999
Series A:
Designated shares -- 1,531,063
Issued and outstanding shares -- 1,531,062 at September 30, 1999 ................... -- 2
Series B:
Designated shares -- 2,180,000 at September 30, 1999
Issued and outstanding shares -- 1,448,037 at September 30, 1999 ................... -- 1
Common stock, $.001 par value:
Authorized shares -- 150,000,000 at September 30, 2000 and
30,000,000 at September 30, 1999,
Issued and outstanding shares -- 19,909,501 and 5,668,875
at September 30, 2000 and 1999, respectively ....................................... 20 6
Additional paid-in capital ............................................................. 95,703 6,999
Notes receivable from stockholders ..................................................... (1,600) (79)
Deferred stock-based compensation ...................................................... (10,030) (2,201)
Accumulated deficit .................................................................... (17,171) (1,405)
-------- --------
Total stockholders' equity ........................................................... 66,922 3,323
-------- --------
Total liabilities and stockholders' equity ........................................... $ 72,121 $ 9,050
======== ========
</TABLE>

See accompanying notes.

30
<PAGE> 31

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues ................................................... $ 19,666 $ 9,589 $ 1,970
Cost of revenues (exclusive of
amortization of deferred stock
compensation of $1,307 and $90
in 2000 and 1999, respectively) .......................... 4,903 2,562 853
-------- -------- --------
Gross profit ............................................... 14,763 7,027 1,117
Operating expenses:
Research and development (exclusive of
amortization of deferred stock
compensation of $2,408 and $222 in
2000 and 1999, respectively) ........................... 6,737 2,709 924
Sales and marketing (exclusive of
amortization of deferred stock
compensation of $1,393 and $294
in 2000 and 1999, respectively) ........................ 4,790 2,378 622
General and administrative (exclusive
of amortization of deferred stock
compensation of $1,690 and $95
in 2000 and 1999, respectively) ........................ 2,402 1,202 411
Stock-based compensation ................................. 6,798 701 --
-------- -------- --------
Total operating expenses ............................... 20,727 6,990 1,957
-------- -------- --------
Operating income (loss) .................................... (5,964) 37 (840)
Interest income ............................................ 850 42 16
Interest expense ........................................... (255) (91) (27)
Other income (expense) ..................................... -- (20) --
-------- -------- --------
Loss before taxes .......................................... (5,369) (32) (851)
Income tax provision ....................................... (293) (154) --
-------- -------- --------
Net loss ................................................... (5,662) (186) (851)
Deemed dividend on Series C redeemable
convertible preferred stock ............................. (10,104) -- --
-------- -------- --------

Net loss applicable to common stockholders ................. $(15,766) $ (186) $ (851)
======== ======== ========

Basic and diluted net loss per share applicable to
common stockholders ...................................... $ (1.98) $ (0.04) $ (0.19)
======== ======== ========

Shares used in computing basic and diluted
net loss per share ...................................... 7,952 5,301 4,379
======== ======== ========
</TABLE>

See accompanying notes.

31
<PAGE> 32

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SERIES C
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 .................... -- $ -- 1,356,424 $ 1
Issuance of common stock for
cash and services ........................... -- -- -- --
Exercise of stock options
by employees ................................ -- -- -- --
Issuance of preferred
stock for debt conversion
and/or cash, net of
issuance costs of $51 ....................... -- -- 123,507 1
Issuance of preferred stock
for services ................................ -- -- 51,131 --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1998 .................... -- -- 1,531,062 2
Exercise of stock options
by employees ................................ -- -- -- --
Issuance of warrants to
third parties for services .................. -- -- -- --
Repayment from stockholder .................... -- -- -- --
Deferred stock-based
compensation ................................ -- -- -- --
Amortization of stock-based
compensation ................................ -- -- -- --
Net income .................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1999 .................... -- -- 1,531,062 2
Issuance of redeemable
convertible preferred stock ................. 5,455,255 10,104 -- --
Exercise of stock options by
employees, net of repurchases ............... -- -- -- --
Stock options exercised via
note receivable ............................. -- -- -- --
Issuance of warrants to
third parties for services
and assets .................................. -- -- -- --
Noncash deemed dividends on
Series C redeemable
convertible preferred stock ................. -- -- -- --
Deferred stock-based
compensation ................................ -- -- -- --
Net proceeds from initial
public offering ............................. -- -- -- --
Conversion of preferred
stock upon IPO .............................. (5,455,255) (10,104) (1,531,062) (2)
Amortization of
stock-based compensation .................... -- -- -- --
Tax benefit on exercise of
non-qualified stock
options under stock plans ................... -- -- -- --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 2000 .................... -- $ -- -- $ --
========== ========== ========== ==========

SERIES B CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 .................... -- $ -- 5,292,000 $ 5
Issuance of common stock for
cash and services ........................... -- -- 300,000 --
Exercise of stock options
by employees ................................ -- -- 26,250 --
Issuance of preferred
stock for debt conversion
and/or cash, net of
issuance costs of $51 ....................... 1,448,037 1 -- --
Issuance of preferred stock
for services ................................ -- -- -- --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1998 .................... 1,448,037 1 5,618,250 6
Exercise of stock options
by employees ................................ -- -- 50,625 --
Issuance of warrants to
third parties for services .................. -- -- -- --
Repayment from stockholder .................... -- -- -- --
Deferred stock-based
compensation ................................ -- -- -- --
Amortization of stock-based
compensation ................................ -- -- -- --
Net income .................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1999 .................... 1,448,037 1 5,668,875 6
Issuance of redeemable
convertible preferred stock ................. -- -- -- --
Exercise of stock options by
employees, net of repurchases ............... -- -- 1,241,125 1
Stock options exercised via
note receivable ............................. -- -- 1,087,500 1
Issuance of warrants to
third parties for services
and assets .................................. -- -- -- --
Noncash deemed dividends on
Series C redeemable
convertible preferred stock ................. -- -- -- --
Deferred stock-based
compensation ................................ -- -- -- --
Net proceeds from initial
public offering ............................. -- -- 4,715,726 5
Conversion of preferred
stock upon IPO .............................. (1,448,037) (1) 7,196,275 7
Amortization of
stock-based compensation .................... -- -- -- --
Tax benefit on exercise of
non-qualified stock
options under stock plans ................... -- -- -- --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 2000 .................... -- $ -- 19,909,501 $ 20
========== ========== ========== ==========

<CAPTION>
NOTES
ADDITIONAL RECEIVABLE RECEIVABLE DEFERRED
PAID-IN FROM FROM STOCK-BASED
CAPITAL STOCKHOLDERS STOCKHOLDER COMPENSATION
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 .................... $ 425 $ (79) $ -- $ --
Issuance of common stock for
cash and services ........................... 59 -- -- --
Exercise of stock options
by employees ................................ 1 -- -- --
Issuance of preferred
stock for debt conversion
and/or cash, net of
issuance costs of $51 ....................... 3,546 -- (50) --
Issuance of preferred stock
for services ................................ 51 -- -- --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1998 .................... 4,082 (79) (50) --
Exercise of stock options
by employees ................................ 4 -- -- --
Issuance of warrants to
third parties for services .................. 11 -- -- --
Repayment from stockholder .................... -- -- 50 --
Deferred stock-based
compensation ................................ 2,902 -- -- (2,902)
Amortization of stock-based
compensation ................................ -- -- -- 701
Net income .................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 1999 .................... 6,999 (79) -- (2,201)
Issuance of redeemable
convertible preferred stock ................. 353 -- -- --
Exercise of stock options by
employees, net of repurchases ............... 493 -- -- --
Stock options exercised via
note receivable ............................. 1,520 (1,521) -- --
Issuance of warrants to
third parties for services
and assets .................................. 731 -- -- --
Noncash deemed dividends on
Series C redeemable
convertible preferred stock ................. 10,104 -- -- --
Deferred stock-based
compensation ................................ 14,627 -- -- (14,627)
Net proceeds from initial
public offering ............................. 50,654 -- -- --
Conversion of preferred
stock upon IPO .............................. 10,100 -- -- --
Amortization of
stock-based compensation .................... -- -- -- 6,798
Tax benefit on exercise of
non-qualified stock
options under stock plans ................... 122 -- -- --
Net loss ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at September 30, 2000 .................... $ 95,703 $ (1,600) $ -- $ (10,030)
========== ========== ========== ==========

TOTAL
ACCUMULATED STOCKHOLDER'S
DEFICIT EQUITY (DEFICIT)
----------- ----------------
<S> <C> <C>
Balance at September 30, 1997 .................... $ (367) $ (15)
Issuance of common stock for
cash and services ........................... -- 59
Exercise of stock options
by employees ................................ -- 1
Issuance of preferred
stock for debt conversion
and/or cash, net of
issuance costs of $51 ....................... -- 3,498
Issuance of preferred stock
for services ................................ -- 51
Net loss ...................................... (851) (851)
---------- ----------
Balance at September 30, 1998 .................... (1,219) 2,743
Exercise of stock options
by employees ................................ -- 4
Issuance of warrants to
third parties for services .................. -- 11
Repayment from stockholder .................... -- 50
Deferred stock-based
compensation ................................ -- --
Amortization of stock-based
compensation ................................ -- 701
Net income .................................... (186) (186)
---------- ----------
Balance at September 30, 1999 .................... (1,405) 3,323
Issuance of redeemable
convertible preferred stock ................. -- 353
Exercise of stock options by
employees, net of repurchases ............... -- 494
Stock options exercised via
note receivable ............................. -- --
Issuance of warrants to
third parties for services
and assets .................................. -- 731
Noncash deemed dividends on
Series C redeemable
convertible preferred stock ................. (10,104) --
Deferred stock-based
compensation ................................ -- --
Net proceeds from initial
public offering ............................. -- 50,659
Conversion of preferred
stock upon IPO .............................. -- 10,104
Amortization of
stock-based compensation .................... -- 6,798
Tax benefit on exercise of
non-qualified stock
options under stock plans ................... -- 122
Net loss ...................................... (5,662) (5,662)
---------- ----------
Balance at September 30, 2000 .................... $ (17,171) $ 66,922
========== ==========
</TABLE>

See accompanying notes.

32
<PAGE> 33

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES

Net loss ........................................................ $ (5,662) $ (186) $ (851)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 1,503 507 55
Loss on disposal of property and equipment .................... -- 19 --
Amortization of intangible assets ............................. 162 -- 133
Issuance of warrants for services ............................. 308 11 --
Amortization of stock-based compensation ...................... 6,798 701 --
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (1,860) (3,594) (667)
Prepaid expenses ............................................ (112) (534) --
Costs in excess of billings on uncompleted
contracts ................................................. 68 (332) --
Taxes receivable ............................................ (171) -- --
Other current assets ........................................ -- -- (182)
Deferred tax assets ......................................... (586) (260) --
Other long term assets ...................................... (415) -- --
Accounts payable ............................................ 163 58 155
Accrued payroll and related expenses ........................ 599 466 112
Accrued expenses ............................................ (69) 1,036 164
Deferred revenue ............................................ (30) 1,800 35
Income taxes payable ........................................ (324) 324 --
-------- -------- --------
Net cash provided by (used in) operating
activities .................................................... 372 16 (1,046)
INVESTING ACTIVITIES
Purchase of property, plant and equipment ....................... (2,986) (1,420) (358)
-------- -------- --------
Net cash used in investing activities ........................... (2,986) (1,420) (358)
FINANCING ACTIVITIES
Proceeds from issuance of notes ................................. -- -- 772
Proceeds from issuance of redeemable convertible
preferred stock ............................................... 9,819 -- --
Net proceeds from issuance of preferred and common
stock ......................................................... 51,152 4 2,527
Repayment from stockholder ...................................... -- 50 --
Borrowings (repayments) under line of credit .................... (1,000) 1,000 --
Principal payments on capital lease obligations ................. (274) (109) (10)
-------- -------- --------
Net cash provided by financing activities ....................... 59,697 945 3,289
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................................... 57,083 (459) 1,885
Cash and cash equivalents at beginning of period ................ 1,513 1,972 87
-------- -------- --------
Cash and cash equivalents at end of period ...................... $ 58,596 $ 1,513 $ 1,972
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest .......................................... $ 165 $ 65 $ 19
Cash paid for income taxes ...................................... $ 1,357 $ 35 $ --
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred for the purchase
of equipment .................................................. $ 197 $ 631 $ 88
Warrants issued for property, plant and equipment ............... $ 422 $ -- $ --
</TABLE>

See accompanying notes.

33
<PAGE> 34
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING 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 semiconductor intellectual property, or SIP, for the memory
elements of complex electronic systems contained on a single silicon chip. The
semiconductor intellectual property consists of designs for memory elements of a
system-on-a-chip, commonly referred to as memories, software systems called
compilers that allow chip designers to configure memories into different sizes
and shapes on a single chip and software tools that can be used to build memory
compilers. The Company also provides custom memory design services.

Initial Public Offering

On August 4, 2000 the Company closed its initial public offering of
3,750,000 shares of common stock at a public offering price of $12.00 per share
and a simultaneous private placement of 403,226 shares of common stock at a
price of $11.16 per share. On August 28, 2000, the Company sold an additional
562,500 shares of common stock upon the underwriters' exercise of their
over-allotment option. Through the public offering and simultaneous private
placement, the Company received proceeds of approximately $51.4 million after
deducting underwriting discounts and commissions and other offering expenses.
Effective with the closing of the initial public offering on August 4, 2000, all
of the outstanding preferred stock automatically converted into 7,196,275 shares
of common stock.

Reverse Stock Split and Capitalization Change

In April 2000, the board of directors authorized a one-for-two reverse stock
split of the Company's common stock. The related common stock and per-share data
in the accompanying financial statements has been retroactively restated to
reflect the reverse stock split.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Virage Logic International (VLI), a
California corporation. Currently, VLI conducts international operations in
India and the Republic of Armenia. All intercompany accounts and transactions
have been eliminated in the accompanying consolidated financial statements. To
date, operations in India and the Republic of Armenia have been immaterial.

Foreign Currency Transactions

Foreign currency transactions at foreign operations are measured using the
U.S. dollar as the functional currency. Accordingly, monetary accounts
(principally cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities) are remeasured using the foreign exchange rate at the
balance sheet date. Accounts related to operations and non-monetary balance
sheet items are remeasured at the rate in effect at the date of the transaction.
The effects of foreign currency remeasurement are reported in current operations
and were immaterial for all periods presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.

34
<PAGE> 35
Revenue Recognition

The Company's revenues are derived from licenses for its semiconductor
intellectual property, which includes memories, standard and custom memory
compilers and software development tools. Standard memory compilers and software
development tools include a bundled license of software and related maintenance.
Custom memory compilers typically include a bundled license of software,
maintenance and customization of the software for the customer's specific
applications.

For each arrangement, the Company determines whether persuasive evidence of
an agreement exists, delivery of the product has occurred, there are no
significant remaining company obligations, the fee is fixed or determinable, and
collectibility is probable. If any of these criteria are not met, revenue
recognition is deferred until such time as the criteria are met.

For standard memory compiler arrangements that consist solely of a license
and maintenance, the Company recognizes the maintenance and the license fee
together upon delivery of the software in accordance with paragraph 59 of SOP
97-2, "Software Revenue Recognition." Accordingly, the Company does not defer
maintenance revenues over the life of the license arrangement but rather accrues
the estimated cost of support at the time license revenues are recognized. This
revenue recognition methodology is based on the following set of circumstances:

a. The maintenance period is one year and is included with the license fee.

b. These standard memory compiler products are not support intensive, and
support costs to date have not been significant.

c. Maintenance includes upgrades or modifications specifically related to
the foundry process, which are rare and to date only one such upgrade
has been provided.

Software development tool arrangements include either a perpetual license
with telephone support or a term license with telephone support and the rights
to unspecified upgrades on a when-and-if available basis. The Company recognizes
the maintenance (telephone support) and the license fees together for perpetual
licenses upon the delivery of the software in accordance with paragraph 59 of
SOP 97-2 and accordingly accrues the estimated cost of support. For term
licenses bundled with maintenance (telephone support and the rights to
unspecified upgrades on a when-and-if available basis), the Company does not
have vendor-specific objective evidence of fair value for maintenance because
maintenance is not sold separately and accordingly recognizes the entire
arrangement fee over the maintenance period.

Revenues from custom memory compilers involve customization to the
functionality of the software and are recognized using contract accounting over
the period that services are performed under the percentage-of-completion
method. For all license and service agreements accounted for using the
percentage-of-completion method, the Company determines progress-to-completion
using input measures based on labor hours incurred. If a software contract under
the percentage of completion method includes a discrete element that meets
segmentation criteria of SOP 81-1, "Accounting for Performance of Construction
and Certain Production Type Contracts", the method chosen to determine the
timing of revenue recognition may be different for each discrete element. Any
off-the-shelf software included in the contract that meets the segmentation
criteria of SOP 81-1 would be excluded from the measurement of
progress-to-completion. A provision for estimated losses on engagements is made
in the period in which the loss becomes probable and can be reasonably
estimated. Costs incurred in advance of billings are recorded as costs in excess
of related billings on uncompleted contracts. The Company does not apply the
percentage-of-completion method in circumstances where customer acceptance is
necessary.

Customer billing occurs in accordance with contract terms. Customer advances
and amounts billed to customers in excess of revenue recognized are recorded as
deferred revenues.

35
<PAGE> 36
Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are invested in money market funds and commercial paper with a major
financial institution.

The Company has classified all investments as available-for-sale.
Available-for-sale securities are carried at fair market value based on quoted
market prices with unrealized gains and losses, net of tax, reported in
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in
interest income.

The Company invests its excess cash in high-quality, short-term debt
instruments, all of which have an original maturity of three months or less. At
September 30, 2000 and 1999, cost approximated fair value for all cash
equivalents. Interest and dividends on the investments are included in interest
income.

Unrealized holding gains and losses on available-for-sale securities at
September 30, 2000 and 1999 and gross realized gains and losses on sales of
available-for-sale securities for the years ended September 30, 2000, 1999 and
1998 were not significant.

Cash equivalents as of September 30, 2000 and 1999 consisted of the
following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
2000 1999
------- ------
(IN THOUSANDS)
<S> <C> <C>
Money market funds ............................. $53,534 $ 561
Commercial paper ............................... 4,968 747
------- ------
Total available-for-sale securities ............ $58,502 $1,308
======= ======
</TABLE>

Fair Value of Other Financial Instruments

The carrying values and estimated fair values of the Company's other
financial instruments are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Line of credit ............... -- -- $1,000 $1,000
Capital leases ............... $556 $556 $ 633 $ 633
</TABLE>

The fair value of the Company's obligations under lines of credit and
capital leases are based on current rates offered to the Company for similar
debt instruments of the same remaining maturities.

Property and Equipment

Property and equipment are recorded at cost net of accumulated depreciation
and amortization. Depreciation and amortization are provided on a straight-line
basis over the useful lives of the assets, generally the shorter of the lease
term or three years.

Accounting for Internal-Use Computer Software

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal-use software. The
Company's accounting policy with respect to accounting for computer software
developed or obtained for internal use is consistent with SOP 98-1. The Company
has purchased and capitalized approximately $2.3 million and $1.4 million for
the years ended September 30, 2000 and 1999, respectively, of internal use
software. Software is amortized for financial reporting purposes using the
straight-line method over the estimated useful life of three years.

36
<PAGE> 37
Intangible Assets

The intangible asset is being amortized on a straight-line basis over their
estimated useful life of three years.

Accounting for Stock Options

The Company has elected to follow 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 because, as
discussed in Note 4, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), requires the use of option valuation models that were
not developed for use in valuing employee stock options. 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. As permitted under SFAS 123, the Company has elected to
follow APB Opinion No. 25 and related interpretations in accounting for
stock-based awards to employees and to adopt the "disclosure only" alternative
described in SFAS 123.

Stock options or warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." The fair value of
such options or warrants is determined using the Black-Scholes model.

Business Risks and Concentration of Credit Risk

The Company operates in the competitive semiconductor industry, which has
been characterized by rapid technological change, short product life cycles, and
cyclical market patterns. Significant technological changes in the industry
could adversely affect operating results.

The Company markets and sells its technology to a broad base of customers,
which are primarily located in the United States, Canada, Asia and Europe. The
Company performs ongoing credit evaluations of its customers' financial
condition, and generally, no collateral is required. All Company billings are
made in U.S. dollars.

Customer Concentrations

A limited number of customers have historically accounted for a substantial
portion of the Company's revenues.

In fiscal 2000, no individual customer accounted for 10% or more of total
revenues. Customers that accounted for at least 10% of total revenues in 1999
and 1998 were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1999 1998
---- ----
<S> <C> <C>
ATI Technologies ........................... 18% --
MMC Networks ............................... 10% 11%
National Semiconductor ..................... 18% 11%
PMC-Sierra ................................. * 14%
Silicon Dynamics ........................... * 13%
TeraLogic .................................. * 13%
Toshiba .................................... 10% *
</TABLE>

(*) Represents less than 10% of revenues

37
<PAGE> 38
Advertising Expense

The cost of advertising is expensed as incurred. Advertising costs totaled
approximately $318,000, $130,000 and $34,000 for the years ended September 30,
2000, 1999, and 1998, respectively.

Research and Development

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. The Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility which is evidenced by a
working model; accordingly, software costs incurred after the establishment of
technological feasibility have not been material and, therefore, have been
expensed.

Net Income (Loss) Per Share

Basic and diluted net loss per share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). Accordingly, basic and diluted net loss per share have been computed using
the weighted average number of shares of common stock outstanding during the
period, less weighted average shares outstanding that are subject to repurchase
by the Company.

The following table presents the computation of basic and diluted net loss
per share applicable to common stockholders:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss applicable to common stockholders ................ $(15,766) $ (186) $ (851)
======== ======= =======
Basic and diluted:
Weighted average shares of common stock
outstanding .......................................... 8,887 5,632 5,559
Less weighted average shares subject to
repurchase ........................................... (935) (331) (1,180)
-------- ------- -------
Shares used in computing basic and diluted net loss
per share applicable to common
stockholders ......................................... 7,952 5,301 4,379
======== ======= =======
Basic and diluted net loss per share applicable to
common stockholders ..................................... $ (1.98) $ (0.04) $ (0.19)
======== ======= =======
</TABLE>

The Company has excluded all outstanding warrants, stock options and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 1,765,750, 2,118,000 and 1,179,917
shares of common stock have been excluded for the years ended September 30,
2000, 1999 and 1998, respectively.

Comprehensive Income (Loss)

In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 established standards for the reporting and display of
comprehensive income (loss) and its components and was effective for fiscal
1999. The Company had no items, other than net loss, of other comprehensive
income (loss) to report in any of the periods presented.

Segment Information

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which establishes standards for
reporting information about operating segments in annual financial statements.
The Company operates only in one segment, the sale of semiconductor intellectual
property for the memory elements of systems-on-a-chip.

38
<PAGE> 39
Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. The Company will assess the impact of SFAS 133 if
such activities are undertaken.

In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company believes its revenue recognition policy is in compliance with SAB
101.

In March 2000, the financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 is
effective July 1, 2000 but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
financial position or results of operations.

NOTE 2. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures ................ $ 538 $ 197
Computers and equipment ............... 1,812 840
Software .............................. 3,739 1,415
Leasehold improvements ................ 140 74
-------- --------
6,229 2,526
Less accumulated depreciation ......... (2,066) (563)
-------- --------
$ 4,163 $ 1,963
======== ========
</TABLE>

Depreciation expense related to property, equipment and leasehold
improvements totaled $1.5 million, $507,000, and $55,000 for the years ended
September 30, 2000, 1999, and 1998 respectively.

NOTE 3. LEASE OBLIGATIONS

The Company leases certain computer equipment and software under long-term
capital leases. The Company has a line of credit with an equipment leasing
company under which it can enter into leases totaling $1,100,000. At September
30, 2000 approximately $464,000 of this line had been utilized. The Company has
also entered into other capital lease arrangements not subject to the line.
Capitalized costs of approximately $950,000, $753,000 and $122,000 are included
in property and equipment at September 30, 2000, 1999 and 1998, respectively.
Accumulated depreciation amounted to approximately $494,000, $173,000 and
$16,000 at September 30, 2000, 1999 and 1998.

The Company leases its facilities under operating leases. The agreements
provide for a rent escalation each year. Rent expense under operating leases was
approximately $563,000, $230,000 and $70,000 for the years ended September 30,
2000, 1999, and 1998, respectively.

39
<PAGE> 40
Aggregate future minimum lease payments under capital leases and operating
leases as of September 30, 2000 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
2001.............................................. $ 388 $ 713
2002.............................................. 183 718
2003.............................................. 105 338
2004.............................................. -- 54
2005.............................................. -- --
------ -------
Total minimum lease and principal payments.......... 676 $ 1,823
=======
Less: Amount representing interest.................. (120)
------
Present value of future lease payments.............. 556
Less: Current portion of capital lease obligations.. (283)
------
Long-term portion of capital lease obligations...... $ 273
======
</TABLE>

NOTE 4. STOCKHOLDERS' EQUITY

Convertible Preferred Stock

The Series A and Series B preferred stock automatically converted into
shares of common stock at the conversion price in effect immediately prior to
the closing of the Company's initial public offering. The conversion ratio was
three-for-two.

All preferred stockholders had the same voting rights as common
stockholders. Each share of Series A and B preferred stock had a number of votes
equal to the number of shares of common stock into which it was converted.
Changes to the rights or preferences of preferred stockholder securities,
increases in authorized preferred stock, issuances of securities with
preferences over preferred stockholder securities, entering into a liquidation
transaction, and changing the number of directors on the board of directors
required the approval from the holders of at least 55% of the outstanding shares
of preferred stock (including Series C redeemable convertible preferred stock).

The holders of Series A and B preferred stock were entitled to receive
dividends when and if declared by the board of directors. The dividends were
payable in preference and priority to any payment of any dividend on common
stock of the Company. Such dividends were not mandatory or cumulative, and no
rights or interest accrued to the holders of preferred stock. No dividends had
been declared to date.

Redeemable Convertible Preferred Stock

On November 24, 1999, the Company authorized 5,500,000 shares of redeemable
convertible preferred stock designated as Series C and on December 23, 1999 the
Company issued 5,455,255 of these shares at $1.90 per share. The Series C
redeemable convertible preferred stock automatically converted into shares of
common stock at the conversion price in effect immediately prior to the closing
of the Company's inital public offering. The conversion ratio was one-for-two.

Holders of Series C redeemable convertible preferred stock voted equally
with holders of common stock on an as-if-converted basis. In addition, the
holders of Series C redeemable convertible preferred stock had the right to
elect two directors and to approve certain corporate transactions with the
holders of Series A and B preferred stock, as discussed above.

In connection with the issuance of the Series C redeemable convertible
preferred stock, the Company recorded a non-cash dividend of $10,104,044 during
the year ended September 30, 2000 to accrete the value of the Series C
redeemable convertible preferred stock to its fair value. This non-cash charge
was recorded as an increase in accumulated deficit with a corresponding credit
to additional paid-in capital and was recognized at the date of issuance,
December 1999, which was the period in which the shares became eligible for
conversion.

40
<PAGE> 41
Common Stock

The Company is authorized to issue up to 150,000,000 shares of common stock.
As of September 30, 2000, 19,909,501 shares of common stock were issued and
outstanding.

At September 30, 2000, common stock was reserved for issuance as follows:

<TABLE>
<S> <C>
Exercise of outstanding stock options ................................ 1,705,750
Shares of common stock available for grant under the 1997 Equity
Incentive Plan...................................................... 1,020,890
Exercise of warrants ................................................. 60,000
---------
2,786,640
=========
</TABLE>

Founders' Shares

In August 1997, the Company issued 4,536,000 shares of common stock at
$0.017 per share to the founders of the Company in exchange for full-recourse
notes receivable of $79,138. The founders' shares are subject to adjustment for
certain events, including mergers, stock dividends, stock splits and other
events.

As of September 30, 2000, all founders' shares were vested, and hence, no
shares were subject to repurchase by the Company.

The notes bear interest at 6.29% per annum and are due and payable in August
2002. The notes are full recourse, and in addition, each of the founders has
pledged the common stock, 4,536,000 shares of common stock in aggregate, as
collateral to secure the obligations under the notes.

1997 Equity Incentive Plan

The Company's 1997 Equity Incentive Plan (the Plan) provides for the
granting of incentive stock options and nonstatutory stock options as determined
by the board of directors. Under the terms of the Plan, the exercise price of
incentive stock options will not be less than 100% of the fair market value of
the shares on the date of grant, and the exercise price of nonstatutory stock
options will not be less than 85% of the fair market value of the shares on the
date of grant. The exercise price of incentive stock options and nonstatutory
stock options granted to an employee or a service provider, who, at the time of
grant, owns stock representing more than 10% of the voting power of all classes
of the stock of the Company, shall be no less than 110% of the fair market value
of the common stock on the date of grant. All option grants may be exercisable
immediately or may be exercisable within the times or upon the events determined
by the board of directors. The term of each option grant will be no more than
ten years. However, in the case of an incentive stock option issued to an
optionee who, at the time of grant, owns stock representing more than 10% of the
voting power of all classes of the stock of the Company, the term of the option
will be no more than five years. All shares that are issued under the Plan are
subject to repurchase by the Company at the original exercise price until the
underlying options have vested. At September 30, 2000, 1,300,250 shares issued
and exercised under the Plan were subject to repurchase.

Rights to immediately purchase stock may also be granted under the Plan with
terms, conditions, and restrictions determined by the board of directors. Except
for shares purchased by officers, directors and consultants, shares acquired
through stock purchase rights vest over a period not to exceed five years with
20% vesting each year. Any unvested shares acquired are subject to repurchase by
the Company. As of September 30, 2000, no such shares have been granted.

41
<PAGE> 42
Information with respect to the Plan is summarized as follows:

<TABLE>
<CAPTION>
SHARES NUMBER OF WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Beginning authorization........... 1,500,000 -- $ --
Options granted................. (60,000) 60,000 $ 0.017
---------- ----------
Balance at September 30, 1997..... 1,440,000 60,000 $ 0.017
Additional options authorized... -- -- --
Options granted................. (1,045,500) 1,045,500 $ 0.10
Options exercised............... -- (26,250) $ 0.017
Options canceled................ 56,250 (56,250) $ 0.017
---------- ----------
Balance at September 30, 1998..... 450,750 1,023,000 $ 0.10
Additional options authorized... 1,500,000 -- --
Options granted................. (1,177,500) 1,177,500 $ 0.30
Options exercised............... -- (50,625) $ 0.08
Options canceled................ 91,875 (91,875) $ 0.14
---------- ----------
Balance at September 30, 1999..... 865,125 2,058,000 $ 0.20
Additional options authorized... 2,195,140 -- --
Options granted................. (2,349,375) 2,349,375 $ 3.11
Options exercised............... -- (2,391,625) $ 0.85
Options canceled................ 310,000 (310,000) $ 1.28
---------- -----------
Balance at September 30, 2000..... 1,020,890 1,705,750 $ 3.12
========== ==========
</TABLE>

The following table summarizes information about stock options outstanding
and exercisable at September 30, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------------------
WEIGHTED
NUMBER AVERAGE
AS OF REMAINING
SEPTEMBER 30, CONTRACTUAL LIFE
EXERCISE PRICE 2000 (IN YEARS) EXERCISE PRICE
-------------- ------------- ---------------- ---------------
<S> <C> <C> <C>
$0.02..... 90,000 7.02 $ 0.02
$0.13..... 98,625 7.94 $ 0.13
$0.23..... 136,875 8.50 $ 0.23
$0.70..... 339,375 9.09 $ 0.70
$1.00..... 90,125 9.27 $ 1.00
$1.50..... 152,750 9.41 $ 1.50
$2.00..... 130,375 9.47 $ 2.00
$4.00..... 248,875 9.59 $ 4.00
$6.00..... 199,000 9.71 $ 6.00
$10.30.... 219,750 9.80 $10.30
---------
Total.. 1,705,750 9.17 $ 3.12
=========
</TABLE>

Pro forma information regarding net income is required by SFAS 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options granted during the years ended September 30,
2000, 1999 and 1998 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using the Black-Scholes
valuation model with the following weighted average assumptions: a risk-free
interest rate of 6.00% for 2000 and 5.50% for 1999 and 1998, no dividend yield
for all years, expected stock price volatility of 80% for 2000 and 1999 and 0%
for 1998 and a weighted average expected option life of five years for all
years.

The options' weighted average grant-date fair value, which is the value assigned
to the options under SFAS 123, was $1.71, $0.08, and $0.05 for options granted
during 2000, 1999 and 1998, respectively.

42
<PAGE> 43

For purposes of FAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the plan consistent with the
method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts.

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Net loss -- as reported $(15,766) $ (186) $ (851)
Net loss -- pro forma $(16,754) $ (227) $ (886)
Basic net loss per share -- as reported $ (1.98) $ (0.04) $ (0.19)
Basic net loss per share -- pro forma $ (2.11) $ (0.04) $ (0.20)
</TABLE>

The pro forma impact of options on the net loss for the years ended
September 30, 2000 and 1999 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of options
vesting as well as the impact of multiple years of stock option grants. The full
effect of SFAS 123 will not be fully reflected until 2001.

2000 Employee Stock Purchase Plan

In April 2000, the Company's board of directors approved the adoption of the
2000 Employee Stock Purchase Plan (the Purchase Plan). A total of 200,000 shares
of common stock has been reserved for issuance under this plan. On each October
1, starting in 2001, the number of shares will be automatically increased by the
lesser of 0.75% of the then outstanding shares of common stock or 200,000
shares. Each offering period will consist of six months. The initial offering
period began on October 1, 2000 and offering periods will end on March 31 and
September 30 of each year following.

The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of the participant's
compensation, at a price equal to 85% of the lower of the fair market value of
the Company's common stock at the beginning or the end of each offering period.
Employees who work at least five months in any calendar year and at least 20
hours per week are eligible to participate in the Purchase Plan. Stockholders
who own more than 5% of outstanding common stock are excluded from participating
in the Purchase Plan. Each eligible employee is limited to purchase no more than
1,500 shares per offering period and no more than $25,000 of stock per year.

Warrants

In February 1999, the Company issued a warrant to purchase 25,000 shares of
Series B convertible preferred stock at $2.40 per share in connection with
professional services. The warrant vests over four years and expires February
21, 2004. The Company determined the fair value of the warrant using the
Black-Scholes valuation model assuming a fair value of the Company's Series B
convertible preferred stock of $2.40, a risk-free interest rate of 5.16%, a
volatility factor of 80% and a life of five years. The fair value of the warrant
was approximately $124,000 at September 30, 1999. The vesting period of this
warrant was amended in November 1999 such that the warrant became fully vested
at that time. Accordingly, the warrant was remeasured in November 1999 at a fair
value of $159,000 and the Company expensed the unamortized portion.

In July 1999, the Company issued a warrant to purchase 7,500 shares of
common stock at $0.70 per share in connection with professional services. The
warrant vests over four years and expires on July 15, 2004. The Company
determined the fair value of the warrant using the Black-Scholes valuation model
assuming a fair value of the Company's common stock of $7.66, a risk-free
interest rate of 5.92%, a volatility factor of 80% and a life of five years. At
September 30, 1999 the fair value of the warrant was approximately $43,200. The
vesting period of the warrant was amended in November 1999 such that the warrant
became fully vested at that time. Accordingly, the warrant was remeasured in
November 1999 at a fair value of $54,000 and the Company expensed the
unamortized portion.

43
<PAGE> 44
In June 2000, the Company entered into a license agreement with Credence and
its wholly-owned subsidiary, Fluence Technology, under which the Company
licenses from Fluence memory built-in self test logic for integration into the
Company's compilers. In exchange for this license, the Company issued a warrant
to purchase 50,000 shares of common stock at $4.00 per share to Credence and its
affiliates. The Company determined the fair value of the warrant, using the
Black-Scholes valuation model. The fair value of the warrant was approximately
$422,000. In addition, the Company will pay Fluence Technology royalties on
sales of its products that incorporate their technology.

Restricted Common Stock

During fiscal 1998, the Company sold 300,000 shares of restricted common
stock to a consultant for a total aggregate purchase price of $59,234,
consisting of cash in the amount of $5,234 and services valued at $54,000. In
the event the consultant ceases providing services to the Company through the
termination of its consulting agreement, the Company has the right to repurchase
the stock at the original purchase price. The right to repurchase the shares by
the Company lapses as follows: 30,000 shares on the date of sale, 45,000 shares
on March 21, 1998, and 6,250 shares for each full month thereafter. On September
30, 1998, the right to repurchase 112,500 shares had lapsed and the remaining
187,500 unvested shares were held in escrow. In November 1999, the Company
removed all vesting restrictions so that the Company shall no longer have the
right to repurchase any shares.

Stock-Based Compensation

During the years ended September 30, 2000 and 1999, the Company issued stock
options to employees with exercise prices that it believed represented the fair
value of the options. Subsequent to the commencement of the Company's initial
public offering process, the Company reevaluated the fair value of its stock
options. Accordingly, in connection with such stock option grants, during the
year ended September 30, 2000 and 1999, the Company recorded deferred
stock-based compensation of $14.6 million and $2.9 million, respectively. This
deferred compensation represents the excess of the fair value of the common
stock on the date of grant over the exercise price. Deferred compensation
expense is being amortized using the graded vesting method, in accordance with
SFAS 123 and SFAS Interpretation No. 28, over the vesting period of each
respective option, generally four years. Under the graded vesting method, each
option grant is separated into portions based on their vesting terms that result
in acceleration of amortization expense for the overall award. The accelerated
amortization pattern results in expensing approximately 59% of the total award
in year one, 25% in year two, 12% in year three and 4% in year four.

Common Stock Valuation

In connection with the Company's initial public offering, the Company
reevaluated the fair value of its common stock used to record stock-based
compensation for employee stock options and the valuation of the warrants issued
for professional services, the purchase of assets and in obtaining a line of
credit. In connection with such stock option grants, during the year ended
September 30, 2000 and 1999, the Company recorded a non-cash charge for
stock-based compensation of $6.8 million and $701,000, respectively. In
connection with warrants, during the year ended September 30, 2000 and 1999, the
Company recorded non-cash charges of $731,000 and $11,000, respectively.

NOTE 5. LINE OF CREDIT

During July 1999, the Company entered into a line of credit with a financial
institution, which expired during July 2000 and the Company let lapse. The line
of credit was limited such that the Company could not borrow in excess of
$3,000,000 or 80% of eligible receivables. Borrowings under the line of credit
bore interest at the bank's prime rate plus 1% per annum (9.25% at September 30,
1999) and were subject to the Company's compliance with certain financial
covenants. The line of credit was secured by all the rights, title of the assets
and intellectual property of the Company. As of September 30, 2000, no amount
was outstanding on the line of credit and as of September 30, 1999, the Company
had approximately $1,000,000 outstanding under the line of credit.

In connection with the line of credit agreement, the Company issued a
warrant for 30,000 shares of Series C preferred stock (see Note 4). The warrant
is exercisable at any time prior to its expiration on July 28, 2004. Upon the

44
<PAGE> 45
closing of the Series C preferred stock round in December 1999, the Company
determined the fair value of the warrant using the Black-Scholes valuation model
assuming an exercise price of the Series C preferred stock of $1.90, a risk free
interest rate of 6.22%, a volatility factor of 80%, and a life of five years.
The resulting value of $103,000 is being amortized to expenses over the term of
the line of credit. As of September 30, 2000, as a result of the expiration of
the line of credit, the Company had amortized the entire amount.

NOTE 6. RELATED PARTY TRANSACTIONS

In June 1999, the Company extended a loan of $150,000 bearing interest of 9%
per annum, to a stockholder of the Company in return for a note receivable. In
March 2000, the note was repaid.

The Company sells products and services to certain companies that are also
stockholders of Virage Logic Corporation. All transactions were conducted at
arm's length. Sales to these stockholders amounted to $227,500, $450,500 and
$317,500, for the years ended September 30, 2000, 1999, and 1998, respectively.
Included in these amounts are $227,500, $67,500 and $132,500 received from Tower
Semiconductor for compiler development services for the years ended September
30, 2000, 1999, and 1998, respectively. As of September 30, 2000, there were no
accounts receivable due from these stockholders.

NOTE 7. AGREEMENTS WITH FOUNDRIES

The Company has entered into agreements with TSMC, UMC, and Chartered,
third-party semiconductor foundries, under which the Company has agreed to
develop memory compilers for certain of the foundries' manufacturing processes
and in return the foundries are obligated to pay the Company royalties on sales
of silicon chips manufactured by the foundries for the Company's fabless
customers. For the year ended September 30, 2000, royalty revenues were $88,000.

Under two separate agreements with one of the foundries, TSMC, TSMC has
contracted to pay the Company licensing fees for embedded memory compilers. The
Company has recorded $945,000 of revenue for such services through September 30,
2000.

NOTE 8. INCOME TAXES

Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the year ended September
30, 1998.

The provision for income taxes for the years ended September 30, 2000 and
1999 consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
Federal:
Current .............................. $ 689,000 $ 355,000
Deferred ............................. (586,000) (260,000)
State:
Current .............................. 151,000 1,000
Deferred ............................. -- --
Foreign:
Current .............................. 39,000 58,000
Deferred ............................. -- --
--------- ---------
Total .................................. $ 293,000 $ 154,000
========= =========
</TABLE>

45
<PAGE> 46

The income tax expense differed from the amounts computed by applying the
U.S. statutory federal income tax rate (34%) to pretax income (loss) as a result
of the following:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Computed expected tax (benefit) ..... $(1,825,000) $ (11,000) $(289,000)
Non-deductible stock-based
compensation ....................... 2,312,000 238,000 --
Current year net operating losses
and/or temporary differences for
which no tax benefit is recognized.. (275,000) (55,000) 289,000
State taxes .......................... 100,000 -- --
Foreign taxes ........................ 39,000 58,000 --
R&D credit ........................... (201,000) (94,000) --
Other ................................ 143,000 18,000 --
----------- --------- ---------
Total income tax provision ........... $ 293,000 $ 154,000 $ --
=========== ========= =========
</TABLE>

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
2000 1999
----------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred revenue ............................. $ 719,000 $ 431,000
Compensation accrual ......................... 292,000 124,129
Other accruals/reserves not currently
deductible ................................ 125,000 167,871
Credits ...................................... 96,000 --
----------- ---------
Total deferred tax assets ...................... 1,232,000 723,000
Valuation allowance .......................... (242,000) (407,000)
----------- ---------
Net deferred tax assets ........................ 990,000 316,000
Deferred tax liabilities:
Depreciation ................................. (130,000) (49,000)
Other ........................................ (14,000) (7,000)
----------- ---------
Net deferred tax assets ........................ $ 846,000 $ 260,000
=========== =========
</TABLE>

The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. The Company recorded a deferred tax asset at September 30, 2000 and
1999 based on availability of taxable income in the carryback periods for
federal purposes. Due to the uncertainty of future earnings and the lack of
carryback provisions for state purposes, management has determined that the
valuation allowance continues to be necessary. The net valuation allowance
increased/(decreased) by $(165,000), $107,000 and $200,000, during the years
ended September 30, 2000, 1999 and 1998, respectively.

NOTE 9. BUSINESS SEGMENT INFORMATION

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

The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.

46
<PAGE> 47
Revenues by geographic region were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States .............. $ 9,806,000 $5,393,000 $1,018,000
Canada ..................... 2,937,000 2,148,000 280,000
Japan ...................... 2,441,000 1,970,000 440,000
Taiwan ..................... 2,329,000 -- --
Europe ..................... 1,400,000 -- --
Other ...................... 753,000 78,000 232,000
----------- ---------- ----------
Total ................... $19,666,000 $9,589,000 $1,970,000
=========== ========== ==========
</TABLE>

NOTE 10. ACQUISITION OF ASSETS

On December 1, 1999, the Company purchased Mentor Graphics Corporation's
(MGC) Physical Libraries Business for 150,000 shares of the Company's Series C
preferred stock valued at approximately $638,250. In addition, the Company
assumed MGC's license arrangements with customers of the Physical Libraries
Business resulting in an obligation of approximately $210,000. The transaction
was accounted for as a purchase and the Company recorded intangible assets of
approximately $353,250, $269,000 and $27,000 related to the goodwill, workforce
and the customer list, respectively. The goodwill, assembled workforce and
customer list are being amortized over three years. Additionally, as part of the
purchase agreement with MGC, the Company is committed to purchase $1,000,000 of
software licenses through June 30, 2001. The Company purchased and capitalized
$500,000 of such software licenses on December 28, 1999, which are being
amortized over three years.

For the year ended September 30, 2000, amortization of the intangible assets
and the software amortization was approximately $162,000 and $125,000,
respectively.

NOTE 11. FISCAL YEAR 2000 BONUS PLANS

Fiscal Year 2000 Executive Variable Incentive Pay Plan

In November 1999, the Company's board of directors approved the adoption of
the Virage Logic Fiscal Year 2000 Executive Variable Incentive Pay Plan (the VIP
Plan). The VIP Plan limits eligibility to employees at the President, Vice
President and director levels. Payments to participants in the VIP Plan are
connected to the Company's fiscal year 2000 revenue and operating results as
compared to the planned results. Eligible participants may receive an additional
compensation of 15% to 50% of base salary, depending on the Company's financial
results.

Fiscal Year 2000 Employee Bonus Program

For fiscal year 2000, the Company instituted a bonus program for its United
States employees, other than sales and marketing employees and participants in
the Fiscal Year 2000 Executive Variable Incentive Pay Plan. Under this program,
10% of pretax profits before deductions for deferred compensation will be
distributed quarterly.

For the year ended September 30, 2000, approximately $343,000 of
compensation was expensed under all of the Company's bonus plans.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL ISSUES

CHANGES IN ACCOUNTANTS

Previously reported in Registration Statement Form S-1, file number
333-36108

47
<PAGE> 48
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item concerning our directors is
incorporated by reference to the information in the section entitled "Proposal
No. 1--Election of Directors" in our Proxy Statement for the 2000 Annual Meeting
of Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year ended September 30, 2000.

The information required by this item concerning our executive officers and
family relationships is incorporated by reference in the section in Part I of
this Annual Report on Form 10-K entitled "Executive Officers of the Registrant."

The information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference to information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management Stock Ownership of Directors and Executive
Officers--Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended September 30,
2000.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item regarding executive compensation is
incorporated by reference to the information in the section entitled "Executive
Compensation" in our Proxy Statement for the 2000 Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of our fiscal year
ended September 30, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information in the section entitled "Security Ownership of Certain Beneficial
Owners and Management Stock Ownership of Directors and Executive Officers" in
our Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with
the Commission within 120 days after the end of our fiscal year ended September
30, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information in the
section entitled "Certain Relationships and Related Transactions" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended September 30,
2000.

48
<PAGE> 49
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES , AND REPORTS ON FORM 8-K

The following documents are being filed as part of this report on Form 10-K:

(a) Index to Consolidated Financial Statements:

(1) Report of Ernst & Young LLP, Independent Auditors

(2) Independent Auditors' Report of Mohler, Nixon & Williams, Accountancy
Corporation

(3) Consolidated Balance Sheets

(4) Consolidated Statements of Operations

(5) Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)

(6) Consolidated Statements of Cash Flows

(7) Notes To Consolidated Financial Statements

Index to Financial Statement Schedules:

(1) Schedule II Valuation and Qualifying Accounts

(b) Reports on Form 8-K:

None

<TABLE>
<CAPTION>
Exhibit
Number Description Of Document
------- -----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation(1)

3.2 Amended and Restated Bylaws(1)

4.1 Specimen Common Stock Certificate(1)

4.2 Restated and Amended Investors' Rights Agreement among Virage Logic
and certain stockholders dated December 3, 1999(1)

4.3 Amendment and Waiver to Restated and Amended Investors' Rights
Agreement(1)

10.1 1997 Equity Incentive Plan, as amended(1)

10.2 Form of Option Agreement under 1997 Equity Incentive Plan(1)

10.3 2000 Employee Stock Purchase Plan(1)

10.4 Virage Logic Corporation Fiscal Year 2000 Executive Variable
Incentive Pay Plan(1)*

10.5 Form of Indemnification Agreement(1)

10.6 Form of Secured Full Recourse Promissory Note granted by each of
Adam Kablanian and Alexander Shubat on August 27, 1997(1)*

10.7 Form of Stock Pledge Agreement dated August 27, 1997 between the
Company and each of Adam Kablanian and Alexander Shubat (1)*

10.8 Form of Secured Full Recourse Promissory Note granted by each of
Adam Kablanian, Alexander Shubat, Vincent Ratford, and James
Pekarsky in March 2000(1)*

10.9 Form of Stock Pledge Agreement, dated March 2000 between the Company
and each of Adam Kablanian, Alexander Shubat, Vincent Ratford and
James Pekarsky(1)*

10.10 Asset Purchase Agreement between Mentor Graphics Corporation and
Virage Logic dated as of December 1, 1999(1)

10.11 Loan and Security Agreement between Silicon Valley Bank, Virage
Logic and VLI dated as of July 28, 1999(1)

10.12 Distribution Agreement between Seiko Instruments Inc. and Virage
Logic dated as of October 1, 1998(1)#

10.13 Development and Licensing Agreement between Taiwan Semiconductor
Manufacturing Co. Ltd. and Virage Logic dated as of March 3,
1999(1)#
</TABLE>

49
<PAGE> 50

<TABLE>
<S> <C>
10.14 Joint Marketing and Technical Support Agreement between Chartered
Semiconductor Manufacturing Ltd. and Virage Logic dated as of
November 14, 1997(1)#

10.15 Memory Compiler Licensing Agreement between United Microelectronics
Corporation and Virage Logic(1)#

10.16 Memorandum of Understanding for Jointly-Developed 1T-SRAM Technology
Memory Compilers between Virage Logic and Mosys, Inc. dated July 1,
1999(1)#

10.17 Memorandum of Understanding for Custom-Touch 1T-SRAM Memory Compiler
for TSMC 0.18mm and 0.15mm Logic Process between Taiwan
Semiconductor Manufacturing Co. Ltd., Mosys, Inc. and Virage
Logic(1)#

10.18 Memorandum of Understanding between Virage Logic and Nurlogic(1)

10.19 Industrial Space Lease between Renco Bayside Investors and Virage
Logic dated as of March 17, 1999(1)

10.20 Office Service Agreement between HQ Global Workplaces, Inc. and
Virage Logic dated as of August 3, 1999(1)

10.21 Office Lease between Morris Piha Real Estate Services, Inc. and
Virage Logic dated as of March 25, 1999(1)

10.22 Master Lease Agreement among Leasing Technologies International,
Inc., Virage Logic and VLI dated as of February 12, 1999(1)

10.23 Employment Offer Letter to Vincent Ratford dated February 1,
1998(1)*

10.24 Employment Offer Letter to Raymond Leung dated August 6, 1998(1)*

10.25 Employment Offer Letter to James Pekarsky dated April 5, 1999(1)*

10.26 Employment Offer Letter to Kenneth Rousseau dated January 18,
2000(1)*

10.27 Source Code License Agreement among Virage Logic, Fluence Technology
Inc., and Credence Systems Corp.(1) #

10.28 Stock Purchase Agreement between Virage Logic and Crosslink Capital,
Inc.(1)

10.29 Form of Secured Full Recourse Promissory Note dated as of July 7,
2000 granted by Yervant Zorian *

10.30 Form of Stock Pledge Agreement, dated July 7, 2000 between the
Company and Yervant Zorian *

16.1 Letter from Mohler, Nixon & Williams Accountancy Corporation re
change in certifying accountant(1)

23.1 Consent of Ernst & Young LLP, independent auditors

23.2 Consent of Mohler, Nixon & Williams Accountancy Corporation,
Independent Auditors

27.1 Financial Data Schedule
</TABLE>

(1) Incorporated by reference to the corresponding exhibit to Virage Logic's
Registration Statement on Form S-1, as amended (File No. 333- 36108).

# Confidential treatment has been granted with respect to portions of the
exhibit. A complete copy of the agreement, including the redacted terms, has
been separately filed with the Securities and Exchange Commission.

* Management contract or compensatory plan or arrangement.

50
<PAGE> 51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Fremont,
State of California, on this 26th day of December, 2000.

VIRAGE LOGIC CORPORATION

By: /s/ Adam A. Kablanian
-----------------------------------
Adam A. Kablanian
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Adam A. Kablanian President, Chief Executive Officer and Director December 26, 2000
------------------------------- (Principal Executive Officer)
Adam A. Kablanian

/s/ James R. Pekarsky Vice President and Chief Financial Officer December 26, 2000
------------------------------- (Principal Financial and Accounting Officer)
James R. Pekarsky

/s/ Richard Elkus, Jr. Director December 26, 2000
------------------------------
Richard Elkus, Jr.

------------------------------ Director December __, 2000
Michael Hackworth

/s/ Alexander Shubat Vice President, Secretary and Director December 26, 2000
------------------------------
Dr. Alexander Shubat

/s/ Michael Stark Director December 26, 2000
------------------------------
Michael Stark

/s/ Sang Wang Director December 26, 2000
------------------------------
Dr. Sang Wang

/s/ Yervant Zorian Vice President, Chief Scientist and Director December 26, 2000
------------------------------
Dr. Yervant Zorian
</TABLE>

51
<PAGE> 52
INDEX TO EXHIBITS

EXHIBITS

<TABLE>
<S> <C>
3.1 Amended and Restated Articles of Incorporation(1)

3.2 Amended and Restated Bylaws(1)

4.1 Specimen Common Stock Certificate(1)

4.2 Restated and Amended Investors' Rights Agreement among Virage Logic
and certain stockholders dated December 3, 1999(1)

4.3 Amendment and Waiver to Restated and Amended Investors' Rights
Agreement(1)

10.1 1997 Equity Incentive Plan, as amended(1)

10.2 Form of Option Agreement under 1997 Equity Incentive Plan(1)

10.3 2000 Employee Stock Purchase Plan(1)

10.4 Virage Logic Corporation Fiscal Year 2000 Executive Variable
Incentive Pay Plan(1)*

10.5 Form of Indemnification Agreement(1)

10.6 Form of Secured Full Recourse Promissory Note granted by each of
Adam Kablanian and Alexander Shubat on August 27, 1997(1)*

10.7 Form of Stock Pledge Agreement dated August 27, 1997 between the
Company and each of Adam Kablanian and Alexander Shubat(1)*

10.8 Form of Secured Full Recourse Promissory Note granted by each of
Adam Kablanian, Alexander Shubat, Vincent Ratford, and James
Pekarsky in March 2000(1)*

10.9 Form of Stock Pledge Agreement, dated March 2000 between the Company
and each of Adam Kablanian, Alexander Shubat, Vincent Ratford and
James Pekarsky(1)*

10.10 Asset Purchase Agreement between Mentor Graphics Corporation and
Virage Logic dated as of December 1, 1999(1)

10.11 Loan and Security Agreement between Silicon Valley Bank, Virage
Logic and VLI dated as of July 28, 1999(1)

10.12 Distribution Agreement between Seiko Instruments Inc. and Virage
Logic dated as of October 1, 1998(1)#

10.13 Development and Licensing Agreement between Taiwan Semiconductor
Manufacturing Co. Ltd. and Virage Logic dated as of March 3,
1999(1)#

10.14 Joint Marketing and Technical Support Agreement between Chartered
Semiconductor Manufacturing Ltd. and Virage Logic dated as of
November 14, 1997(1)#