VIRAGE LOGIC CORP, 424B1, 2000-08-02

VIRAGE LOGIC CORP
424B1, 2000-08-02

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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-36108

PROSPECTUS

3,750,000 SHARES

[VIRAGE LOGIC LOGO]

COMMON STOCK

--------------------------------------------------------------------------------

This is our initial public offering of shares of common stock. We are
offering 3,750,000 shares. No public market currently exists for our shares.

The shares have been approved for quotation on the Nasdaq National Market
under the symbol "VIRL."

INVESTING IN OUR SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6.

<TABLE>
<CAPTION>
PER
SHARE TOTAL
------ ------------
<S> <C> <C>
Public Offering Price....................................... $12.00 $ 45,000,000
Underwriting Discount....................................... $ 0.84 $ 3,150,000
Proceeds to Virage Logic.................................... $11.16 $ 41,850,000
</TABLE>

We have granted the underwriters a 30-day option to purchase up to 562,500
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotment, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Lehman Brothers expects to deliver the shares on or about August 4, 2000.

--------------------------------------------------------------------------------

LEHMAN BROTHERS
ROBERTSON STEPHENS
SG COWEN
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation

JULY 31, 2000
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[INSIDE FRONT COVER]

Virage Logic Logo

Text: Virage Logic provides semiconductor companies with memory designs for
systems contained on a silicon chip

Color Artwork: Artistic representation of a silicon embedded memory die
<PAGE> 3

-------------------------

TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
Summary............................... 1
Risk Factors.......................... 6
Forward-Looking Statements............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 31
</TABLE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management............................ 40
Related Party Transactions............ 50
Principal Stockholders................ 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 57
Underwriting.......................... 58
Legal Matters......................... 60
Experts............................... 60
Where You Can Find Additional
Information......................... 61
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

-------------------------

THROUGH AND INCLUDING AUGUST 25, 2000, ALL DEALERS THAT BUY, SELL OR TRADE
IN OUR SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OF SUBSCRIPTIONS.
<PAGE> 4

SUMMARY

The following summary contains information about our company and the
offering that we believe is important. You should read the entire prospectus,
including the financial statements and the notes to those financial statements,
for a complete understanding of our business and the offering. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of the factors described under the
heading "Risk Factors" and elsewhere in this prospectus.

OUR COMPANY

Virage Logic provides semiconductor intellectual property, or SIP, for the
memory elements of complex electronic systems contained on a single silicon
chip. Our SIP consists of (1) designs for the memory elements of these systems,
which are referred to as embedded memories, (2) software systems called
compilers that allow the designers of these systems to configure embedded
memories into different shapes and sizes on a single silicon chip and (3)
software tools that can be used to build memory compilers. We also provide
custom memory design services. The electronic systems that incorporate our
semiconductor intellectual property are commonly referred to as
systems-on-a-chip because they incorporate all of the components of an entire
electronic system, such as the microprocessor, communications, logic and memory
elements, on a single silicon chip rather than as separate elements of a circuit
board. 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. We license our SIP and offer our
custom design services to semiconductor companies that design and develop the
systems-on-a-chip used in these types of products.

The growth of the Internet and the development of high-speed communications
infrastructure are creating demand for communications equipment and electronic
devices that can utilize the increased available bandwidth. The designers of
these products use systems-on-a-chip to decrease the size and enhance the
performance of these products. According to 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.

These types of products increasingly require larger amounts of
high-performance and highly customizable memories that utilize extremely small
amounts of power in order to deliver the processing speed necessary to take
advantage of increased bandwidth. The designers of these products are facing
increased market pressure to rapidly introduce new products, which shortens the
time available for research and development. To meet these challenges,
semiconductor companies are increasingly relying on external sources of
pre-designed, production-tested elements from third-party SIP suppliers, such as
Virage Logic.

We do not manufacture systems-on-a-chip ourselves. Rather, we license our
SIP to semiconductor companies for them to incorporate as the memory element
design component of their overall system-on-a-chip designs. Our customers can be
divided into two principal categories: companies that do not have facilities to
manufacture their own silicon chips, which are referred to as fabless
semiconductor companies, and companies that manufacture the silicon chips for
their own products internally, which are referred to as integrated device
manufacturers. Our fabless semiconductor company customers include ATI
Technologies, Broadcom, Level One, Lockheed Martin, Macronix, MMC Networks,
PMC-Sierra, TranSwitch and Vitesse. Our integrated device manufacturer customers
include AMD, Conexant, Fijitsu, Hitachi, Hyundai, IBM, Matsushita, National
Semiconductor, OKI, Phillips and Toshiba.

1
<PAGE> 5

We offer our customers:

- memory design expertise;

- a broad product line of memory types and compilers;

- memories that have been production tested;

- significant advantages in getting their system designs into production
quickly;

- high-density, high-performance memories with ultra-low power consumption;
and

- software development tools that allow our memories to be easily
integrated with other elements of our customers' system-on-a-chip
designs.

Our objective is to be the leading supplier of semiconductor intellectual
property for the memory elements of systems-on-a-chip. Key elements of our
strategy include:

- utilizing and developing endorsements of our embedded memories by leading
third-party semiconductor manufacturers;

- becoming a preferred supplier to fabless semiconductor companies;

- increasing our base of integrated device manufacturer customers;

- continuing to innovate our existing technologies for advanced
manufacturing processes;

- expanding our research and development efforts; and

- expanding our distribution channels.

RECENT DEVELOPMENTS

Our revenues for the three months ended June 30, 2000 were $5.1 million
compared to our revenues of $2.5 million for the same period of the previous
year. The primary reasons for this increase were the first sales from the
introduction of our 0.15 micron memory compilers and increased sales of
compilers for 0.18 micron memories.

CORPORATE INFORMATION

Virage Logic Corporation was incorporated in California on November 27,
1995. We reincorporated in Delaware on July 25, 2000. Our principal executive
offices are located at 46501 Landing Parkway, Fremont, California 94538. Our
telephone number is (510) 360-8000. Our website address is www.viragelogic.com.
Information on our website and websites linked to it is not intended to be a
part of this prospectus.

THE OFFERING

<TABLE>
<S> <C>
Common stock offered.................................. 3,750,000 shares
Common stock to be outstanding after this offering.... 18,837,627 shares(1)
Use of proceeds....................................... Research and development, sales and marketing
and general corporate purposes, including
possible acquisitions.
Nasdaq National Market symbol......................... VIRL
</TABLE>

-------------------------

(1) Includes 403,226 shares to be sold to Crosslink Capital, Inc. or its
affiliates.

Simultaneously with this offering, we anticipate selling a total of 403,226
shares of common stock in a private placement to one of our stockholders,
Crosslink Capital, Inc., or its affiliates, at a price of $11.16 per share. See
"Description of Capital Stock -- Simultaneous Private Placement."

2
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The number of shares of common stock to be outstanding after this offering
is based on shares outstanding on March 31, 2000, as adjusted for a 1-for-2
reverse stock split which we completed on July 25, 2000 and excludes the
following:

- 562,500 shares of common stock that may be issued upon the exercise of
the underwriters' option to purchase additional shares in this offering;

- 1,559,500 shares of common stock that may be issued upon the exercise of
outstanding options granted under our 1997 Equity Incentive Plan;

- 239,515 additional shares of common stock available for future grant
under our 1997 Equity Incentive Plan;

- 60,000 shares of common stock that may be issued upon the exercise of
three outstanding warrants; and

- 200,000 shares of common stock available for future purchase under our
2000 Employee Stock Purchase Plan.

During April 2000, we increased the number of shares of common stock
available for issuance under our 1997 Equity Incentive Plan by 1.5 million
shares. Since April 1, 2000, we have granted options to purchase 887,000
additional shares of common stock under this plan. In addition, we granted a
warrant to purchase 50,000 shares of common stock to an industry partner and its
affiliates as part of a license agreement.

Unless we indicate otherwise, all information in this prospectus assumes:

- the automatic conversion of our Series A, Series B and Series C preferred
stock into common stock at the closing of this offering;

- the 1-for-2 reverse stock split completed on July 25, 2000;

- the sale by us of 403,226 shares of our common stock at a price of $11.16
per share to Crosslink Capital, Inc., or its affiliates, in a private
placement simultaneous with the closing of this offering; and

- that the underwriters do not exercise their option to purchase additional
shares in this offering.

3
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The consolidated balance sheet data at March 31, 2000 and the consolidated
statement of operations data for the years ended September 30, 1997, 1998, 1999
and the six months ended March 31, 2000 are derived from our audited
consolidated financial statements appearing elsewhere in this prospectus. The
consolidated statement of operations data for the period from November 27, 1995
(inception) to September 30, 1996 and the six months ended March 31, 1999 are
unaudited. This historical financial information may not be an accurate
indicator of our future performance. We have restated our financial statements
as of and for the periods ended September 30, 1999 and March 31, 2000 for
non-cash charges due to a reevaluation of the fair value of our common stock.
See note 12 of the notes to the consolidated financial statements.

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 27,
1995
(INCEPTION) SIX MONTHS ENDED
TO YEAR ENDED SEPTEMBER 30, MARCH 31,
SEPTEMBER 30, ------------------------------ ---------------------
1996 1997 1998 1999 1999 2000
------------- ------ ------ ---------- ------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $ 324 $ 369 $1,970 $ 9,589 $ 3,474 $ 8,806
Gross profit.................. 238 161 1,117 7,027 2,395 6,526
Stock-based compensation...... -- -- -- 701 -- 2,235
Net income (loss)............. 6 (373) (851) (186) 218 (2,148)
Deemed dividend on Series C
redeemable convertible
preferred stock............. -- -- -- -- -- (10,104)
----- ------ ------ ------- ------- --------
Net income (loss) applicable
to common stockholders...... $ 6 $ (373) $ (851) $ (186) $ 218 $(12,252)
===== ====== ====== ======= ======= ========
Net income (loss) per share
applicable to common
stockholders:
Basic....................... $0.06 $(0.85) $(0.19) $ (0.04) $ 0.04 $ (2.22)
Diluted..................... $0.02 $(0.85) $(0.19) $ (0.04) $ 0.02 $ (2.22)
Shares used in computing net
income (loss) per share
applicable to common
stockholders:
Basic....................... 94 438 4,379 5,301 5,067 5,526
Diluted..................... 376 438 4,379 5,301 10,254 5,526
Pro forma net loss per share
applicable to common
stockholders:
Basic....................... $ (0.02) $ (0.96)
Diluted..................... $ (0.02) $ (0.96)
Shares used in computing pro
forma net loss per share
applicable to common
stockholders:
Basic....................... 9,770 12,722
Diluted..................... 9,770 12,722
</TABLE>

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<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 7,925 $ 7,925 $ 53,025
Working capital........................................... 9,903 9,903 55,003
Total assets.............................................. 19,720 19,720 64,820
Long-term debt obligations, less current portion.......... 382 382 382
Series C redeemable convertible preferred stock........... 10,104 -- --
Accumulated deficit....................................... (13,657) (13,657) (13,657)
Total stockholders' equity................................ 4,393 14,497 59,597
-------- -------- --------
</TABLE>

Pro forma net loss per share applicable to common stockholders and shares
used in computing pro forma net loss per share applicable to common stockholders
are calculated as if all of our outstanding shares of Series A, Series B and
Series C preferred stock were converted into shares of our common stock on the
date of their issuance. See footnote 1 of the notes to our consolidated
financial statements.

The "Pro Forma" amounts in the Consolidated Balance Sheet Data reflect the
conversion of our outstanding shares of Series A, Series B and Series C
preferred stock into 7,196,276 shares of common stock upon the completion of
this offering.

The "Pro Forma As Adjusted" amounts in the Consolidated Balance Sheet Data
reflect the conversion of all preferred stock, our receipt of net proceeds of
$4.5 million from our sale of 403,226 shares of common stock to Crosslink
Capital, Inc., or its affiliates, at a price of $11.16 per share in a private
placement simultaneous with the closing of this offering, and our receipt of net
proceeds of $40.6 million from the issuance and sale in this offering of
3,750,000 shares of common stock at the initial public offering price of $12.00
per share, after deducting underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds," "Capitalization" and "Description of
Capital Stock -- Simultaneous Private Placement."

5
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RISK FACTORS

Investing in our common stock is very risky. You should carefully consider
the following risk factors and all other information contained in this
prospectus before purchasing our common stock. If any of the following risks
actually occurs, our business, financial condition or results of operations
could be materially harmed. In such event, the trading price of our common stock
could decline, and you may lose all or part of your investment. References to
"strategic partners" or "strategic relationships" are not intended to
necessarily imply any equity ownership in us by such entities.

RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY

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 have 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.

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

6
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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 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

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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.

WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO ACHIEVE PROFITABILITY IN THE
FUTURE.

We have incurred significant losses in the past. At March 31, 2000, our
accumulated deficit was $13.7 million. Because we have experienced a history of
losses, we cannot predict whether we will be profitable in the future. Further,
you should not rely on the historical growth of our revenues as any indication
of our future operating results or prospects.

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 that are currently in development, 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. We have not yet obtained agreements with any
integrated device manufacturer or fabless customers that include these royalty
payments and may be unable to do so. Even if we are successful obtaining these
agreements, they may not have the anticipated benefits. Through March 31, 2000,
we have received approximately $9,000 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 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.
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 the first half of fiscal 2000, IBM generated 10% of our
revenues. We expect a small number of companies in the aggregate to represent
between 20% to 40% of our revenues for the foreseeable future. The license
agreements we enter into with our customers do not obligate them to license
future generations of our intellectual property and, as a result, we cannot
predict the length of our relationship with any significant customer. As a
result of this customer concentration, we could experience a dramatic reduction
in our revenues if we lose one or more
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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.

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.

We believe that our principal competitive advantages are the depth of our
engineering expertise, our ability to offer manufacturing-tested products, the
customizability of our products, the breadth of our product offering and our
ability to offer memories for prevailing design technologies. However, 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. In addition, part of our strategy also involves expanding our
domestic sales force and hiring sales representatives in Europe. 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.

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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 June 2000, we grew from 38 to 126 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, 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. To date, we have acquired a portion of the
assets owned by Mentor Graphics for total consideration of 150,000 shares of
Series C preferred stock. We currently have no commitments or agreements for any
material acquisition and no material acquisition is currently being pursued.
Although we have not experienced significant operational difficulties with our
acquisition of assets from Mentor Graphics, 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. At July 27, 2000 we had four U.S. patents issued, eight pending U.S.
patent applications and one draft application. In addition, we had two pending
U.S. trademark applications. 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

10
<PAGE> 14

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.

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 48% of
our revenues in fiscal 1998, 44% of our revenues in fiscal 1999 and 54% of our
revenues in the six months ended March 31, 2000. We anticipate that sales to
customers located outside the United States will increase and will continue to
represent a significant portion of our total revenues in future periods. In
addition, most of our customers that do not own their own fabrication plants
rely on third-party foundries that may be outside of the United States.
Accordingly, our operations and revenues are subject to a number of risks
associated with 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.

11
<PAGE> 15

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. Although the adoption of SOP 97-2, SOP 98-4 and SOP 98-9 has not had, and
we do not expect these adoptions to have, a material impact on our consolidated
financial statements or results of operations, the American Institute of
Certified Public Accountants has not issued full implementation guidelines for
SOP 97-2, SOP 98-4 and SOP 98-9. 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.

RISKS RELATED TO THE OFFERING

OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.

After this offering, our officers, directors and principal stockholders
will together control approximately 60.0% of our outstanding common stock. As a
result, these stockholders, if they act together, will be able to control our
management and affairs and all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control and may affect the market price of our common stock. This
concentration of ownership may not be in the best interest of our other
stockholders.

OUR RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS WILL CONTAIN, AND DELAWARE
LAW CONTAINS, PROVISIONS THAT COULD DISCOURAGE A TAKEOVER AND MAY NEGATIVELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

Our restated Certificate of Incorporation and bylaws will contain, and
Delaware law contains, provisions that might enable our management to resist a
takeover. These provisions might discourage, delay or prevent a change in the
control of our company or a change in our management. In addition, these
provisions could limit the price that investors would be willing to pay in the
future for shares of our common stock. Some of these provisions which will be
contained in our restated Certificate of Incorporation or bylaws:

- divide our board of directors into three classes with each class subject
to election every three years;

- authorize the issuance of preferred stock that can be created and issued
by our board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;

- prohibit stockholder action by written consent; and

- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.

See "Description of Capital Stock" for a more detailed description of these
provisions.

12
<PAGE> 16

A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.

If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. Upon the
closing of this offering and our simultaneous private placement of 403,226
shares to Crosslink Capital, Inc., or its affiliates, we will have outstanding
18,837,627 shares of common stock, based upon shares outstanding on March 31,
2000, as adjusted for the 1-for-2 reverse stock split, and assuming no exercise
of outstanding options after March 31, 2000. Of these shares, the 3,750,000
shares sold in this offering will be freely tradable. Of the remaining shares of
common stock outstanding immediately after this offering, approximately
13,500,000 shares will be available for sale in the public market 180 days after
the date of this prospectus when the lock-up agreements between the underwriters
and the stockholders expire. However, some of those sales will be subject to the
volume and other restrictions imposed by Rule 144 under the federal securities
laws on our affiliates. On occasion, underwriters have removed lock-up
restrictions early and it is possible that Lehman Brothers Inc. may remove some
or all of these restrictions earlier than 180 days after the closing of this
offering.

The remaining outstanding shares will become tradable upon expiration of
various holding periods under Rule 144 (subject in some cases to the volume
restrictions of that rule) or earlier and without restrictions if they are
registered under the federal securities laws. After this offering, the holders
of an aggregate of 11,917,000 shares of our common stock as well as the
purchasers in the simultaneous private placement will have certain registration
rights, including the right to include their shares in public offerings we
undertake in the future. In addition, of these holders, the holders of 4,899,682
shares of common stock as well as the purchasers in the simultaneous private
placement will have the right to require us to register the sale of their
shares. See "Description of Capital Stock -- Registration Rights."

WE MAY BE UNABLE TO RAISE CAPITAL IN THE FUTURE WHEN NEEDED WHICH COULD PREVENT
US FROM GROWING.

We believe that the net proceeds from this offering and the simultaneous
private placement, together with cash generated by our operations, will be
sufficient to meet our operating and capital requirements for at least the next
18 months. Aside from this offering, our primary sources of capital are our cash
reserves and cash generated by operations. If our operations do not generate
sufficient capital or if we have unexpected expenditures, we may need to raise
additional funds through public or private financing or other arrangements. We
cannot be certain that any such financing will be available on acceptable terms,
or at all, and our failure to raise capital when needed could seriously harm our
business. In addition, additional equity financing may dilute our stockholders'
interest, and debt financing, if available, may involve restrictive covenants
and could result in a substantial portion of our operating cash flow being
dedicated to the payment of principal and interest on debt. If adequate funds
are not available, we may need to curtail our operations significantly.

OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED, AND WE EXPECT THE PRICE OF OUR
COMMON STOCK WILL FLUCTUATE SUBSTANTIALLY.

Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this offering. We and the representatives
of the underwriters have determined the initial public offering price. The price
at which our common stock will trade after this offering is likely to be highly
volatile and may fluctuate substantially due to a number of factors, in addition
to our financial performance, such as:

- industry announcements of technological innovations;

- competitive trends, including timely adoption and market acceptance of,
competing standards;

- introduction of new technologies by us or our competitors;

13
<PAGE> 17

- developments related to intellectual property rights;

- conditions and trends in the semiconductor industry; and

- market perception of our growth prospects.

In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stock of technology companies. These broad market fluctuations may result
in a material decline in the market price of our common stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts management's attention and resources
that are needed to successfully run our business.

INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
FOLLOWING THIS OFFERING.

If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value of
$8.87. If the holders of outstanding options and warrants exercise those options
and warrants, you will incur further dilution. See "Dilution."

WE MAY INVEST OR SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU
MAY NOT AGREE.

We will retain broad discretion over the use of net proceeds from this
offering. You may not agree with how we spend the proceeds, and our use of the
proceeds may not yield a significant return or any return at all. Because of the
number and variability of factors that determine our use of the net proceeds
from this offering, our ultimate use of the proceeds may vary substantially from
our currently planned uses. See "Use of Proceeds" for a description of our
current plans for using the net proceeds from this offering.

FORWARD-LOOKING STATEMENTS

Some of the statements under "Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. Some of these factors are listed
under "Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "intends," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus as a result of actual results, new information, future events or
otherwise.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY ON THE
DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS
OR OF ANY SALE OF OUR COMMON STOCK.

We have filed trademark applications with the U.S. Patent and Trademark
Office for Custom-Touch and Embed-It! All other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.

14
<PAGE> 18

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 3,750,000 shares of
common stock we are offering at the initial public offering price of $12.00 per
share and the sale of 403,226 shares of common stock in the simultaneous private
placement at a price of $11.16 per share will be approximately $45.1 million
after paying underwriting discounts and commissions and offering expenses.

We currently estimate that we will use the net proceeds as follows:
approximately 15% to 25% to hire additional engineers for research and
development, approximately 20% to 30% to hire additional personnel to expand our
sales and marketing activities and the remainder for general corporate purposes,
including working capital. The amount we spend and the timing of the
expenditures for each of these purposes will largely depend on our ability to
hire qualified personnel. Although we have no current plans, agreements or
commitments to enter into any material acquisition, we may, if the opportunity
arises, use an unspecified portion of the net proceeds to acquire or invest in
products, technologies or companies. Our management will have broad discretion
in determining how the net proceeds should be applied. The timing and amount of
our actual expenditures will be based on many factors, including cash flows from
operations and the growth of our business. In addition to raising capital, a
purpose of this offering is to establish a public market for our common stock.

Pending these uses, we intend to invest the funds in short-term,
investment-grade, interest-bearing securities and government securities. We
cannot predict whether the proceeds invested will yield a favorable return.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support our operations and to
finance the growth and development of our business. In addition, we are
prohibited from paying dividends by the terms of our outstanding line of credit.
Therefore, we do not expect to pay cash dividends in the foreseeable future.

15
<PAGE> 19

CAPITALIZATION

The following table summarizes our capitalization as of March 31, 2000:

- on an actual basis;

- on a pro forma basis as of such date to reflect the conversion before the
closing of this offering of all outstanding shares of Series A and Series
B convertible preferred stock and Series C redeemable convertible
preferred stock into 7,196,276 shares of common stock and the filing of a
restated Certificate of Incorporation to increase the number of common
and preferred shares authorized; and

- on a pro forma as adjusted basis to reflect the sale of 3,750,000 shares
of our common stock offered by this prospectus at the initial public
offering price of $12.00 per share and our receipt of net proceeds of
$40.6 million from such sale, after deducting the underwriting discounts
and commissions and estimated offering expenses, and the sale of 403,226
shares of common stock to Crosslink Capital, Inc., or its affiliates, in
a private placement at a price of $11.16 per share simultaneously with
this offering and our receipt of net proceeds of $4.5 million from such
sale.

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 7,925 $ 7,925 $ 53,025
======== ======== ========
Long-term obligations, less current portion................. 382 382 382
-------- -------- --------
Redeemable convertible preferred stock, $.001 par value,
5,500,000 shares authorized actual; no shares authorized
pro forma and pro forma as adjusted; 5,455,255 shares
issued and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted........... 10,104 --
Stockholders' equity:
Preferred stock, $.001 par value, no shares authorized
actual; 25,000,000 shares authorized pro forma and pro
forma as adjusted; no shares issued and outstanding pro
forma and pro forma as adjusted(1)..................... -- --
Convertible preferred stock, $.001 par value, 3,054,100
shares authorized actual; no shares authorized pro
forma and pro forma as adjusted; 2,979,099 shares
issued and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted........ 3 --
Common stock, $.001 par value, 35,000,000 shares
authorized actual; 150,000,000 shares authorized pro
forma and pro forma as adjusted; 7,488,125 shares
issued and outstanding actual; 14,684,401 shares issued
and outstanding pro forma; 18,837,627 shares issued and
outstanding, pro forma as adjusted(1).................. 7 15 19
Additional paid-in capital................................ 29,586 39,685 84,781
Notes receivable from stockholders........................ (800) (800) (800)
Deferred stock-based compensation......................... (10,746) (10,746) (10,746)
Accumulated deficit....................................... (13,657) (13,657) (13,657)
-------- -------- --------
Total stockholders' equity........................ 4,393 14,497 59,597
-------- -------- --------
Total capitalization.............................. $ 14,879 $ 14,879 $ 59,979
======== ======== ========
</TABLE>

------------------------

(1) Upon completion of this offering, our Certificate of Incorporation will be
amended to authorize 150,000,000 shares of common stock and 25,000,000
shares of "blank check" preferred stock.

16
<PAGE> 20

You should read this information together with the sections of this
prospectus entitled "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this prospectus.

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding on March 31, 2000, as adjusted for
a 1-for-2 reverse stock split which was completed on July 25, 2000 and excludes:

- 562,500 shares of common stock that may be issued upon the exercise of
the underwriters' option to acquire additional shares in this offering;

- 1,559,500 shares of common stock that may be issued upon the exercise of
outstanding options granted under our 1997 Equity Incentive Plan;

- 239,515 additional shares of common stock available for future grant
under our 1997 Equity Incentive Plan;

- 60,000 shares of common stock that may be issued upon the exercise of
three outstanding warrants; and

- 200,000 shares of common stock available for future purchase under our
2000 Employee Stock Purchase Plan.

During April 2000, we increased the number of shares available for grant
under our 1997 Equity Incentive Plan by 1.5 million shares. Since April 1, 2000
we have granted options to purchase 887,000 additional shares of common stock
under this plan. In addition, we granted a warrant to purchase 50,000 shares of
common stock to an industry partner and its affiliates as part of a license
agreement.

To the extent that the above options and warrants are exercised, there will
be further dilution to new investors. See "Management -- Employee Benefit Plans"
for further information about our equity incentive plan and stock purchase plan.

17
<PAGE> 21

DILUTION

Our pro forma net tangible book value at March 31, 2000 was approximately
$13.9 million, or $0.95 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the 1-for-2 reverse stock split completed on July 25, 2000 and the automatic
conversion of our Series A and Series B convertible preferred stock and Series C
redeemable convertible preferred stock into 7,196,276 shares of our common stock
immediately before the closing of this offering. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
simultaneous private placement and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to (1) our receipt of
net proceeds of $40.6 million from the sale of 3,750,000 shares of common stock
offered by this prospectus at the initial offering price of $12.00 per share and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us and (2) our receipt of net proceeds of $4.5
million from the sale of 403,226 shares of common stock to Crosslink Capital,
Inc., or its affiliates, in a private placement simultaneously with this
offering, our pro forma net tangible book value at March 31, 2000 would have
been $59.0 million, or approximately $3.13 per share. This represents an
immediate increase in pro forma net tangible book value of $2.18 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $8.87 per share to new investors. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Pro forma net tangible book value per share at March 31,
2000...................................................... $0.95
Increase in net tangible book value per share attributable
to new investors and investors in the simultaneous private
placement................................................. 2.18
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.13
------
Dilution per share to new investors in this offering........ $ 8.87
======
</TABLE>

The following table summarizes at March 31, 2000, the total number of
shares of common stock purchased from us, the total consideration paid, and the
average price per share paid by existing stockholders and by new investors
before deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, at the initial public offering price of $12.00
per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 14,684,401 78.0% $14,073,945 22.1% $ 0.96
Investors in the simultaneous
private placement................ 403,226 2.1% $ 4,500,000 7.1% $11.16
New investors...................... 3,750,000 19.9% $45,000,000 70.8% $12.00
---------- ---- ----------- ----
Total............................ 18,837,627 100% $63,573,945 100%
========== ==== =========== ====
</TABLE>

The foregoing tables exclude the following shares:

- shares of common stock that may be issued upon the exercise of the
underwriters' option to acquire additional shares in this offering;

- 1,799,015 shares of common stock that may be issued under our 1997 Equity
Incentive Plan consisting of:

- 1,559,500 shares of common stock underlying options outstanding on March
31, 2000 at a weighted average exercise price of $0.67 per share, of
which 548,500 were fully vested on March 31, 2000; and

- 239,515 shares of common stock underlying options available for future
grants on March 31, 2000;

18
<PAGE> 22

- 15,000 shares of common stock that may be issued upon conversion, at an
effective conversion price of $3.80 per common share, of 30,000 shares of
Series C redeemable preferred stock that may be issued upon the exercise
of a Series C redeemable convertible preferred stock warrant outstanding
on March 31, 2000;

- 37,500 shares of common stock that may be issued upon conversion, at an
effective conversion price of $1.60 per common share, of 25,000 shares of
Series B preferred stock that may be issued upon the exercise of a Series
B preferred stock warrant outstanding on March 31, 2000;

- 7,500 shares of common stock that may be issued upon exercise of a common
stock warrant outstanding on March 31, 2000, with an exercise price of
$0.70 per share; and

- 200,000 shares of common stock available under our 2000 Employee Stock
Purchase Plan.

During April 2000, we increased the number of shares available for grant
under our 1997 Equity Incentive Plan by 1.5 million shares. Since April 1, 2000,
we have granted options to purchase 887,000 additional shares of common stock
under this plan. In addition, we granted a warrant to purchase 50,000 shares of
common stock to an industry partner and its affiliates as part of a license
agreement.

If these options or warrants are exercised, there will be further dilution
to new investors. See "Management -- Employee Benefit Plans" for further
information regarding our equity incentive plan and stock purchase plan.

If the underwriters exercise their over-allotment option in full, the
following will occur:

- the percentage of shares of our common stock held by existing
stockholders will decrease to approximately 75.7% of the total number of
shares of our common stock outstanding after this offering;

- the number of shares of our common stock held by new public investors
will increase to 4,312,500 or approximately 22.2% of the total number of
shares of our common stock outstanding after this offering; and

- our pro forma net tangible book value will increase to $3.37 per share to
existing stockholders and our pro forma net tangible book value will be
diluted by $8.63 per share to new investors.

19
<PAGE> 23

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 prospectus. The consolidated statement of
operations data for each of the fiscal years ended September 30, 1997 and
September 30, 1998 and the consolidated balance sheet data at September 30, 1997
and 1998 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus, which have been audited by Mohler, Nixon
& Williams Accountancy Corporation, independent auditors. The consolidated
statement of operations data for the fiscal year ended September 30, 1999 and
the six month period ended March 31, 2000 and the consolidated balance sheet
data at September 30, 1999 and March 31, 2000 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus, which
have been audited by Ernst & Young LLP, independent auditors. The consolidated
statement of operations data for the period from November 27, 1995 (inception)
through September 30, 1996 and the six-month period ended March 31, 1999 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. The pro forma net loss per share applicable
to common stockholders and shares used in computing pro forma net loss per share
applicable to common stockholders are calculated as if all of our preferred
stock were converted into shares of our common stock on the date of their
issuance. See footnote 1 of notes to consolidated financial statements.

We have restated our financial statements as of and for the periods ended
September 30, 1999 and March 31, 2000 for non-cash charges due to a reevaluation
of the fair value of our common stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview" and note 12 of
notes to the consolidated financial statements.

20
<PAGE> 24

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 27,
1995 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30, MARCH 31,
SEPTEMBER 30, ---------------------------- --------------------
1996 1997 1998 1999 1999 2000
-------------- ------ ------ ---------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................ $324 $ 369 $1,970 $ 9,589 $ 3,474 $ 8,806
Cost of revenues (exclusive of amortization of deferred
stock compensation of $90 and $450 in 1999 and for the
six months ended March 31, 2000, respectively)........ 86 207 853 2,562 1,079 2,281
---- ------ ------ ------- ------- --------
Gross profit............................................ 238 162 1,117 7,027 2,395 6,526
Operating expenses:
Research and development (exclusive of amortization of
deferred stock compensation of $222 and $841 in 1999
and for the six months ended March 31, 2000,
respectively)....................................... 166 256 924 2,709 965 3,034
Sales and marketing (exclusive of amortization of
deferred stock compensation of $294 and $609 in 1999
and for the six months ended March 31, 2000,
respectively)....................................... 24 120 622 2,378 717 2,103
General and administrative (exclusive of amortization
of deferred stock compensation of $95 and $335 in
1999 and for the six months ended March 31, 2000,
respectively)....................................... 43 152 411 1,202 366 1,146
Stock-based compensation.............................. -- -- -- 701 -- 2,235
---- ------ ------ ------- ------- --------
Total operating expenses................................ 233 528 1,957 6,990 2,048 8,518
---- ------ ------ ------- ------- --------
Operating income (loss)................................. 5 (366) (840) 37 347 (1,992)
Interest income......................................... -- -- 16 42 25 115
Interest expense........................................ -- (4) (27) (91) (16) (158)
Other income (expense).................................. 1 (3) -- (20) -- --
---- ------ ------ ------- ------- --------
Income (loss) before taxes.............................. 6 (373) (851) (32) 356 (2,035)
Income tax provision.................................... -- -- -- (154) (138) (113)
Net income (loss)....................................... 6 (373) (851) (186) 218 (2,148)
Deemed dividend on Series C redeemable convertible
preferred stock....................................... -- -- -- -- -- (10,104)
---- ------ ------ ------- ------- --------
Net income (loss) applicable to common stockholders..... $ 6 $ (373) $ (851) $ (186) $ 218 $(12,252)
==== ====== ====== ======= ======= ========
Net income (loss) per share applicable to common
stockholders:
Basic................................................. $.06 $(0.85) $(0.19) $ (0.04) $ 0.04 $ (2.22)
==== ====== ====== ======= ======= ========
Diluted............................................... $.02 $(0.85) $(0.19) $ (0.04) $ 0.02 $ (2.22)
==== ====== ====== ======= ======= ========
Shares used in computing net income (loss) per share
applicable to common stockholders:
Basic................................................. 94 438 4,379 5,301 5,067 5,526
Diluted............................................... 376 438 4,379 5,301 10,254 5,526
Pro forma net income (loss) per share applicable to
common stockholders:
Basic................................................. $ (0.02) $ (0.96)
======= ========
Diluted............................................... $ (0.02) $ (0.96)
======= ========
Shares used in computing pro forma net income applicable
to common stockholders (loss) per share:
Basic................................................. 9,770 12,722
Diluted............................................... 9,770 12,722
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------- MARCH 31,
1996 1997 1998 1999 2000
---- ---- ------- ---------- ----------
(IN THOUSANDS)
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 57 $ 87 $ 1,972 $1,513 $ 7,925
Working capital............................................. 102 (173) 2,368 1,554 9,903
Total assets................................................ 361 273 3,265 9,050 19,720
Long-term debt obligations, less current portion............ -- 23 64 454 382
Series C redeemable convertible preferred stock............. -- -- -- -- 10,104
Retained earnings (accumulated deficit)..................... 6 (367) (1,219) (1,405) (13,657)
Total stockholders' equity.................................. 359 (15) 2,743 3,323 4,393
</TABLE>

21
<PAGE> 25

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

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 prospectus. 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 prospectus.

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 accompanies
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 quarter ended
March 31, 2000 totalled $9,000. 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 that are currently in development, 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 not
entered into any agreements implementing the new royalty structure.

22
<PAGE> 26

the first half of fiscal 2000, IBM generated 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.

Sales to customers located outside the United States accounted for 48% of
our revenues in fiscal 1998, 44% of our revenues in fiscal 1999 and 54% of our
revenues in the six months ended March 31, 2000. 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, Canada and Europe. We plan
to use a portion of the proceeds of this offering to invest in a direct sales
network 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. 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 aggregate deferred stock-based compensation at July 27, 2000 was
$18.1 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. We anticipate that the
amortization of stock-based compensation for options granted through July 27,
2000 will equal approximately $7.0 million for fiscal 2000, $6.5 million in
2001, $2.7 million in 2002, $1.0 million in 2003 and $0.2 million in 2004.

We have restated our financial statements for the year ended September 30,
1999 and for the six months ended March 31, 2000 to account for non-cash charges
due to a beneficial conversion feature embedded in the Series C redeemable
convertible preferred stock and a reassessment of the estimated fair value of
our common stock used to record stock-based compensation charges in connection
with stock option grants and the valuation of warrants issued. The impact on net
income (loss) available to common stockholders for the year ended September 30,
1999 was a change from previously reported income of $236,000 into a loss of
$186,000. The loss available to common stockholders for the six months ended
March 31, 2000 increased from $674,000 to $12,252,000 primarily due to the
$10,104,000 deemed dividend attributable to the beneficial conversion feature
embedded in the Series C redeemable convertible preferred stock.

23
<PAGE> 27

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------ ----------------
1997 1998 1999 1999 2000
------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 56.2 43.3 26.7 31.1 25.9
------ ----- ----- ----- -----
Gross profit...................................... 43.8 56.7 73.3 68.9 74.1
Operating expenses:
Research and development........................ 69.4 46.9 28.3 27.8 34.4
Sales and marketing............................. 32.5 31.6 24.8 20.6 23.9
General and administrative...................... 41.2 20.9 12.5 10.5 13.0
Stock-based compensation........................ -- -- 7.3 -- 25.4
------ ----- ----- ----- -----
Total operating expenses.......................... 143.1 99.3 72.9 59.0 96.7
------ ----- ----- ----- -----
Operating income (loss)........................... (99.4) (42.6) 0.4 10.0 (22.6)
Interest expense.................................. (1.1) (1.4) (0.9) (0.5) (1.8)
Interest income................................... -- 0.8 0.4 0.7 1.3
Income tax provision.............................. -- -- (1.6) (4.0) (1.3)
------ ----- ----- ----- -----
Net income (loss)................................. (101.2)% (43.2)% (1.9)% 6.3% (24.4)%
====== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000

Revenues. Revenues increased 153.5% from $3.5 million for the six months
ended March 31, 1999 to $8.8 million for the six months ended March 31, 2000.
This increase was primarily attributable to license fees received from fabless
semiconductor companies resulting from the introduction of our 0.18 micron
embedded memory technologies in September 1999.

Gross Profit. Gross profit is revenues less cost of revenues. Cost of
revenues consists primarily of personnel expenses and the allocated portion of
facilities and equipment expenses. Cost of revenues excludes $450,000 of
amortization of stock-based compensation for the six months ended March 31, 2000
and no such amortization for the six months ended March 31, 1999. Gross profit
increased 172.5% from $2.4 million for the six months ended March 31, 1999 to
$6.5 million for the six months ended March 31, 2000. Gross profit as a
percentage of revenues improved between those periods from 68.9% to 74.1%. These
increases were primarily attributable to increased licensing to fabless
semiconductor companies of higher margin embedded memory technologies that
required no additional customization.

Research and Development Expense. Research and development expense includes
personnel and other costs associated with the development of successive
generations of embedded memory technologies and of new technologies. Research
and development expense increased 214.2% from $966,000 for the six months ended
March 31, 1999 to $3.0 million for the six months ended March 31, 2000. Research
and development expense excludes $841,000 of amortization of stock-based
compensation for the six months ended March 31, 2000 and no such amortization
for the six months ended March 31, 1999. The increase in research and
development expense was primarily due to the development of our new 0.18 micron
and 0.15 micron embedded memory technologies, as well as new technologies such
as our Custom-Touch STAR, Custom-Touch 1T-SRAM and Custom-Touch CAM. These
efforts required hiring additional personnel. We believe that continued
technology development is essential for us to remain competitive in the markets
we serve.

Sales and Marketing Expense. Sales and marketing expense consists primarily
of personnel, commissions and other associated costs. Sales and marketing
expense increased 193.4% from $717,000 for the six months ended March 31, 1999
to $2.1 million for the six months ended March 31, 2000. Sales and

24
<PAGE> 28

marketing expense excludes $609,000 of amortization of stock compensation for
the six months ended March 31, 2000 and no such amortization for the six months
ended March 31, 1999. Approximately $1.0 million of the increase in sales and
marketing expense was due to hiring additional personnel and increased salaries
and benefits and the remainder of this increase was due to expanded sales and
marketing activities. We anticipate that sales and marketing expense will
continue to increase as we expand our sales force and target new customers for
our technologies.

General and Administrative Expense. General and administrative expense
consists primarily of personnel and other costs associated with the management
of our business. General and administrative expense increased 212.9% from
$366,000 for the six months ended March 31, 1999 to $1.1 million for the six
months ended March 31, 2000. General and administrative expense excludes
$335,000 of amortization of stock-based compensation for the six months ended
March 31, 2000 and no such amortization for the six months ended March 31, 1999.
The increase in general and administrative expense was primarily due to
increased personnel costs and professional fees.

Stock-Based Compensation. With respect to the grant of stock options to
employees, we recorded aggregate stock-based compensation of approximately $10.8
million for the six months ended March 31, 2000, of which $2,235,000 was
amortized in that period. The amount of deferred stock-based compensation is
presented as a reduction of stockholders' equity and is being amortized using
the graded-vesting method over the vesting period of the applicable options,
generally four years.

Interest Income. Interest income increased from $25,000 for the six months
ended March 31, 1999 to $115,000 for the six months ended March 31, 2000. This
increase was principally due to higher average cash balances resulting from the
net proceeds of the sale of our Series C redeemable convertible preferred stock
in the first fiscal quarter of 2000.

Interest Expense. Interest expense increased from $16,000 for the six
months ended March 31, 1999 to $158,000 for the six months ended March 31, 2000.
This increase was the result of an increase in our average outstanding debt and
an increase in fixed assets held under a capital lease.

Income Tax Provision. The provision for income taxes was approximately
$138,000 and $113,000 for the six months ended March 31, 1999 and 2000,
respectively. The effective tax rate was 38.8% for the six months ended March
31, 1999, and the related provision was computed using the actual effective rate
for fiscal year 1999. Although we reported a pretax loss for the six months
ended March 31, 2000, we recorded an income tax provision of $113,000 due to our
ability to recognize only federal deferred taxes, as state current taxes paid
are not refundable.

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 six months ended March 31, 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.

YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999

Revenues. Our revenues for fiscal 1997, 1998 and 1999 were $369,000, $2.0
million and $9.6 million, respectively, representing growth of 434.2% from 1997
to 1998 and 386.7% from 1998 to 1999. The 1998 increase in revenues was
primarily due to approximately $1.0 million in increased licensing of our 0.25
micron embedded memory technologies, as well as increased sales of our custom
design services. 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.

Gross Profit. Gross profit is revenues less cost of revenues. Cost of
revenues excludes $90,000 of amortization of stock-based compensation for the
year ended September 30, 1999 and no such

25
<PAGE> 29

amortization for the years ended September 30, 1997 and 1998. Gross profit was
$161,000, $1.1 million and $7.0 million for fiscal 1997, 1998 and 1999,
respectively, which represented 43.8%, 56.7% and 73.3% of revenues for those
periods, respectively. Our gross profit increased 592.1% from 1997 to 1998 and
529.1% from 1998 to 1999. The increases in gross profit and gross profit
percentage between 1997 and 1998 and between 1998 and 1999 were primarily
attributable to increased license fees from fabless semiconductor companies and
integrated device manufacturers for higher-margin embedded memory technologies
that required no additional customization.

Research and Development Expense. Research and development expense was
$256,000, $924,000 and $2.7 million for fiscal 1997, 1998 and 1999,
respectively, which represented an increase of 260.8% from 1997 to 1998 and an
increase of 193.2% from 1998 to 1999. Research and development expense excludes
$222,000 of amortization of stock-based compensation for the year ended
September 30, 1999 and no such amortization for the years ended September 30,
1997 and 1998. The increases in research and development expense between 1997
and 1998 and between 1998 and 1999 were primarily due to increases in the number
of employees involved in research and development as we accelerated the
introduction of new technologies, particularly the 0.18 micron technologies.

Sales and Marketing Expense. Sales and marketing expense was $120,000,
$622,000 and $2.4 million for fiscal 1997, 1998 and 1999, respectively, which
represented an increase of 419.0% from 1997 to 1998 and an increase of 282.5%
from 1998 to 1999. Sales and marketing expense excludes $294,000 of amortization
of stock-based compensation for the year ended September 30, 1999 and no such
amortization for the years ended September 30, 1997 and 1998. The increase in
sales and marketing expense between 1997 and 1998 was primarily due to increased
expenses associated with hiring additional personnel and increases in salaries
and benefits resulting from increased sales. 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.

General and Administrative Expense. General and administrative expense was
$152,000, $411,000 and $1.2 million for fiscal 1997, 1998 and 1999,
respectively, which represented an increase of 170.4% from 1997 to 1998 and an
increase of 192.3% from 1998 to 1999. General and administrative expense
excludes $95,000 of amortization of stock-based compensation for the year ended
September 30, 1999 and no such amortization for the years ended September 30,
1997 and 1998. The increases in general and administrative expense between 1997
and 1998 and between 1998 and 1999 were the result of increases in personnel and
in professional fees.

Stock-Based Compensation. With respect to the grant of stock options to
employees, we recorded aggregate stock-based compensation of $2.9 million for
fiscal 1999. 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. We
amortized $701,000 in 1999.

Interest Income. Interest income was $16,000 and $42,000 for fiscal 1998
and 1999, respectively principally due to higher average cash balances following
our sale of Series B preferred stock in July 1998.

Interest Expense. Interest expense was $4,000, $28,000 and $91,000 for
fiscal 1997, 1998 and 1999, 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. No provision for income taxes was recorded for fiscal
1997 and 1998, as we incurred net losses in those years. Although we reported a
loss for fiscal 1999, we recorded an income tax provision of $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.

26
<PAGE> 30

QUARTERLY RESULTS OF OPERATIONS

The following tables contain unaudited consolidated statement of operations
data for our six 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.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $1,492 $1,982 $2,459 $3,655 $ 4,187 $ 4,619
Cost of revenues (exclusive of amortization
of deferred stock compensation of $29,
$61, $109 and $341 for the three months
ended June 30, 1999, September 30, 1999,
December 31, 1999 and March 31, 2000,
respectively)............................ 500 579 640 843 1,070 1,210
------ ------ ------ ------ ------- --------
Gross profit............................... 992 1,403 1,819 2,812 3,117 3,409
Operating expenses:
Research and development (exclusive of
amortization of deferred stock
compensation of $102, $120, $306 and
$535 for the three months ended June
30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000,
respectively).......................... 408 557 694 1,050 1,437 1,596
Sales and marketing (exclusive of
amortization of deferred stock
compensation of $140, $154, $232 and
$377 for the three months ended June
30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000,
respectively).......................... 244 467 709 958 972 1,131
General and administrative (exclusive of
amortization of deferred stock
compensation of $3, $92, $99 and $236
for the three months ended June 30,
1999, September 30, 1999, December 31,
1999 and March 31, 2000,
respectively).......................... 149 217 258 577 672 474
Stock-based compensation................. -- -- 274 427 746 1,489
------ ------ ------ ------ ------- --------
Total operating expenses................... 801 1,241 1,935 3,012 3,827 4,690
------ ------ ------ ------ ------- --------
Operating income (loss).................... 191 162 (116) (200) (710) (1,281)
Interest expense........................... (7) (9) (12) (64) (74) (84)
Interest income............................ 11 14 6 11 20 94
Other income (expense)..................... -- -- -- (19) -- --
------ ------ ------ ------ ------- --------
Income (loss) before taxes................. 195 167 (122) (272) (764) (1,271)
Income tax provision (benefit)............. 73 65 18 (2) 30 83
------ ------ ------ ------ ------- --------
Net income (loss).......................... 122 102 (140) (270) (794) (1,354)
Deemed dividend on Series C redeemable
convertible preferred stock.............. -- -- -- -- -- (10,104)
------ ------ ------ ------ ------- --------
Net income (loss) applicable to common
stockholders............................. $ 122 $ 102 $ (140) $ (270) $ (794) $(11,458)
====== ====== ====== ====== ======= ========
Basic net income (loss) per share
applicable to common stockholders........ $ 0.03 $ 0.02 $(0.03) $(0.05) $ (0.15) $ (2.04)
====== ====== ====== ====== ======= ========
Diluted net income (loss) per share........ $ 0.01 $ 0.01 $(0.03) $(0.05) $ (0.15) $ (2.04)
====== ====== ====== ====== ======= ========
</TABLE>

27
<PAGE> 31

Over the six quarters presented, our quarterly revenues grew from $1.5
million to $4.6 million. Revenue growth over this period was the result of
increased licensing of our 0.25 micron embedded memory technologies and 0.18
micron technologies to both fabless semiconductor companies and integrated
device manufacturers.

Gross profit as a percentage of revenues increased from 66.5% for the
quarter ended December 31, 1998 to 73.8% for the quarter ended March 31, 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. For the quarter ended September 30, 1999, our gross
profit as a percentage of revenues increased due to a greater percentage of
sales in that quarter of higher margin embedded memory technologies.

Over the last six quarters, research and development expenses increased
from $408,000 to $1.6 million as we developed new technologies and added
personnel. Sales and marketing expenses have grown over this period from
$244,000 to $1.1 million, while general and administrative expenses grew from
$149,000 to $474,000. General and administrative expenses were higher in the
fourth quarter of 1999 and 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
stock-based compensation and related amortization in future periods.

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

LIQUIDITY AND CAPITAL RESOURCES

We financed our operating losses for fiscal 1997 and 1998 through the
issuance of notes, borrowing under capital leases and the sale of preferred
stock. We had a net loss of $186,000 for fiscal 1999. We had a net loss
applicable to common stockholders for the six months ended March 31, 2000 of
$12.3 million, which was attributable primarily to a stock-based compensation
charge of $2.2 million and a deemed dividend on Series C redeemable convertible
preferred stock of $10.1 million during that period. At March 31, 2000, we had
$7.9 million in cash and cash equivalents, an increase of $6.4 million from cash
held at September 30, 1999 and $5.9 million from cash held at September 30,
1998. The increase in cash balances at March 31, 2000 was primarily due to our
receipt of $9.8 million of cash proceeds from the sale of our Series C
redeemable convertible preferred stock in the first quarter of fiscal 2000. As
of March 31, 2000, we had an accumulated deficit of $13.7 million.

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We have an accounts receivable revolving line of credit with Silicon Valley
Bank that allows us to borrow up to $3.0 million. At March 31, 2000, the total
line of credit was available. The interest rate on this line of credit is prime
plus 1.0%. We also have a line of credit of $1.1 million with an equipment
leasing company. At March 31, 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 used for operating activities was $134,000 and $1.0 million for
fiscal 1997 and 1998, respectively, net cash provided by operating activities
was $17,000 for fiscal 1999, and net cash used by operating activities was
$522,000 for the first six months of fiscal 2000. The usage of cash in 1997 was
due to a net loss of $373,000, partially offset by depreciation and amortization
and favorable changes in operating assets and liabilities. The usage of cash in
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. The generation of cash for 1999 was due to
depreciation of $507,000 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. Increases in
accounts receivable, income tax payments and reductions in deferred revenues
were the primary uses of cash during the first six months of 2000.

Net cash used for investing activities was $6,000, $358,000 and $1.4
million for fiscal 1997, 1998 and 1999, respectively, and $2.1 million for the
first six months of fiscal 2000. 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 1997 and
1998. We intend to purchase approximately $500,000 of additional capital assets,
primarily computer equipment and software, during the remainder of fiscal 2000.

Net cash provided by financing activities was $169,000, $3.3 million and
$945,000 for fiscal 1997, 1998 and 1999, respectively, and $9.0 million for the
first six months of fiscal 2000. Net cash provided by financing activities in
1997 reflects the issuance of notes in the aggregate principal amount of
$170,000. 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.
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 the first six months of fiscal 2000 reflects our
receipt of $9.8 million in cash proceeds from the issuance of Series C
redeemable convertible preferred stock. The increase in net cash provided by
financing activities during the first six months of fiscal 2000 was partially
offset by repayments of $1.0 million on the accounts receivable revolving line
of credit and certain repayments for capitalized lease obligations during the
first six months of 2000.

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 net proceeds of this
offering and the simultaneous private placement combined with existing capital
resources and cash generated from operations will be sufficient to meet our
needs for the next 18 months, 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.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing accounting standards. SFAS No. 133 requires that all derivatives be
recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 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 all fiscal years beginning after June 15, 2000. We do not
currently have forward exchange contracts to hedge exposures denominated in
foreign currencies or any other derivative financial instruments for trading or
speculative purposes, but it is possible we may enter into such contracts in the
future as our international sales or operations expand.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or SOP, No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the cost of computer software developed or obtained
for internal use and identifies the characteristics of internal-use software.
Our accounting policy with respect to accounting for computer software developed
or obtained for internal use is consistent with SOP 98-1. Software is amortized
for financial reporting purposes using the straight-line method over the
estimated useful life of three years.

In December 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin No. 101 (SAB 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.
We believe our revenue recognition policy is in compliance with SAB 101.

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 debt
obligations, we believe that there is no material exposure to interest rate
fluctuations.

CHANGES IN ACCOUNTANTS

On June 9, 1999, we engaged Ernst & Young LLP to act as our independent
auditors to report on our financial statements for the year ended September 30,
1999. The decision to appoint Ernst & Young LLP was approved by our board of
directors. Before we engaged Ernst & Young LLP, Mohler, Nixon & Williams
Accountancy Corporation had acted as our independent auditors since 1997. We
dismissed Mohler Nixon as our independent auditors on the date we engaged Ernst
& Young. None of Mohler Nixon's reports on our financial statements for any of
the years reported contained an adverse opinion or disclaimer of opinion, nor
were the opinions modified as to uncertainty, audit scope or accounting
principles, nor were there any events of the type requiring disclosure under
Item 304(a)(1)(v) of Regulation S-K under the Securities Act. During fiscal 1997
and 1998 and the interim period of 1999 through June 9, 1999, there were no
disagreements with Mohler Nixon, resolved or unresolved, on any matter of
accounting principles or practices, financial disclosure, or auditing scope or
procedure, which, if not resolved to Mohler Nixon's satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its reports.

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<PAGE> 34

BUSINESS

OVERVIEW

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

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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. 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 75
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 and 0.18 micron processes and were the first
third-party intellectual property company to deliver embedded memories
for the 0.15 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 50 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

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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.

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 and 0.18 micron processes and
were the first third-party intellectual property company to deliver
embedded memories for the 0.15 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

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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.

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. We expect to release this technology by year-end 2000.
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 year-end 2000. We have entered into certain agreements with Mosys and
TSMC with respect to the development of these compilers. See "Research
and Development."

Our 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.

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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.

- 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, 0.15 micron
and 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.

Recently, we have entered into 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 agreement 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 a

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minimal up-front development fee, 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 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 $256,000 in fiscal 1997, $924,000
in fiscal 1998, $2.7 million in fiscal 1999 and $3.0 million in the six months
ended March 31, 2000. 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 June 30, 2000, we had 36
employees engaged in research and development. We expect to identify and hire
additional technical personnel in fiscal year 2000 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.
Currently, all of our direct sales representatives and field application
engineers are located in the United States. We plan to use a portion of the
proceeds of this offering to establish a direct sales network in Europe. 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 50 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 that are currently in development, we expect to
receive both license and royalty fees from customers, as well as royalties from
third-party foundries, once these products are released. Our license agreements
contain limited warranties and eliminate our liability for consequential
damages. 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 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.

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- 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
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*, Lockheed Martin*, Macronix, MMC
Networks*, PMC-Sierra*, TranSwitch,
Vitesse
---------------------------------------------------------------------------------
Integrated Device Manufacturers AMD, Conexant, Fujitsu, Hitachi*,
Hyundai, IBM, Matsushita, National
Semiconductor*, OKI*, Philips, Toshiba*
---------------------------------------------------------------------------------
Embed-It! Architect Licensees Hitachi, Hyundai, Lockheed Martin,
Macronix, National Semiconductor, SIS,
TSMC, Toshiba, Winbond
---------------------------------------------------------------------------------
</TABLE>

* Indicates the ten customers that generated the highest level of
revenues for us in fiscal 1999.

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 1998, MMC
Networks, National Semiconductor, PMC-Sierra, Silicon Dynamics and TeraLogic,
each 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. In the first half of fiscal 2000, IBM generated 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.

37
<PAGE> 41

At July 27, 2000, we have four U.S. patents issued, eight U.S. patent
applications on file and one draft application 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 July 27, 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.

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 June 30, 2000, we had 126 employees, including 17 in sales and
marketing, 36 in research and development, 62 in engineering operations and 11
in general and administrative functions. Thirty-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.

38
<PAGE> 42

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 Lebanon, 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 Lebanon office, which occupies approximately
968 square feet, is leased on a month-to-month basis. 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
3,000 square feet in a building leased through December 2000. The development
center in India is located in Noida and occupies approximately 2,500 square feet
in a building leased through April 2002. We believe that our existing facilities
will be adequate for the next 12 months.

LEGAL PROCEEDINGS

We are not a party to any pending litigation.

39
<PAGE> 43

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES

The names and ages of our existing executive officers, directors and
significant employees at July 27, 2000 are set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Adam A. Kablanian.............. 41 President, Chief Executive Officer and Chairman of the
Board
Alexander Shubat............... 38 Vice President of Engineering and 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............... 41 Vice President of Engineering Operations
Yervant Zorian................. 43 Vice President and Chief Scientist and Director
Roger A. Bitter................ 56 Vice President of Worldwide Sales
Kenneth V. Rousseau............ 42 Vice President of Software Development
William J. Palumbo............. 41 Vice President and General Manager of New Jersey Operations
Alok Singh..................... 40 Vice President and General Manager of India Operations
Richard Elkus(2)............... 65 Director
Michael L. Hackworth(1)(2)..... 59 Director
Michael Stark(1)(2)............ 44 Director
Sang Wang(1)................... 54 Director
</TABLE>

-------------------------
(1) Member of the compensation committee

(2) Member of the audit committee

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.

40
<PAGE> 44

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.

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 recently
joined our management team as Vice President and Chief Scientist. 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 was the
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.

41
<PAGE> 45

Richard Elkus has served as a Director since April 2000. Since May 1997,
Mr. Elkus has served as a director of KLA-Tencor, a manufacturer of metrology
and wafer inspection equipment for the semiconductor industry. Before the merger
of Prometrix Corporation and Tencor in February 1994, Mr. Elkus was Chairman and
Chief Executive Officer of Prometrix which he co-founded in 1983. He also serves
on the boards of directors of Lam Research, a semiconductor equipment company,
Sopra S.A., a semiconductor equipment company, and Voyan Technology, a broadband
systems company. He holds a B.S. from Stanford University and an M.B.A. from
Dartmouth College, Tuck School of Business Administration.

Michael L. Hackworth has served as a Director since March 2000. Since
January 1985, he has held various positions at Cirrus Logic, a supplier of
analog circuits and advanced mixed-signal chip solutions, including President
and Chief Executive Officer from January 1985 to June 1998, Chairman and Chief
Executive Officer from June 1998 to April 1999 and Chairman since April 1999. He
also serves as a Director of Cirrus Logic and Read-Rite, a manufacturer of data
storage products. Mr. Hackworth holds a B.S. in Engineering from University of
Santa Clara.

Michael Stark has served as a Director since December 1999. Since December
1998, Mr. Stark has served as Managing Director of Crosslink Capital, Inc., a
San Francisco-based venture capital firm. From 1992 to December 1998, he was a
Managing Director of Crosslink Capital, which was a business unit of Robertson
Stephens. From 1989 to 1992 he was Director of Research at Robertson Stephens.
From 1983 to 1989, Mr. Stark was a senior research analyst with Robertson
Stephens, covering the semiconductor industry. Before joining Robertson Stephens
in 1983, he worked in Intel's strategic planning group. He serves on the board
of directors of several private companies. Mr. Stark holds a B.S. in Engineering
from Northwestern University and an M.B.A. from the University of Michigan.

Sang Wang has served as a Director since November 1998. Since April 1999,
Dr. Wang has served as Chief Executive Officer of Nassda Corporation, a Santa
Clara based EDA company. Before joining Nassda, he co-founded and served as
Chief Executive Officer and Chairman of EPIC Design Technology, an EDA company,
from September 1986 to May 1999. EPIC was acquired by Synopsys in February 1997.
Dr. Wang holds a B.S. in Electrical Engineering from National Taiwan University,
an M.S. in Physics from The Ohio State University and a Ph.D in Electrical
Engineering from Stanford University.

BOARD COMPOSITION

We currently have seven directors. Before the completion of this offering,
each director was elected to serve until the next annual meeting of stockholders
or until their successors are elected and qualified. In connection with this
offering, our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, only one class of directors
will be elected at each annual meeting of our stockholders, with the other
classes continuing for the remainder of their respective terms. Dr. Zorian and
Dr. Wang will be designated Class I directors with terms expiring at the annual
meeting of stockholders in 2001, Dr. Shubat and Mr. Stark will be designated
Class II directors with terms expiring at the annual meeting of stockholders in
2002, and Mr. Kablanian, Mr. Hackworth and Mr. Elkus will be designated Class
III directors with terms expiring at the annual meeting of stockholders in 2003.

BOARD COMMITTEES

Our board of directors has an audit and a compensation committee.

Audit Committee. The audit committee was formed in April 2000 and currently
consists of Mr. Elkus, Mr. Hackworth and Mr. Stark. Mr. Elkus and Mr. Hackworth
are independent directors. Mr. Stark is not considered an independent director
due to his employment by Crosslink Capital, which beneficially owns
approximately 15% of our outstanding shares. However, our board of directors
believes that Mr. Stark's substantial experience as a securities analyst will
bring additional expertise to the audit committee. The audit committee's
responsibilities include recommending to the board of directors the independent
public accountants to conduct the annual audit of our accounts, reviewing the
scope and results of the independent audits, and reviewing and evaluating
internal accounting policies.

42
<PAGE> 46

Compensation Committee. The compensation committee was formed in April 1999
and currently consists of Dr. Wang, Mr. Hackworth and Mr. Stark. The
compensation committee administers the 1997 Equity Incentive Plan and the 2000
Employee Stock Purchase Plan, determines the compensation and benefits of our
officers, and establishes and reviews general policies relating to the
compensation and benefits of our officers and employees.

DIRECTOR COMPENSATION

Directors do not receive cash payment for their service on the board or any
board committee, but are entitled to receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
board committee meetings. We have granted, and expect to continue to grant,
non-employee directors options to purchase shares of our common stock. In
November 1998, we granted Dr. Wang and Dr. Zorian each an option to purchase
30,000 shares at an exercise price of $0.13 per share; in March 2000, we granted
Mr. Hackworth an option to purchase 100,000 shares of common stock at an
exercise price of $2.00 per share; in April 2000, we granted Mr. Elkus an option
to purchase 47,500 shares and Dr. Zorian an option to purchase 20,000 shares,
each at an exercise price of $4.00 per share; and in May 2000, we granted Mr.
Stark an option to purchase 30,000 shares, Mr. Elkus an option to purchase 7,500
shares, each at an exercise price of $4.00 per share. Each of these options was
immediately exercisable, but with the exception of the option granted to Mr.
Elkus in May 2000, the shares received upon exercise are subject to a right to
repurchase these shares. This right to repurchase expires for 25% of the shares
upon the one-year anniversary of the date of the option grant. Thereafter, the
right to repurchase the remaining shares expires ratably over the next three
years, in annual installments in the case of Dr. Wang and Dr. Zorian's 1998
grant, and in monthly installments in the case of Mr. Hackworth, Mr. Elkus, Mr.
Stark and Dr. Zorian's 2000 grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Before we formed the compensation committee in April 1999, the entire board
participated in all compensation decisions. None of our executive officers
presently serves, or in the past fiscal year has served, as a member of the
board of directors or compensation committee of any other company whose
executive officers served in past fiscal year on our board of directors or
compensation committee. See "Related Party Transactions" for a description of
transactions between us and entities affiliated with the members of our
compensation committee.

43
<PAGE> 47

EXECUTIVE COMPENSATION

The following table contains certain information concerning the
compensation of our chief executive officer and each of the next four most
highly compensated executive officers, whose aggregate compensation exceeded
$100,000 during the fiscal year ended September 30, 1999. We refer to these
individuals as the "named executive officers" elsewhere in this prospectus.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(S) SALARY BONUS OPTIONS
------------------------------ -------- ------- ------------
<S> <C> <C> <C>
Adam A. Kablanian......................................... $146,739 $ 2,259 --
President, Chief Executive Officer and Chairman of the
Board
Alexander Shubat.......................................... $148,388 $ 2,259 --
Vice President and Chief Technical Officer
Vincent F. Ratford........................................ $144,615 $89,792(1) --
Vice President of Sales and Marketing
Raymond T. Leung.......................................... $136,538 $ 2,016 150,000(2)
Vice President of Engineering Operations
</TABLE>

-------------------------
(1) Consists of sales commissions.

(2) The options to purchase these shares were exercised immediately following
grant, but the shares issued upon exercise are subject to our right of
repurchase. This right of repurchase expires for 25% of the shares on the
first anniversary of the date of the option grant and thereafter, expires
for the remaining shares ratably over the next three years on a quarterly
basis.

OPTION GRANTS IN FISCAL YEAR 1999

The following table contains certain information concerning options granted
to each of our named executive officers during the fiscal year ended September
30, 1999.

Estimated values are computed by:

- multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $12.00 per share, and

- subtracting from that result the aggregate option exercise price.

Potential realizable values are computed by:

- multiplying the number of shares of common stock subject to a given
option by the initial public offering price of $12.00 per share,

- assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rates shown in the table for the entire
ten-year term of the option, and

- subtracting from that result the aggregate option exercise price.

44
<PAGE> 48

The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE OR APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES BASE PRICE TERM
OPTIONS IN FISCAL PER SHARE EXPIRATION ESTIMATED -----------------------
NAME GRANTED YEAR ($/SHARE) DATE VALUE 5% 10%
---- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Adam A. Kablanian.... -- -- -- -- -- -- --
Alexander Shubat..... -- -- -- -- -- -- --
Vincent F. Ratford... -- -- -- -- -- -- --
Raymond T. Leung..... 150,000 12.7% $0.13 11/12/08 $1,780,500 $2,677,684 $3,948,154
</TABLE>

The percentage of options granted is based upon an aggregate of 1,177,500
options granted during the fiscal year ended September 30, 1999 to our
employees, including the named executive officers. All of these options were
granted under our 1997 Equity Incentive Plan.

In March 2000, we granted options to purchase the following numbers of
shares to our named executive officers: Mr. Kablanian, 150,000 shares; Mr.
Shubat, 100,000 shares; Mr. Ratford, 62,500 shares; and Mr. Leung, 62,500
shares, all at an exercise price of $1.50 per share.

The options granted to Mr. Leung and the other executive officers are
immediately exercisable, but the shares issued upon exercise are subject to a
right of repurchase. This right will expire for 25% of the underlying shares on
the one-year anniversary of the date of option grant. Thereafter, this right
will expire ratably over the next three years, on a monthly basis for the
options issued in March 2000, and on a quarterly basis for the options issued to
Mr. Leung in November 1998. Each of the named executive officers, with the
exception of Mr. Leung, have exercised each of the options granted since the
beginning of the 1999 fiscal year. Mr. Leung has exercised the option to
purchase 150,000 shares granted in November 1998 but not the option granted in
March 2000. See "Related Party Transactions."

The exercise price of each of the options granted is equal to our board of
directors' determination of the fair market value of our common stock on the
date of grant. This determination is based on the price most recently paid by
independent third party investors for shares of our preferred stock prior to the
grant date and is modified to account for changes in our business since the
third-party sales and the differences in rights between our common and preferred
stock.

EXERCISE OF STOCK OPTIONS

The following table contains certain information concerning the exercise of
stock options by each of the named executive officers during the fiscal year
ended September 30, 1999. All of these options were granted under our 1997
Equity Incentive Plan.

There was no public market for our common stock during the year ended
September 30, 1999. Accordingly, the value realized upon exercise represents the
positive spread between the exercise price of

45
<PAGE> 49

stock options and the fair market value of the options on the date of exercise,
as determined by our board of directors.

<TABLE>
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED
----------------------------------------------------------- -------- --
<S> <C> <C>
Adam A. Kablanian.......................................... -- --
Alexander Shubat........................................... -- --
Vincent F. Ratford......................................... -- --
Raymond T. Leung........................................... 150,000(1) --(2)
</TABLE>

-------------------------
(1) The shares issued upon exercise of these options are subject to our right of
repurchase. This right of repurchase expires for 25% of the shares on the
first anniversary of the date of the option grant and thereafter expires
ratably on a quarterly basis over the next three years for the remaining
shares.

(2) These options were exercised immediately following issuance at an exercise
price that our board of directors determined to be equal to the fair market
value of our common stock.

EMPLOYMENT OFFER LETTERS AND CHANGE OF CONTROL ARRANGEMENTS

In connection with our hiring of James R. Pekarsky, our Vice President of
Finance and Chief Financial Officer, Vincent F. Ratford, our Vice President of
Sales and Marketing, and Raymond T. Leung, our Vice President of Engineering
Operations, we entered into a letter agreement with each of these officers.
Under these agreements, we agreed to pay Mr. Pekarsky an annual salary of
$150,000, Mr. Ratford an annual salary of $140,000 plus bonuses based on sales,
and Mr. Leung an annual salary of $125,000. In addition, we granted Mr. Pekarsky
options to purchase 150,000 shares of common stock at an exercise price of $0.70
per share, Mr. Ratford options to purchase 300,000 shares of common stock at an
exercise price of $0.13 per share, and Mr. Leung options to purchase 150,000
shares of common stock at an exercise price of $0.13 per share. These options
were immediately exercisable, but subject to our right to repurchase the shares
if the employees terminate their employment. The repurchase right terminates
over four years. However, in the event the employment of any of these
individuals is terminated following a change of control, these shares will
generally become immediately vested. These officers' employment is for no
specified length of time, and either party has the right to terminate such
officer's employment at any time with or without cause.

EMPLOYEE BENEFIT PLANS

1997 Equity Incentive Plan

Our 1997 Equity Incentive Plan was adopted by our board of directors in
August 1997 and approved by our stockholders in August 1997. The plan was later
amended by our board of directors in February 1999, November 1999, February 2000
and April 2000 and such amendments were approved by our stockholders in February
1999, November 1999 and July 2000. Our 1997 Equity Incentive Plan provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and for the granting to employees,
officers, directors and consultants of nonstatutory stock options and restricted
stock purchase rights. On March 31, 2000, this plan provided for the issuance of
a total of 3,695,140 shares of our common stock, of these shares, 1,896,125 were
issued upon exercise of stock options, 1,559,500 shares were subject to
outstanding options and 239,515 shares were available for future grants. In
April 2000, our board of directors increased the number of shares available for
grant under our 1997 Equity Incentive Plan by 1.5 million shares.

Unless terminated sooner, the 1997 Equity Incentive Plan will terminate
automatically in August 2007.

Our board of directors administers the stock option plan and has the power
to determine:

- the terms of the options or restricted stock awards granted, including
the exercise price of the options or purchase price of the restricted
stock grants;

46
<PAGE> 50

- the number of shares subject to each option or restricted stock award;

- the vesting and exercisability and payment of each option or restricted
stock award; and

- the form of consideration payable upon exercise of each option or
restricted stock award.

In addition, the administrator may modify outstanding options, provided
that it may not impair the rights of any optionee without such optionee's prior
written consent.

Options and restricted stock awards granted under our 1997 Equity Incentive
Plan are generally not transferable by the optionee, and each option and
restricted stock award is exercisable during the lifetime of the optionee and
only by such optionee. Options granted under the 1997 Equity Incentive Plan must
generally be exercised within three months after the end of the optionee's
status as an employee, director or consultant of Virage Logic, or within twelve
months after such optionee's termination by death or disability, but in no event
no later than the expiration of the option's term.

The exercise price of all incentive stock options granted under the 1997
Equity Incentive Plan must be at least equal to the fair market value of the
common stock on the date of the grant. For any participant who owns stock
possessing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive stock option granted must at
least equal 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1997 Equity Incentive Plan may not exceed ten years.

The 1997 Equity Incentive Plan provides that in the event that we merge
with another corporation in a merger in which we are not the surviving
corporation or following which our stockholders immediately before such merger
cease to own their shares, or sell substantially all of our assets, each option
or stock purchase right shall be assumed or substituted for by the successor
corporation. If the outstanding options and stock purchase rights are not
assumed or substituted for by the successor corporation, the options and the
stock purchase rights will expire in accordance with the conditions that our
board of directors will determine.

2000 Employee Stock Purchase Plan

Our board of directors adopted our 2000 Employee Stock Purchase Plan in
April 2000. This plan provides our employees with an opportunity to purchase our
common stock through accumulated payroll deductions.

A total of 200,000 shares of common stock has been reserved for issuance
under this plan. In addition, this plan provides for annual increases in the
number of shares available for issuance under the plan on the first day of each
year, beginning October 1, 2001, equal to the lesser of:

- 200,000 shares;

- 0.75% of the outstanding shares of our capital stock on that date; or

- such lesser amount as may be determined by our board of directors.

Our board of directors, or a committee appointed by the board, administers
this plan. Our board or its committee has full and exclusive authority to
interpret the terms of this plan and determine eligibility. Employees are
eligible to participate in this plan if they are employed by us or any
participating subsidiary for at least 20 hours per week for at least five months
in any calendar year. However, an employee may not be granted an option to
purchase stock under the purchase plan if such employee immediately after grant
owns stock possessing five percent or more of the total combined voting power or
value of all classes of our capital stock or of any subsidiary.

The plan provides for offering periods of six months. The offering periods
will generally start on October 1 and April 1 of each year, commencing October
1, 2000, and will end on March 31 and September 30 of each year.

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<PAGE> 51

This plan permits participants to purchase our common stock though payroll
deductions of up to 15% of the participant's compensation, up to a maximum of
$25,000 per year, and up to a maximum of 1,500 shares per offering period.
Compensation is defined as the participant's base straight time gross earnings
and commissions, but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation.

Amounts deducted and accumulated for the participant's account are used to
purchase shares of our common stock on the last trading day of each purchase
period at a price of 85% of the lower of the fair market values of the common
stock at the beginning of the offering period and the end of the purchase
period. Participants may reduce their withholding percentage to zero at any time
during an offering period but may otherwise only change their withholding
percentage on the first day of each purchase period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.

This plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended, allows for favorable tax treatment of
participants. Rights granted under the plan will not be transferable by a
participant other than by will or the laws of descent and distribution.

This plan provides that if we merge with or into another corporation or
effect a sale of substantially all of our assets, a successor entity may assume
or substitute for each outstanding purchase right. If the successor entity
refuses to assume or substitute the outstanding purchase rights, the offering
period then in progress will be shortened, and a new exercise date will be set.

This plan will terminate in 2020. Our board of directors has the authority,
however, to amend or terminate this plan at any time and may apply any action
which would affect the participants' outstanding rights to purchase stock under
this plan.

Fiscal Year 2000 Executive Variable Incentive Pay Plan

In fiscal 2000, our board of directors adopted the Virage Logic Corporation
Fiscal Year 2000 Executive Variable Incentive Pay Plan, or the VIP Plan. The
purpose of the VIP Plan is to provide key employees with a variable pay plan
that links employee contribution and company performance and provides an
incentive to achieve our objectives. Eligibility under the VIP Plan is limited
to employees at the President, Vice President and director levels. Payments to
participants in the VIP Plan are linked to our revenues and operating profits in
fiscal 2000 as compared with the planned revenues and operating profits for that
year. Pursuant to the VIP Plan, participants may receive additional annual
compensation of 15% (for director-level employees) or 25% (for our President and
Vice Presidents) of their base salary if our revenues and operating profits for
fiscal 2000 are as planned, and up to 30% and 50% of the base salary,
respectively, if our revenues in fiscal 2000 are 130% or more than planned and
our operating profits in fiscal 2000 are 200% or more than planned.

Fiscal Year 2000 Employee Bonus Program

For fiscal year 2000, we have instituted a bonus program for our employees.
Under this program, 10% of our pre-tax profits before deductions for deferred
compensation will be distributed quarterly to our U.S. employees, other than our
sales and marketing employees and participants in the Fiscal Year 2000 Executive
Variable Incentive Pay Plan.

401(k) Plan

In June 1998, we implemented a Retirement Savings and Investment Plan
covering our full-time employees located in the United States. This plan is
intended to qualify under Section 401(k) of the Internal Revenue Code of 1986,
as amended, so that contributions to this plan by employees, and the investment
earnings thereon, are not taxable to employees until withdrawn. Pursuant to the
plan, employees may elect to reduce their current compensation from a minimum of
one percent of their annual compensation up to the statutory prescribed annual
limit ($10,500 in 2000) and to have the amount of

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reduction contributed to the plan. We may make additional matching contributions
on behalf of plan participants on a discretionary basis, and such contributions
shall vest during a period of four years.

LIMITATION ON LIABILITY AND INDEMNITY

Upon the closing of this offering, our charter documents will provide that
we will indemnify our directors and executive officers and may indemnify our
other officers, employees and other agents to the fullest extent permitted by
Delaware law. Our charter documents will allow us to purchase insurance for any
person whom we are required or permitted to indemnify. We have obtained a policy
of directors' and officers' liability insurance that insures such persons
against the cost of defense, settlement or payment of a judgment under certain
circumstances.

We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements, we will indemnify them
against amounts actually and reasonably incurred in connection with an actual,
or a threatened, proceeding if any of them may be made a party because of their
role as one of our directors or officers. We are obligated to pay these amounts
only if the officer or director acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to our best interests. For any
criminal proceeding, we are obligated to pay these amounts only if the officer
or director had no reasonable cause to believe his or her conduct was unlawful.
The indemnification agreements also set forth procedures that will apply in the
event of a claim for indemnification thereunder.

In addition, our restated Certificate of Incorporation to be filed in
connection with this offering will provide that the liability of our directors
for monetary damages shall be eliminated to the fullest extent permissible under
Delaware law. This provision does not eliminate a director's duty of care. Each
director will continue to be subject to liability for:

- breach of the director's duty of loyalty to us;

- acts or omissions not in good faith or involving intentional misconduct
or knowing violations of law;

- acts or omissions that the director believes to be contrary to our best
interests or our stockholders;

- any transaction from which the director derived an improper personal
benefit;

- improper transactions between the director and us; and

- for improper distributions to stockholders and loans to directors and
officers.

This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.

There is no pending litigation or proceeding involving any of our directors
or officers for which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

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RELATED PARTY TRANSACTIONS

SALES OF SECURITIES

In January 1996, we issued 2,520,000 shares of common stock to each of Adam
A. Kablanian and Alexander Shubat in exchange for a total of $100 paid by each
officer. At the same time we issued 1,280,000 shares of Series A preferred stock
to Mr. Kablanian in exchange for $333,000 paid in cash and property and 38,212
shares of Series A preferred stock to Mr. Shubat in exchange for $10,000 in
property. Each share of Series A preferred stock is convertible into 1.5 shares
of common stock.

In March 1997, we subsequently repurchased 2,268,000 of the shares of
common stock issued to Mr. Kablanian and Mr. Shubat for an aggregate purchase
price of $90 paid to each officer. In August 1997, we sold 2,268,000 shares of
common stock to each of Mr. Kablanian and Mr. Shubat pursuant to Founder's
Restricted Stock Purchase Agreements, in exchange for promissory notes from each
officer in the principal amount of $39,569. These notes bear interest at a rate
of 6.29%, are secured by a pledge of the shares and are due on August 27, 2002.

In July 1998, we sold 1,448,037 shares of Series B preferred stock for a
purchase price of $2.40 per share to 21 investors. Tower Semiconductor, one of
our 5% stockholders, purchased 625,000 of these shares and Sang Wang purchased
41,666 of these shares. Dr. Wang was subsequently elected to our board of
directors. Each share of Series B preferred stock is convertible into 1.5 shares
of common stock.

In December 1999, we sold 5,455,255 shares of Series C preferred stock at a
purchase price of $1.90 per share to 49 investors. Affiliates of Crosslink
Capital, Inc., which then became one of our 5% stockholders, purchased 4,197,753
shares, Michael Hackworth purchased 13,157 shares and Richard Elkus purchased
26,315 shares. Mr. Stark, a managing member of Crosslink Capital, Mr. Hackworth
and Mr. Elkus were each subsequently appointed to our board of directors. Each
share of Series C preferred stock is convertible into 0.5 shares of common
stock.

In connection with the investment of its affiliates, we entered into an
agreement with Crosslink Capital, Inc. to use our reasonable best efforts to
cause the managing underwriters in this offering to offer Crosslink the right to
purchase at the offering price, the lesser of 10% of the shares of common stock
sold in this offering or shares of common stock with a total purchase price of
$3.0 million. In return for Crosslink's waiver of its rights under the prior
agreement, we have agreed to sell to Crosslink and its affiliates 403,226 shares
of common stock in a private placement simultaneous with this offering. See
"Description of Capital Stock -- Simultaneous Private Placement."

We have granted demand registration rights to the purchasers of our Series
B and Series C preferred stock and the affiliates of Crosslink Capital, Inc. who
will be purchasing our common stock simultaneously with the closing of this
offering. In addition, we have granted limited rights to Mr. Kablanian and Mr.
Shubat to require us to include their shares of common stock, including common
stock that may be issued upon conversion of the Series A preferred stock, in any
registration effected for our own account. See "Description of Capital
Stock -- Registration Rights."

EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION AGREEMENTS

We have entered into letter agreements with Mr. Pekarsky, our Vice
President of Finance and Chief Financial Officer, Mr. Ratford, our Vice
President of Sales and Marketing, and Mr. Leung, our Vice President of
Engineering Operations, which set forth certain terms of their employment with
us. See "Management -- Employment Offer Letters and Change of Control
Arrangements."

OPTION GRANTS

We have granted options to our directors and executive officers, and we
intend to grant additional options to our directors and officers in the future.
See "Management -- Director Compensation" and "-- Option Grants in Fiscal Year
1999." In addition, in May 2000, Yervant Zorian, one of our directors,

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became an executive officer of our company. As part of his compensation package,
he was granted an option to acquire 180,000 shares of our common stock at an
exercise price of $4.00 per share.

INDEMNIFICATION AGREEMENTS

We have entered into indemnification agreements with our directors and
executive officers. Such agreements require us, among other things, to indemnify
our officers and directors, other than for liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. See
"Management -- Limitation of Liability and Indemnity."

LOANS TO CERTAIN OFFICERS

In March 2000, we extended loans to Mr. Kablanian in the principal amount
of $225,000, Mr. Shubat in the principal amount of $150,000, Mr. Pekarsky in the
principal amount of $105,000, and Mr. Ratford in the principal amount of
$133,750 in order to allow them to exercise stock options. These loans are
evidenced by one or more full recourse promissory notes which are payable in
March 2005. These notes bear interest at a rate of 6.69% and are secured by a
pledge of the shares purchased. In addition, $39,569 plus accrued interest is
still outstanding under each of the promissory notes executed by Mr. Kablanian
and Mr. Shubat in August 1997.

OTHER RELATED PARTY TRANSACTIONS

In January 1999, we entered into a Development Agreement with Tower
Semiconductor, which currently owns approximately 6% of our common stock. Under
this agreement, we agreed to develop memory compilers for specified Tower
manufacturing processes. In addition, we granted Tower an exclusive perpetual
license to use these compilers and our technology to generate certain defined
modules, although we are permitted to license compilers to Tower's customers for
generating memories using a Tower fabrication process. We have performed all
development work required of us under this agreement.

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PRINCIPAL STOCKHOLDERS

The following table contains certain information concerning the beneficial
ownership of our common stock on June 30, 2000 and as adjusted to reflect the
sale of the common stock being offered by this prospectus for:

- each person who is known by us to beneficially own more than 5% of our
common stock;

- each of our directors;

- each of our named executive officers; and

- all of our executive officers and directors as a group.

Percentage of ownership is based on shares of common stock outstanding on
June 30, 2000, giving effect to the conversion of our preferred stock into
common stock upon the closing of this offering, and 18,837,627 shares
outstanding after this offering, assuming no exercise of the underwriters'
over-allotment option.

Beneficial ownership is calculated based on requirements of the SEC. All
shares of the common stock subject to options currently exercisable or
exercisable within 60 days after June 30, 2000 are deemed to be outstanding for
computing the percentage of ownership of the person holding such options, but
are not deemed to be outstanding for computing the percentage of ownership of
any other person. To our knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named in
the table has sole voting and investment power for the shares set forth opposite
such person's name.

Unless otherwise indicated in this table, the address of each individual
listed in the table is Virage Logic Corporation, 46501 Landing Parkway, Fremont,
California 94538.

<TABLE>
<CAPTION>
PERCENT PERCENT
BEFORE AFTER
NAME OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------ ---------- -------- --------
<S> <C> <C> <C>
Crosslink Capital, Inc...................................... 2,098,876(1) 14.3% 13.3%(13)
2 Embarcadero, Suite 2200
San Francisco, CA 94111
Tower Semiconductor......................................... 937,500 6.4% 5.0
P.O. Box 619
Migdal Haemek 10556
ISRAEL
Adam A. Kablanian........................................... 4,582,500(2) 31.2 24.3
Alexander Shubat............................................ 2,674,818(3) 18.2 14.2
James R. Pekarsky........................................... 200,000(4) 1.4 1.1
Vincent F. Ratford.......................................... 362,500(5) 2.5 1.9
Raymond T. Leung............................................ 212,500(6) 1.4 1.1
Richard Elkus............................................... 68,157(7) * *
Michael L. Hackworth........................................ 106,578(8) * *
Michael Stark............................................... 2,128,876(9) 14.5 13.4(14)
Sang Wang................................................... 99,077(10) *
Yervant Zorian.............................................. 230,000(11) 1.5 1.2
All current executive officers and directors as a group (10
persons).................................................. 10,665,006(12) 70.0% 55.0%
</TABLE>

-------------------------
* Less than 1%.

(1) Includes 406,727 shares held by Crosslink Omega Ventures III, L.L.C.;
634,249 shares held by Crosslink Offshore Omega Ventures III; 56,075 shares
held by Omega Bayview, L.L.C.; and 1,001,825 shares held by Crosslink
Crossover Fund III, L.P. Crosslink. Crosslink Capital, Inc. is a managing
member of each of these limited liability companies.

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<PAGE> 56

(2) Includes 150,000 shares subject to a right of repurchase on June 30, 2000.
Also includes 347,000 shares held by trusts for Mr. Kablanian's minor
children.

(3) Includes 100,000 shares subject to a right of repurchase on June 30, 2000.
Also includes 347,000 shares held by trusts for Mr. Shubat's minor
children.

(4) Consists of 150,000 shares subject to a right of repurchase on June 30,
2000 and options to purchase 50,000 shares that are immediately exercisable
subject to our right to repurchase the shares issued upon exercise.

(5) Includes 212,500 shares subject to a right of repurchase on June 30, 2000.

(6) Includes 93,750 shares subject to a right or repurchase on June 30, 2000
and 62,500 shares that may be issued upon the exercise of an option that is
immediately exercisable, subject to our right to repurchase the shares
issued upon exercise.

(7) Includes 55,000 shares that may be issued upon the exercise of options that
are immediately exercisable, subject to our right of repurchase with
respect to 47,500 shares.

(8) Includes 100,000 shares that may be issued upon exercise of an option that
is immediately exercisable, subject to our right of repurchase.

(9) Includes 30,000 shares that may be issued upon the exercise of an option
that is immediately exercisable, subject to our right of repurchase. Also
includes 406,727 shares held by Crosslink Omega Ventures III, L.L.C.;
634,249 shares held by Crosslink Offshore Omega Ventures III; 56,075 shares
held by Omega Bayview, L.L.C.; and 1,001,825 shares held by Crosslink
Crossover Fund III, L.P. Mr. Stark is a managing director of Crosslink
Capital, Inc. which is a managing member of each of these limited liability
companies. As managing director, Mr. Stark exercises voting and dispositive
control over the shares held by the Crosslink entities. Mr. Stark disclaims
beneficial ownership of the shares held by the Crosslink entities, except
to the extent of his pecuniary interest.

(10) Includes 30,000 shares that may be issued upon the exercise of an option
that is immediately exercisable, subject to our right to repurchase 22,500
of the shares issued upon exercise.

(11) Consists of 230,000 shares that may be issued upon the exercise of options
that are immediately exercisable, subject to our right to repurchase
222,500 of the shares issued upon exercise.

(12) Includes 706,250 shares subject to a right of repurchase and 557,500 shares
that may be issued upon the exercise of options that are immediately
exercisable, subject to our right to repurchase the shares issued upon
exercise.

(13) Assumes issuance of 403,226 shares to Crosslink Crossover Fund III, L.P.
and Offshore Crosslink Crossover Fund III, Unit Trust in the simultaneous
private placement. Crosslink Capital, Inc. is a managing member of each of
these funds.

(14) Assumes issuance of 403,226 shares to Crosslink Crossover Fund III, L.P.
and Offshore Crosslink Crossover Fund III, Unit Trust in the simultaneous
private placement. Mr. Stark is a managing director of Crosslink Capital,
Inc. which is a managing member of these funds. As managing director, Mr.
Stark exercises voting and dispositive control over the shares held by the
Crosslink entities. Mr. Stark disclaims beneficial ownership of the shares
held by the Crosslink entities, except to the extent of his pecuniary
interest.

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DESCRIPTION OF CAPITAL STOCK

Upon the completion of this offering, we will be authorized to issue
150,000,000 shares of common stock, $.001 par value per share, and 25,000,000
shares of undesignated preferred stock, $.001 par value per share.

The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our restated
Certificate of Incorporation to be effective before the closing of this
offering, our bylaws and the provisions of applicable Delaware law.

COMMON STOCK

Assuming the conversion of our Series A preferred stock, Series B preferred
stock and Series C preferred stock to common stock, and the completion of a
1-for-2 reverse stock split, as of March 31, 2000, there were 14,684,401 shares
of common stock outstanding. At March 31, 2000, options and warrants to purchase
1,619,500 shares of common stock were also outstanding. Since April 1, 2000, we
granted options to purchase 887,000 shares of common stock. There will be
18,837,627 shares of common stock outstanding (assuming no exercise of the
underwriters' overallotment option or exercise of outstanding options after
March 31, 2000), after giving effect to the sale of the shares offered by this
prospectus and the simultaneous private placement of 403,226 shares of common
stock to Crosslink Capital, Inc., or its affiliates. The holders of our common
stock will be entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders, including elections of directors.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably any dividends
declared by our board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of our common stock will be entitled to share ratably in
all assets remaining after payment of liabilities, subject to the prior
distribution rights of any outstanding preferred stock. Our common stock has no
preemptive or conversion rights or other subscription rights. The outstanding
shares of our common stock are, and the shares of common stock to be issued upon
completion of this offering will be, fully paid and non-assessable.

PREFERRED STOCK

Upon the completion of this offering, our board of directors will have the
authority, without further action by our stockholders, to issue up to 25,000,000
shares of preferred stock, $.001 par value, in one or more series. Our board of
directors also will have the authority to designate the rights, powers,
preferences, privileges and restrictions of each series, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series.

Issuances of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and for other corporate purposes, may have
the effect of delaying, deferring or preventing a change in control of Virage
Logic without further action by the stockholders. The issuance of preferred
stock with voting and conversion rights may also adversely affect the voting
power of the holders of common stock. In certain circumstances, an issuance of
preferred stock could have the effect of decreasing the market price of our
common stock.

All outstanding shares of preferred stock will be converted to common stock
upon the completion of this offering and we currently have no plans to issue any
other shares of preferred stock.

WARRANTS

As of March 31, 2000, we had the following outstanding warrants to purchase
shares of our capital stock: (1) a warrant to purchase up to 7,500 shares of
common stock at an exercise price of $0.70 per share that was issued in
consideration for legal services; (2) a warrant to purchase up to 25,000 shares
of Series B preferred stock, convertible into 37,500 shares of common stock at
an effective conversion price

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of $1.60, which was issued to a consultant; and (3) a warrant to purchase up to
30,000 shares of Series C preferred stock, convertible into 15,000 shares of
common stock at an effective conversion price of $3.80 per share, which was
issued to Silicon Valley Bank as consideration for our credit line. In addition,
since April 1, 2000 we issued warrants to purchase 50,000 shares of common stock
at an exercise price of $4.00 per share to an industry partner and its
affiliates in exchange for a license agreement.

REGISTRATION RIGHTS

After this offering, under an investors' rights agreement, the holders of
11,917,000 shares of common stock and the affiliates of Crosslink Capital, Inc.
who purchase common stock in the simultaneous private placement will be entitled
to rights to require us to register shares under the Securities Act. If we
propose to register our common stock under the Securities Act in connection with
the public offering of common stock, then these holders are entitled to notice
of the registration and to include shares of common stock in the registration at
our expense. In addition, six months after the closing of this offering, holders
of 4,899,682 shares of common stock and, one year after the closing of this
offering, the affiliates of Crosslink Capital, Inc. who purchase common stock in
the simultaneous private placement, will have the right to demand on up to three
separate occasions that we register their shares for resale at our expense on
any form of SEC registration statement available to us. These holders may also
require us to file additional registration statements on Form S-3 to register
their shares for resale. All of these registration rights are limited by the
terms and conditions of our agreements with these stockholders, including the
right of the underwriters of an offering to limit the number of shares included
in such registration.

SIMULTANEOUS PRIVATE PLACEMENT

In connection with our sale of shares of Series C preferred stock to
affiliates of Crosslink Capital, Inc., we entered into an agreement with
Crosslink to use our reasonable best efforts to cause the managing underwriters
in our initial public offering to offer Crosslink the right to purchase shares
in that offering. See "Related Party Transactions -- Sales of Securities."
Crosslink has agreed to waive our compliance with this agreement, contingent
upon the closing of our sale to Crosslink or its affiliates of shares of common
stock with a total purchase price of $4.5 million at the initial public offering
price, net of underwriting discounts and commissions, in a private placement
simultaneously with this offering. Simultaneously with the closing of this
offering, we will sell 403,226 shares of common stock at a price of $11.16 per
share in this private placement. In addition, we have amended our investors
rights agreement to grant the Crosslink affiliates the same rights related to
the registration of these shares under the Securities Act as our holders of
Series B and C preferred stock, beginning one year after the date of this
prospectus. Crosslink and its affiliates have entered into lock-up agreements
with respect to these shares under which they have agreed not to offer or sell
any of these shares for a period of one year after the date of this prospectus.
See "-- Registration Rights."

DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS

We were initially incorporated in California. On July 25, 2000, we
reincorporated in the State of Delaware.

Provisions of Delaware law and our charter documents could have an
anti-takeover effect and may delay, discourage or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interests,
including attempts that might result in a premium being paid over the market
price of our common stock.

Section 203. We will be subject to the provisions of Section 203 of the
Delaware law. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the

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stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior, did own, 15%
or more of the corporation's voting stock. These provisions may have the effect
of delaying, deferring or preventing a change in control of Virage Logic without
further action by the stockholders.

Board of Directors. Following the closing of this offering, our restated
Certificate of Incorporation and bylaws will provide that, subject to any rights
of holders of preferred stock to elect additional directors under specified
circumstances, the number of directors will be fixed from time to time
exclusively by resolution of the board of directors. The directors, other than
those who may be elected by the holders of preferred stock, will be divided into
three classes, as nearly equal in number as possible. Each director will hold
office until such person's successor is duly elected and qualified. In addition,
subject to any rights of holders of preferred stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
board of directors resulting from death, resignation, disqualification, removal
or other cause will be filled by the affirmative vote of a majority of the
remaining directors then in office, even if less than a quorum, and not by the
stockholders. No decrease in the number of directors constituting the board of
directors will shorten the term of any incumbent director. Subject to the rights
of holders of preferred stock, generally any director may be removed from office
only for cause by the affirmative vote of the holders of at least a majority of
our outstanding common stock.

These provisions would preclude a third-party from removing incumbent
directors and simultaneously gaining control of our board of directors by
filling the vacancies created by removal with its own nominees. Under the
classified board provision described above, it would take at least two elections
of directors for any individual or group to gain control of our board of
directors. Accordingly, these provisions could discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of Virage Logic.

No Stockholder Action By Written Consent; Special Meetings. Following the
closing of this offering, our restated Certificate of Incorporation will provide
that stockholders may only take action at a duly called annual or special
meeting and not by written consent. At the same time our bylaws will provide
that special meetings of stockholders may be called only by the chairman of the
board or the president, by any officer at the request in writing of a majority
of the directors or by the holders of at least 25% of our outstanding shares.
These provisions may delay consideration of a stockholder proposal until the
next annual meeting.

Advance Notice Procedures. Following the closing of this offering, our
bylaws will provide for an advance notice procedure for the nomination, other
than by or at the direction of our board of directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders.

Charter Amendments. Following the closing of this offering, our restated
Certificate of Incorporation will provide that the affirmative vote of at least
75% of our board of directors or the holders of at least 80% of our outstanding
common stock is required to amend, repeal or adopt any provision inconsistent
with the foregoing provisions of the restated Certificate of Incorporation. Our
bylaws will also provide that they may be altered, amended or repealed only by
the affirmative vote of directors constituting not less than a majority of the
entire board of directors (if effected by action of the board of directors) or
by the affirmative vote of the holders of at least 80% of the voting power of
all classes of outstanding capital stock, voting together as a single class (if
effected by action of the stockholders).

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services.

56
<PAGE> 60

SHARES ELIGIBLE FOR FUTURE SALE

After completion of this offering, we will have outstanding 18,837,627
shares of common stock. Of these shares, the 3,750,000 shares sold in this
offering (plus any shares issued upon exercise of the underwriters'
over-allotment option) will be freely tradable without restriction under the
Securities Act, unless purchased by "affiliates" of Virage Logic. The remaining
15,087,627 shares are "restricted securities" within the meaning of Rule 144
under the Securities Act of 1933. These restricted securities generally may not
be sold in the absence of an effective registration statement under the
Securities Act, other than in accordance with Rule 144 or another exemption from
registration.

Our officers, directors and substantially all holders of our capital stock
and vested stock options, as well as Crosslink Capital, Inc. and its affiliates,
have entered into lock-up agreements under which they have agreed not to offer
or sell any shares of our common stock for a period of 180 days, or one year in
the case of the shares purchased in the simultaneous private placement, after
the date of this prospectus without the prior written consent of Lehman Brothers
Inc. See "Underwriting." These individuals or entities may request that Lehman
Brothers Inc. consider an early release from their lock-up agreements. Lehman
Brothers Inc. may, at any time and without notice, grant an early release for
shares subject to these lock-up agreements. Following the lock-up period, these
shares will not be eligible for sale in the public market without registration
under the Securities Act unless such sales meet the applicable conditions and
restrictions of Rule 144 or Rule 701, as described below.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares of our common stock for at least one year is entitled to sell in any
three-month period a number of shares that does not exceed the greater of 1.0%
of the number of shares of our common stock then outstanding (which will equal
approximately 188,000 shares immediately after this offering) or the average
weekly trading volume of our common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about Virage Logic. Persons who are not affiliates and have
held our shares for at least two years are not subject to the volume and manner
of sale restrictions. Outstanding shares that were issued upon the exercise of
options issued pursuant to a written compensatory plan to directors, officers,
employees, advisors and consultants may also be sold under the resale provisions
of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without
having to comply with the public information, holding periods, volume limitation
or notice provisions of Rule 144, and permits affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after the date of this prospectus (subject to the
additional restrictions imposed by the lock-up agreements).

We also intend to file a registration statement under the Securities Act as
soon as practicable following this offering to register 3,499,015 shares of
common stock that may be issued upon the exercise of outstanding stock options
or reserved for issuance under our stock option plans or employee purchase plan.
After the effective date of such registration statement, these shares will be
available for sale in the open market subject to the lock-up agreements
described above and, for our affiliates, to the conditions and restrictions of
Rule 144.

57
<PAGE> 61

UNDERWRITING

The underwriters named below, acting through their representatives, Lehman
Brothers Inc., FleetBoston Robertson Stephens Inc., SG Cowen Securities
Corporation and Fidelity Capital Markets, a division of National Financial
Services Corporation, have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of our common stock indicated opposite their names below. The
underwriters are committed to purchase and pay for all these shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. ....................................... 1,521,000
FleetBoston Robertson Stephens Inc.......................... 929,500
SG Cowen Securities Corporation............................. 929,500
Fidelity Capital Markets, a division of National Financial
Services Corporation...................................... 45,000
Deustche Bank Securities, Inc............................... 45,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 45,000
Merrill Lynch, Pierce Fenner & Smith Incorporated........... 45,000
UBS Warburg LLC............................................. 45,000
Thomas Weisel Partners LLC.................................. 45,000
Legg Mason Wood Walker, Inc................................. 25,000
Needham & Company, Inc...................................... 25,000
Raymond James & Associates, Inc............................. 25,000
Wachovia Securities, Inc.................................... 25,000
---------
Total..................................................... 3,750,000
=========
</TABLE>

We have been advised that the underwriters propose to offer the shares of
our common stock to the public at the initial public offering price located on
the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $0.48 per share, of which $0.10 may be reallowed
to other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
reduction will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus. Our common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

Before this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock offered by
this prospectus was determined through negotiations between us and the
representatives of the underwriters. Among the factors considered in such
negotiations were prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
be comparable to us, estimates of our business potential, the present state of
our development and other factors deemed relevant.

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.

In December 1999, two employees of FleetBoston Robertson Stephens Inc. each
purchased 13,157 shares of Series C preferred stock, one employee of FleetBoston
Robertson Stephens Inc. purchased 10,526 shares of Series C preferred stock and
two employees of SG Cowen Securities Corporation purchased 13,157 shares and
26,315 shares of Series C preferred stock, respectively. In addition, certain
members of Omega Bayview, L.L.C., which purchased 112,150 shares of Series C
preferred stock, are officers and employees of FleetBoston Robertson Stephens
Inc.

We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 562,500
additional shares of our common stock at the same price per share as we will
receive for the 3,750,000 shares that the underwriters have agreed to purchase.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of additional shares that the number of shares of our

58
<PAGE> 62

common stock to be purchased by it shown in the above table represents as a
percentage of the shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 3,750,000 shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the shares of our common stock offered by this prospectus.

The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.

<TABLE>
<CAPTION>
TOTAL
---------------------------------
PER SHARE NO EXERCISE FULL EXERCISE
--------- --------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions.......... $ 0.84 $3,150,000 $3,622,500
</TABLE>

We estimate expenses payable by us in connection with this offering, other
than underwriting discounts and commissions referred to above, will be
approximately $1,250,000.

The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933.

Each of our executive officers, directors and substantially all of our
other stockholders and optionholders have agreed with the representatives for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of our common stock, or any
securities convertible into or exchangeable for shares of our common stock owned
as of the date of this prospectus or thereafter acquired directly from us by
such holders or with respect to which they have or hereafter acquire the power
of disposition, without the prior written consent of Lehman Brothers Inc.
However, Lehman Brothers Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
lock-up agreements. There are no agreements between the representatives and any
of our stockholders providing consent by the representatives to the sale of
shares before the expiration of the lock-up period.

In addition, we have agreed that during the 180-day lock-up period, we will
not, without the prior written consent of Lehman Brothers Inc., subject to
certain exceptions:

- consent to the disposition of any shares held by stockholders subject to
lock-up agreements before expiration of the lock-up period; or

- issue, sell, contract to sell, or otherwise dispose of, any shares of our
common stock, any options or warrants to purchase any shares of our
common stock or any securities convertible into, exercisable for or
exchangeable for shares of our common stock other than our sale of shares
in this offering, our issuance of common stock upon the exercise of
currently outstanding options, and our issuance of incentive awards under
our stock incentive plans. See "Shares Eligible for Future Sale."

Our shares have been approved for quotation on the Nasdaq National Market
under the symbol "VIRL."

The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover short positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created

59
<PAGE> 63

if the underwriters are concerned that they may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchase of common stock made by the underwriters in the
open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.

Any offers in Canada will be made only under an exception from the
requirements to file a prospectus in each province of Canada where a sale is
made.

Purchasers of the shares of our common stock offered by this prospectus may
be required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.

Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering, and will be
facilitating electronic distribution through the Internet.

At our request, the underwriters have reserved up to 262,500 shares of
common stock to be issued by us and offered hereby for sale, at the initial
public offering price, to directors, officers, employees, other business
associates and related persons of Virage Logic. The number of shares of our
common stock available for sale to the general public will be reduced to the
extent that these individuals purchase all or a portion of these reserved
shares. Any reserved shares that are not purchased will be offered by the
underwriters to the general public on the same basis as the shares of common
stock offered by this prospectus. We have agreed to indemnify those certain
underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of directed shares.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Heller Ehrman White & McAuliffe LLP, Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by O'Melveny & Myers LLP, San Francisco, California.

EXPERTS

Ernst & Young LLP, independent auditors, has audited our consolidated
financial statements and schedule at September 30, 1999 and March 31, 2000, and
for the year ended September 30, 1999 and the six months ended March 31, 2000.
The information under the caption "Selected Consolidated Financial Data" at
September 30, 1999 and March 31, 2000 and for the year ended September 30, 1999
and the six months ended March 31, 2000, included in this prospectus and
elsewhere in the registration statement, have been derived from consolidated
financial statements audited by Ernst & Young LLP. We have included our
consolidated financial statements and schedule in this prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.

Mohler, Nixon & Williams Accountancy Corporation, independent auditors,
have audited our consolidated financial statements and schedule at September 30,
1997 and 1998 and for the years then ended, as set forth in their report. We
have included our consolidated financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on Mohler,
Nixon & Williams

60
<PAGE> 64

Accountancy Corporation's report, given upon the authority of such firm as
experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act related to the shares of our
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement or the exhibits and
schedules to that registration statement. For further information concerning
Virage Logic and the common stock, we refer you to the registration statement,
including the exhibits and schedules. Statements made in this prospectus
concerning the contents of any contract or other document are not necessarily
complete. Please refer to the copy of the document filed as an exhibit to the
registration statement for a more complete description. Each statement is
qualified in all respects by reference to the applicable exhibit.

You may inspect the registration statement without charge and obtain copies
of all or any part by paying certain fees at the SEC's public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, and its regional
offices at Seven World Trade Center, 13th Floor, New York, NY 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our Securities and Exchange Commission filings, including the
registration statement, are also available to you on the SEC's web site at
http://www.sec.gov. As a result of this offering, we will become subject to the
information and reporting requirements of the Exchange Act, and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the SEC. We intend to furnish our stockholders with annual reports
containing audited consolidated financial statements.

61
<PAGE> 65

VIRAGE LOGIC CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Mohler, Nixon & Williams Accountancy Corporation,
Independent Auditors...................................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statement of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit).................. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 66

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, 1999 and March 31, 2000, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity (deficit), and cash flows for the year ended September
30, 1999, and the six months ended March 31, 2000. The consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1999 and March 31, 2000, and the
consolidated results of its operations and its cash flows for the year ended
September 30, 1999, and for the six months ended March 31, 2000 in conformity
with accounting principles generally accepted in the United States.

As discussed in Note 12 to the consolidated financial statements, the
consolidated balance sheet, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for the year ended September 30, 1999 and for the
six-month period ended March 31, 2000 have been restated.

San Jose, California
July 20, 2000

/s/ ERNST & YOUNG LLP

F-2
<PAGE> 67

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
and Stockholders of
Virage Logic Corporation

We have audited the accompanying consolidated balance sheet of Virage Logic
Corporation as of September 30, 1998, 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, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 as of September 30, 1998, and the consolidated results
of its operations, redeemable convertible preferred stock and stockholders'
equity (deficit) and cash flows for each of the two years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.

/s/ MOHLER, NIXON & WILLIAMS
Accountancy Corporation

Campbell, California
February 18, 2000

F-3
<PAGE> 68

VIRAGE LOGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
SEPTEMBER 30, EQUITY
------------------------- MARCH 31, AT MARCH 31,
1998 1999 2000 2000
----------- ----------- ------------ --------------
(RESTATED) (RESTATED) (UNAUDITED)
(RESTATED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,971,762 $ 1,512,757 $ 7,925,191
Accounts receivable, net.................................. 668,747 4,262,705 5,071,928
Costs in excess of related billings on uncompleted
contracts............................................... -- 331,875 342,938
Prepaid expenses and other................................ 185,147 719,284 919,249
Prepaid taxes............................................. -- -- 485,180
----------- ----------- ------------
Total current assets.................................... 2,825,656 6,826,621 14,744,486
Property, equipment and leasehold improvements, net......... 438,983.... 1,963,536 3,710,632
Intangible assets, net of amortization of $54,632 at March
31, 2000.................................................. -- -- 594,203
Deferred tax assets......................................... -- 260,000 671,033
----------- ----------- ------------
Total assets............................................ $ 3,264,639 $ 9,050,157 $ 19,720,354
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 203,336 $ 261,006 $ 574,812
Accrued payroll and related expenses...................... 139,247 604,791 994,555
Accrued expenses.......................................... 32,727 1,069,077 1,831,354
Credit line payable....................................... -- 1,000,000 --
Current portion of capital lease obligations.............. 47,364 179,041 284,939
Deferred revenue.......................................... 35,008 1,834,999 1,155,492
Income taxes payable...................................... -- 323,787 --
----------- ----------- ------------
Total current liabilities............................... 457,682 5,272,701 4,841,152
Long-term portion of capital lease obligations.............. 64,308 454,127 381,936
----------- ----------- ------------
Total liabilities....................................... 521,990 5,726,828 5,223,088
Commitments
Series C redeemable convertible preferred stock, $.001 par
value, 5,500,000 shares authorized, 5,455,255 shares
issued and outstanding at March 31, 2000 (aggregate
liquidation preference $10,364,984), no shares issued and
outstanding pro forma..................................... -- -- 10,104,044
Stockholders' equity:
Convertible preferred stock, $.001 par value 3,711,063
shares authorized at September 30, 1998 and 1999 and
3,054,100 shares authorized at March 31, 2000, issuable
in series
Series A:
Designated shares -- 1,531,063
Issued and outstanding shares -- 1,531,062 (none pro
forma)
Aggregate liquidation preference of $400,679........ 1,531 1,531 1,531 $ --
Series B:
Designated shares -- 2,180,000 at September 30, 1998
and 1999, 1,523,037 at March 31, 2000
Issued and outstanding shares -- 1,448,037 (none pro
forma)
Aggregate liquidation preference of $3,475,288........ 1,448 1,448 1,448 --
Common stock, $.001 par value:
Authorized shares -- 30,000,000 at September 30, 1998
and 1999, 35,000,000 at March 31, 2000 (150,000,000
pro forma)
Issued and outstanding shares -- 5,618,250, 5,668,875
and 7,488,125 at September 30, 1998 and 1999, and
March 31, 2000, respectively (14,684,401 pro forma)... 5,618 5,669 7,488 14,684
Additional paid-in capital................................ 4,081,789 6,999,120 29,586,367 39,686,194
Notes receivable from stockholders........................ (79,138) (79,138) (800,390) (800,390)
Receivable from stockholder............................... (50,000) -- -- --
Deferred stock-based compensation......................... -- (2,200,775) (10,746,220) (10,746,220)
Accumulated deficit....................................... (1,218,599) (1,404,526) (13,657,002) (13,657,002)
----------- ----------- ------------ ------------
Total stockholders' equity.......................... 2,742,649 3,323,329 4,393,222 $ 14,497,266
----------- ----------- ------------ ------------
------------
Total liabilities and stockholders' equity.......... $ 3,264,639 $ 9,050,157 $ 19,720,354
=========== =========== ============
</TABLE>

See accompanying notes.

F-4
<PAGE> 69

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
----------------------------------- --------------------------
1997 1998 1999 1999 2000
--------- ---------- ---------- ----------- ------------
(RESTATED) (UNAUDITED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 368,800 $1,970,040 $9,588,946 $3,474,139 $ 8,806,487
Cost of revenues (exclusive of
amortization of deferred stock
compensation of $89,546 and $449,504 in
1999 and for the six months ended March
31, 2000, respectively)................ 207,407 853,047 2,562,357 1,079,097 2,280,968
--------- ---------- ---------- ---------- ------------
Gross profit............................. 161,393 1,116,993 7,026,589 2,395,042 6,525,519
Operating expenses:
Research and development (exclusive of
amortization of deferred stock
compensation of $221,804 and $840,712
in 1999 and for the six months ended
March 31, 2000, respectively)........ 256,099 924,065 2,709,340 965,602 3,033,595
Sales and marketing (exclusive of
amortization of deferred stock
compensation of $294,379 and $609,487
in 1999 and for the six months ended
March 31, 2000, respectively)........ 119,763 621,602 2,377,880 716,739 2,103,232
General and administrative (exclusive
of amortization of deferred stock
compensation of $95,291 and $335,129
in 1999 and for the six months ended
March 31, 2000, respectively)........ 151,994 411,038 1,201,645 366,197 1,146,007
Stock-based compensation............... -- -- 700,966 -- 2,234,831
--------- ---------- ---------- ---------- ------------
Total operating expenses............. 527,856 1,956,705 6,989,831 2,048,538 8,517,665
--------- ---------- ---------- ---------- ------------
Operating income (loss).................. (366,463) (839,712) 36,758 346,504 (1,992,146)
Interest income.......................... -- 16,372 41,928 25,303 114,758
Interest expense......................... (4,227) (27,835) (90,807) (15,709) (157,644)
Other income (expense)................... (2,711) -- (19,506) -- --
--------- ---------- ---------- ---------- ------------
Income (loss) before taxes............... (373,401) (851,175) (31,627) 356,098 (2,035,032)
Income tax provision..................... -- -- (154,300) (138,000) (113,400)
--------- ---------- ---------- ---------- ------------
Net income (loss)........................ (373,401) (851,175) (185,927) 218,098 (2,148,432)
Deemed dividend on Series C redeemable
convertible preferred stock............ -- -- -- -- (10,104,044)
--------- ---------- ---------- ---------- ------------
Net income (loss) applicable to common
stockholders........................... $(373,401) $ (851,175) $ (185,927) $ 218,098 $(12,252,476)
========= ========== ========== ========== ============
Basic net income (loss) per share
applicable to common stockholders...... $ (0.85) $ (0.19) $ (0.04) $ 0.04 $ (2.22)
========= ========== ========== ========== ============
Diluted net income (loss) per share
applicable to common stockholders...... $ (0.85) $ (0.19) $ (0.04) $ 0.02 $ (2.22)
========= ========== ========== ========== ============
Pro forma basic net loss per share
applicable to common stockholders...... $ (0.02) $ (0.96)
========== ============
Pro forma diluted net loss per share
applicable to common stockholders...... $ (0.02) $ (0.96)
========== ============
</TABLE>

See accompanying notes.
F-5
<PAGE> 70

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES C
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996............. -- $ -- 1,356,424 $1,356 -- $ --
Repurchase of common stock from
founders............................... -- -- -- -- -- --
Issuance of common stock to founders for
notes.................................. -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------
Balance at September 30, 1997............. -- -- 1,356,424 1,356 -- --
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 $51,094....................... -- -- 123,507 124 1,448,037 1,448
Issuance of preferred stock for
services............................... -- -- 51,131 51 -- --
Net loss................................. -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------
Balance at September 30, 1998............. -- -- 1,531,062 1,531 1,448,037 1,448
Exercise of stock options by employees... -- -- -- -- -- --
Issuance of warrants to third parties for
services............................... -- -- -- -- -- --
Repayment from stockholder............... -- -- -- -- -- --
Deferred stock-based compensation
(restated)............................. -- -- -- -- -- --
Amortization of stock-based compensation
(restated)............................. -- -- -- -- -- --
Net income (restated).................... -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------
Balance at September 30, 1999
(restated)............................... -- -- 1,531,062 1,531 1,448,037 1,448
Issuance of redeemable preferred stock
(restated)............................. 5,455,255 10,104,044 -- -- -- --
Exercise of stock options by employees... -- -- -- -- -- --
Issuance of warrants to nonemployees
(restated)............................. -- -- -- -- -- --
Noncash deemed dividends to series C
stockholders (restated)................
Deferred stock-based compensation
(restated)............................. -- -- -- -- -- --
Amortization of stock-based compensation
(restated)............................. -- -- -- -- -- --
Net loss (restated)...................... -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------
Balance at March 31, 2000 (restated)...... 5,455,255 $10,104,044 1,531,062 $1,531 1,448,037 $1,448
========= =========== ========= ====== ========= ======

NOTES
COMMON STOCK ADDITIONAL RECEIVABLE RECEIVABLE DEFERRED
-------------------- PAID-IN FROM FROM STOCK-BASED
SHARES AMOUNT CAPITAL STOCKHOLDERS STOCKHOLDER COMPENSATION
---------- ------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996............. 7,560,000 $ 7,560 $ 344,054 $ -- $ -- $ --
Repurchase of common stock from
founders............................... (6,804,000) (6,804) 6,534 -- -- --
Issuance of common stock to founders for
notes.................................. 4,536,000 4,536 74,602 (79,138) -- --
Net loss................................. -- -- -- -- -- --
---------- ------- ----------- --------- -------- ------------
Balance at September 30, 1997............. 5,292,000 5,292 425,190 (79,138) -- --
Issuance of common stock for cash and
services............................... 300,000 300 58,934 -- -- --
Exercise of stock options by employees... 26,250 26 432 -- -- --
Issuance of preferred stock for debt
conversion and/or cash, net of issuance
costs of $51,094....................... -- -- 3,546,153 -- (50,000) --
Issuance of preferred stock for
services............................... -- -- 51,080 -- -- --
Net loss................................. -- -- -- -- -- --
---------- ------- ----------- --------- -------- ------------
Balance at September 30, 1998............. 5,618,250 5,618 4,081,789 (79,138) (50,000) --
Exercise of stock options by employees... 50,625 51 4,090 -- -- --
Issuance of warrants to third parties for
services............................... -- -- 11,500 -- -- --
Repayment from stockholder............... -- -- -- -- 50,000 --
Deferred stock-based compensation
(restated)............................. -- -- 2,901,741 -- -- (2,901,741)
Amortization of stock-based compensation
(restated)............................. -- -- -- -- -- 700,966
Net income (restated).................... -- -- -- -- -- --
---------- ------- ----------- --------- -------- ------------
Balance at September 30, 1999
(restated)............................... 5,668,875 5,669 6,999,120 (79,138) -- (2,200,775)
Issuance of redeemable preferred stock
(restated)............................. -- -- 353,250 -- -- --
Exercise of stock options by employees... 1,819,250 1,819 1,064,076 (721,252) -- --
Issuance of warrants to nonemployees
(restated)............................. -- -- 285,601 -- -- --
Noncash deemed dividends to series C
stockholders (restated)................ 10,104,044
Deferred stock-based compensation
(restated)............................. -- -- 10,780,276 -- -- (10,780,276)
Amortization of stock-based compensation
(restated)............................. -- -- -- -- -- 2,234,831
Net loss (restated)...................... -- -- -- -- -- --
---------- ------- ----------- --------- -------- ------------
Balance at March 31, 2000 (restated)...... 7,488,125 $ 7,488 $29,586,367 $(800,390) $ -- $(10,746,220)
========== ======= =========== ========= ======== ============

RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDER'S
DEFICIT) EQUITY (DEFICIT)
------------ ----------------
<S> <C> <C>
Balance at September 30, 1996............. $ 5,977 $ 358,947
Repurchase of common stock from
founders............................... -- (270)
Issuance of common stock to founders for
notes.................................. -- --
Net loss................................. (373,401) (373,401)
------------ -----------
Balance at September 30, 1997............. (367,424) (14,724)
Issuance of common stock for cash and
services............................... -- 59,234
Exercise of stock options by employees... -- 458
Issuance of preferred stock for debt
conversion and/or cash, net of issuance
costs of $51,094....................... -- 3,497,725
Issuance of preferred stock for
services............................... -- 51,131
Net loss................................. (851,175) (851,175)
------------ -----------
Balance at September 30, 1998............. (1,218,599) 2,742,649
Exercise of stock options by employees... -- 4,141
Issuance of warrants to third parties for
services............................... -- 11,500
Repayment from stockholder............... -- 50,000
Deferred stock-based compensation
(restated)............................. -- --
Amortization of stock-based compensation
(restated)............................. -- 700,966
Net income (restated).................... (185,927) (185,927)
------------ -----------
Balance at September 30, 1999
(restated)............................... (1,404,526) 3,323,329
Issuance of redeemable preferred stock
(restated)............................. -- 353,250
Exercise of stock options by employees... -- 344,643
Issuance of warrants to nonemployees
(restated)............................. -- 285,601
Noncash deemed dividends to series C
stockholders (restated)................ (10,104,044)
Deferred stock-based compensation
(restated)............................. -- --
Amortization of stock-based compensation
(restated)............................. -- 2,234,831
Net loss (restated)...................... (2,148,432) (2,148,432)
------------ -----------
Balance at March 31, 2000 (restated)...... $(13,657,002) $ 4,393,222
============ ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 71

VIRAGE LOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- -----------
(RESTATED) (UNAUDITED) (RESTATED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $(373,401) $ (851,175) $ (185,927) $ 218,098 $(2,148,432)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 5,806 55,191 507,101 155,985 612,924
Loss on disposal of property and equipment........ -- -- 19,506 -- --
Amortization of intangible assets................. 106,490 133,113 -- -- 54,632
Issuance of warrants for services................. -- -- 11,500 6,500 285,601
Amortization of stock-based compensation.......... -- -- 700,966 -- 2,234,832
Bad debt expense.................................. -- -- 43,000 -- 8,000
Changes in operating assets and liabilities:
Accounts receivable............................. 44,250 (666,747) (3,636,958) (1,039,418) (817,223)
Other current assets............................ 5,143 (181,885) -- -- --
Prepaid expenses................................ -- -- (534,137) (420,339) (582,909)
Costs in excess of billings on uncompleted
contracts..................................... -- -- (331,875) -- (11,063)
Deferred tax assets............................. -- -- (260,000) -- (411,354)
Accounts payable................................ 48,521 154,815 57,670 (53,997) 313,806
Accrued payroll and related expenses............ 25,624 111,723 465,544 106,340 389,764
Accrued expenses................................ 3,558 164,390 1,036,350 1,066,762 552,277
Deferred revenue................................ -- 35,008 1,799,991 171,637 (679,507)
Income taxes payable............................ -- -- 323,787 135,716 (323,787)
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ (134,009) (1,045,567) 16,518 347,284 (522,439)
INVESTING ACTIVITIES
Purchase of property, plant, and equipment.......... (5,851) (358,478) (1,420,160) (1,064,910) (2,065,064)
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities............... (5,851) (358,478) (1,420,160) (1,064,910) (2,065,064)
FINANCING ACTIVITIES
Proceeds from issuance of notes..................... 170,000 771,960 -- -- --
Proceeds from issuance of redeemable convertible
preferred stock................................... -- -- -- -- 9,819,044
Proceeds from issuance of preferred and common
stock............................................. -- 2,527,598 4,141 -- 344,642
Repayment from stockholder.......................... -- -- 50,000 50,000 --
Repurchase of common stock.......................... (270) -- -- -- --
Borrowings (repayments) under line of credit........ -- -- 1,000,000 -- (1,000,000)
Principal payments on capital lease obligations..... (569) (10,464) (109,504) (63,636) (163,749)
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 169,161 3,289,094 944,637 (13,636) 8,999,937
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 29,301 1,885,049 (459,005) (731,262) 6,412,434
Cash and cash equivalents at beginning of period.... 57,412 86,713 1,971,762 1,971,762 1,512,757
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 86,713 $ 1,971,762 $ 1,512,757 $ 1,240,500 $ 7,925,191
========= =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 867 $ 18,627 $ 65,156 $ 15,710 $ 107,644
Cash paid for income taxes.......................... $ -- $ -- $ 35,013 $ 16,600 $ 1,333,400
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred for the purchase
of equipment...................................... $ 35,000 $ 88,000 $ 631,000 $ 167,000 $ 197,000
Warrants issued for services........................ $ -- $ -- $ 11,500 $ 6,500 $ 285,601
</TABLE>

See accompanying notes.
F-7
<PAGE> 72

VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Virage Logic Corporation (the Company) was incorporated in California in
November 1995. 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

In March 2000, the board of directors of the Company authorized the Company
to proceed with an initial public offering of its common stock. If the offering
is consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at March 31, 2000 gives effect to the conversion of all
outstanding shares of all preferred stock outstanding at March 31, 2000 into
7,196,276 shares of common stock upon the completion of the offering.

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 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.

F-8
<PAGE> 73
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

Unaudited Interim Consolidated Financial Information

The financial information for the six months ended March 31, 1999 is
unaudited, but has been prepared on the same basis as the annual financial
statements and, in the opinion of management includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for its consolidated results of operations and cash flows for those
periods.

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, 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
F-9
<PAGE> 74
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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.

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
March 31, 2000 and September 30, 1998 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, 1998, 1999 and March 31, 2000 and gross realized gains and losses
on sales of available-for-sale securities for the years ended September 30,
1997, 1998 and 1999 and for the six-month periods ended March 31, 1999 and 2000
were not significant.

Cash equivalents as of September 30, 1998, 1999 and March 31, 2000
consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED
------------------------ MARCH 31,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Money market funds............................. $ 2,505 $ 560,947 $ 703,144
Commercial paper............................... 995,744 746,816 5,917,083
U.S. Treasury Bills............................ 499,945 -- --
---------- ---------- ----------
Total available-for-sale securities.......... $1,498,194 $1,307,763 $6,620,227
========== ========== ==========
</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, 1998 SEPTEMBER 30, 1999 MARCH 31, 2000
------------------------- --------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------------- ---------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Line of credit....... -- -- $1,000,000 $1,000,000 -- --
Capital leases....... $111,672 $111,672 $ 633,168 $ 633,168 $666,875 $666,875
</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.

F-10
<PAGE> 75
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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 $297,000 and $1.4 million for the
years ended September 30, 1998 and 1999, respectively, and $3.2 million for the
six months ended March 31, 2000 of internal use software. Software is amortized
for financial reporting purposes using the straight-line method over the
estimated useful life of three years.

Intangible Assets

Intangible assets are 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 narrow base of customers,
which are primarily located in the United States, Canada and Japan. 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.

F-11
<PAGE> 76
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

Customer Concentrations

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

Customers that accounted for at least 10% of total revenues were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED
-------------------- MARCH 31,
1997 1998 1999 2000
---- ---- ---- ----------
<S> <C> <C> <C> <C>
National Semiconductor.............................. -- 11% 18% *
PMC-Sierra.......................................... -- 14% * *
ATI Technologies.................................... -- -- 18% *
Toshiba............................................. -- * 10% *
IBM................................................. -- -- -- 10%
MMC Networks........................................ -- 11% 10% *
Silicon Dynamics.................................... -- 13% * --
TeraLogic........................................... -- 13% * *
SanDisk............................................. 42% -- -- --
Xilinx.............................................. 13% -- -- --
Equator Technologies................................ 18% -- -- --
HPL................................................. 14% -- -- --
Tower Semiconductor................................. 13% * * *
</TABLE>

-------------------------
(*) Represents less than 10% of revenues.

Advertising Expense

The cost of advertising is expensed as incurred. Advertising costs totaled
approximately $46,000, $34,000, $130,000 and $60,000 for the years ended
September 30, 1997, 1998, 1999 and the six months ended March 31, 2000,
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 income (loss) per share is presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the anticipated effective date of the
Company's initial public offering must be included in the calculation of basic
and diluted net income (loss) per common share as if they had been outstanding
for all periods presented.

F-12
<PAGE> 77
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

In accordance with SFAS 128, basic and diluted net income (loss) per share
have been computed using the weighted average number of shares of common stock
outstanding during the period, less weighted average shares outstanding that are
subject to repurchase by the Company. Pro forma basic and diluted net income
(loss) per share, as presented in the statements of operations, have been
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible preferred stock (using
the if-converted method) from the original date of issuance.

F-13
<PAGE> 78
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------- -----------------
1997 1998 1999 1999 2000
------ ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Net income (loss) applicable to common
stockholders.................................... $ (373) $ (851) $ (186) $ 218 $(12,252)
====== ======= ======= ====== ========
Basic:
Weighted average shares of common stock
outstanding.................................. 1,184 5,559 5,632 5,618 6,097
Less weighted average shares subject to
repurchase................................... (746) (1,180) (331) (551) (571)
------ ------- ------- ------ --------
Shares used in computing basic net income (loss)
per share applicable to common
stockholders................................. 438 4,379 5,301 5,067 5,526
====== ======= ======= ====== ========
Basic net income (loss) per share applicable to
common stockholders............................. $(0.85) $ (0.19) $ (0.04) $ 0.04 $ (2.22)
====== ======= ======= ====== ========
Diluted:
Effect of dilutive securities:
Shares used above............................ 438 4,379 5,301 5,067 5,526
Employee stock options and unvested common
stock outstanding.......................... -- -- -- 718 --
Convertible preferred stock.................. -- -- -- 4,469 --
------ ------- ------- ------ --------
Shares and assumed conversions used in
computing diluted net income (loss) per
share applicable to common stockholders.... 438 4,379 5,301 10,254 5,526
====== ======= ======= ====== ========
Diluted net income (loss) per share applicable to
common stockholders............................. $(0.85) $ (0.19) $ (0.04) $ 0.02 $ (2.22)
====== ======= ======= ====== ========
Pro forma:
Shares used above............................... 5,301 5,526
Pro forma adjustment to reflect weighted average
effect of the assumed conversion of
convertible preferred stock.................. 4,469 7,196
------- --------
Shares used in computing pro forma basic net
income (loss) per share applicable to common
stockholders................................. 9,770 12,722
======= ========
Pro forma basic net income (loss) per share
applicable to common stockholders............... $ (0.02) $ (0.96)
======= ========
Pro forma diluted:
Effect of diluted securities:
Shares used to compute pro forma basic net
income (loss) per share adjusted for the
add back of shares subject to repurchase... 9,770 12,722
Employee stock options and unvested common
stock outstanding.......................... -- --
------- --------
Shares used in computing pro forma diluted
net income (loss) per share applicable to
common stockholders........................ 9,770 12,722
======= ========
Pro forma diluted net income (loss) per share
applicable to common stockholders............... $ (0.02) $ (0.96)
======= ========
</TABLE>

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

F-14
<PAGE> 79
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

1999. The Company had no items, other than net income (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.

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.

2. 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 March 31,
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 $122,000, $753,000 and $925,000 are included
in property and equipment at September 30, 1998 and 1999 and March 31, 2000,
respectively. Accumulated depreciation amounted to approximately $16,000,
$173,000 and $337,000 at September 30, 1998 and 1999 and March 31, 2000.

The Company leases its facilities under operating leases. The agreements
provide for a rent escalation each year. Rent expense under operating leases was
approximately $15,000, $70,000, $230,000 and $259,000 for the years ended
September 30, 1997, 1998, 1999 and the six months ended March 31, 2000,
respectively.

F-15
<PAGE> 80
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

Aggregate future minimum lease payments under capital leases and operating
leases as of March 31, 2000 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ending March 31,
2000...................................................... $ 387,577 $ 449,823
2001...................................................... 271,610 408,953
2002...................................................... 137,838 246,018
2003...................................................... 47,470 75,300
2004...................................................... -- 16,106
--------- ----------
Total minimum lease and principal payments.................. 844,495 $1,196,200
==========
Less: Amount representing interest.......................... (177,620)
---------
Present value of future lease payments...................... 666,875
Less: Current portion of capital lease obligations.......... (284,939)
---------
Long-term portion of capital lease obligations.............. $ 381,936
=========
</TABLE>

3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, SIX MONTHS
---------------------- ENDED
1998 1999 MARCH 31, 2000
-------- ---------- --------------
<S> <C> <C> <C>
Furniture and fixtures........................ $ 50,627 $ 197,861 $ 293,082
Computers and equipment....................... 143,749 840,888 1,356,864
Software...................................... 296,732 1,414,635 3,159,932
Leasehold improvements........................ 8,872 73,776 77,302
-------- ---------- -----------
499,980 2,527,160 4,887,180
Less accumulated depreciation................. (60,997) (563,624) (1,176,548)
-------- ---------- -----------
$438,983 $1,963,536 $ 3,710,632
======== ========== ===========
</TABLE>

Depreciation expense related to property, equipment and leasehold
improvements totaled $5,806, $55,191, $507,101, $155,985 and $593,620 for the
years ended September 30, 1997, 1998 and 1999 and the six months ended March 31,
1999 and 2000, respectively.

4. STOCKHOLDERS' EQUITY

Convertible Preferred Stock

The Company is authorized to issue 3,054,100 shares of convertible
preferred stock, designated in series. A summary of convertible preferred stock
is as follows:

<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------
SHARES ISSUED AGGREGATE
SHARES AND NONCUMULATIVE LIQUIDATION LIQUIDATION
AUTHORIZED OUTSTANDING DIVIDEND PREFERENCE PREFERENCE
---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A............. 1,531,063 1,531,062 $0.02 $0.2617 $ 400,679
Series B............. 1,523,037 1,448,037 $0.17 $2.4000 3,475,288
--------- --------- ----------
3,054,100 2,979,099 $3,875,967
========= ========= ==========
</TABLE>

F-16
<PAGE> 81
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

All preferred stockholders have the same voting rights as common
stockholders. Each share of Series A and B preferred stock has a number of votes
equal to the number of shares of common stock into which it is convertible.
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
require the approval from the holders of at least 55% of the outstanding shares
of preferred stock (including Series C redeemable convertible preferred stock).

In the event of any voluntary or involuntary liquidation of the Company,
subject to the rights of the holders of the Series C redeemable convertible
preferred stock, Series A and B preferred stockholders are entitled to a
liquidation preference per share as shown above plus any declared but unpaid
dividends, all in preference to the holders of the common stock. If upon the
occurrence of such event, the assets and funds distributed among the holders of
the Series A and B preferred stock shall be insufficient to permit the payment
to such holders, then the entire assets and funds of the corporation legally
available for distribution after distribution to the holders of Series C
redeemable convertible preferred stock shall be distributed ratably among the
holders of Series A and B preferred stock in proportion to the aggregate
preferential amount each such holder is otherwise entitled to receive. Upon the
completion of the distribution, the holders of the common stock will ratably
receive any and all remaining assets of the Company.

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

The holders of Series A and B preferred stock have the right, at any time
after the date of issuance, to convert each of their shares into common shares.
The conversion ratio is two-to-three as of September 30, 1999 and March 31, 2000
after adjusting for the one-for-two reverse stock split as described in Note 1.
The preferred stock automatically converts into shares of common stock at the
conversion price in effect upon the earlier of (i) immediately prior to the
closing of an underwritten public offering registered under the Securities Act
of 1933, as amended, covering the offer and sale of common stock at a public
offering price of not less than $12.00 per share (adjusted for stock dividends,
stock split, or recapitalizations) with aggregate cash proceeds to the Company
of at least $25,000,000; or (ii) the date specified by written consent or
agreement of the holders of not less than 55% of the outstanding shares of
Series A and Series B preferred stock and Series C redeemable convertible
preferred stock.

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 holders of the
Series C redeemable convertible preferred stock may request redemption of their
shares, plus all declared but unpaid cumulative dividends. The redemption may be
requested prior to 30 days before November 30, 2003 and must be paid in cash in
three equal annual installments beginning on November 30, 2003.

In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series C redeemable convertible
preferred stock are entitled to receive the liquidation preference of $1.90 per
share amount, plus all declared but unpaid cumulative dividends, prior and in
preference to the holders of the Series A and Series B preferred stock and
common stock.

F-17
<PAGE> 82
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

Each share of Series C redeemable convertible preferred stock is
convertible into 0.5 shares of common stock. Immediately prior to the completion
of an initial public offering with a public offering price of at least $12.00
per share and aggregate proceeds of at least $25,000,000, or upon the consent of
the holders of 55% of the outstanding shares of Series A and Series B preferred
stock and Series C redeemable convertible preferred stock, all shares of Series
C redeemable convertible preferred stock will automatically be converted to
common stock and the holders of these shares will not be paid the redemption
premium.

Holders of Series C redeemable convertible preferred stock vote equally
with holders of common stock on an as-if-converted basis. In addition, the
holders of Series C redeemable convertible preferred stock have 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.

Common Stock

The Company is authorized to issue up to 35,000,000 shares of common stock.
As of March 31, 2000, 7,488,125 shares of common stock were issued and
outstanding.

At March 31, 2000, common stock was reserved for issuance as follows:

<TABLE>
<S> <C>
Conversion of outstanding preferred stock................... 7,196,276
Exercise of outstanding stock options....................... 1,559,500
Shares of common stock available for grant under the 1997
Equity Incentive Plan..................................... 239,515
Exercise of warrants........................................ 60,000
---------
9,055,291
=========
</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 March 31, 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

F-18
<PAGE> 83
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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 March 31, 2000, 565,251 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. At March 31, 2000, no shares were subject to
repurchase by the Company.

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............... 695,140 -- --
Options granted............................. (1,385,625) 1,385,625 $ 1.19
Options exercised........................... -- (1,819,250) $ 0.56
Options canceled............................ 64,875 (64,875) $ 0.19
---------- ----------
Balance at March 31, 2000..................... 239,515 1,559,500 $ 0.67
========== ==========
</TABLE>

F-19
<PAGE> 84
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

The following table summarizes information about stock options outstanding
and exercisable at March 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------------------
WEIGHTED
NUMBER AVERAGE
AS OF REMAINING
MARCH 31, CONTRACTUAL LIFE
EXERCISE PRICE 2000 (IN YEARS) EXERCISE PRICE
-------------- --------- ---------------- --------------
<S> <C> <C> <C>
$0.02............................................. 240,000 8.44 $0.02
$0.13............................................. 203,625 8.28 $0.14
$0.23............................................. 261,000 9.00 $0.24
$0.70............................................. 424,125 9.58 $0.70
$1.00............................................. 116,375 9.75 $1.00
$1.50............................................. 180,250 9.91 $1.50
$2.00............................................. 134,125 10.00 $2.00
---------
Total.......................................... 1,559,500 9.22 $0.67
=========
</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 year ended September 30, 1999
under the fair value method of SFAS 123. The fair value for options was
estimated at the date of grant using the minimum value method with the following
weighted average assumptions: a risk-free interest rate of 6.40% for 1997, 5.50%
for 1998 and 1999, 6.00% for the six month period ended March 31, 2000, no
dividend yield for all years, and a weighted average expected option life of
five years.

The difference between the reported net income (loss) and the pro forma net
income (loss) for the years ended September 30, 1997, 1998, 1999, and the six
months ended March 31, 2000 was not material.

The options' weighted average grant-date fair value, which is the value
assigned to the options under SFAS 123, was $0.01, $0.05, $0.08 and $0.25 for
options granted during 1997, 1998, 1999 and the six months ended March 31, 2000,
respectively.

The pro forma impact of options on the net income for the year ended
September 30, 1999 and the six months ended March 31, 2000 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.

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. At September 30, 1999 the
fair value of the warrant was approximately $124,000. 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 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,

F-20
<PAGE> 85
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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.

Restricted Common Stock

During fiscal 1998, the Company sold 300,000 shares of restricted common
stock to a consultant for a total aggregate purchase 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 year ended September 30, 1999 and the six months ended March 31,
2000, 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 common stock options as of March 2000.
Accordingly, in connection with such stock option grants, during the year ended
September 30, 1999 and the six-month period ended March 31, 2000, the Company
recorded deferred stock-based compensation of $2,901,741 and $10,780,276,
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 which results 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.

5. LINE OF CREDIT

During July 1999, the Company entered into a line of credit with a
financial institution, which expires during July 2000. The line of credit is
limited such that the Company may not borrow in excess of $3,000,000 or 80% of
eligible receivables. Borrowings under the line of credit bear interest at the
bank's prime rate plus 1% per annum (9.25% at September 30, 1999) and are
subject to the Company's compliance with certain financial covenants. At
September 30, 1999 and March 31, 2000, the Company was in compliance with the
covenants. The line of credit is secured by all the rights, title of the assets
and intellectual property of the Company. As of September 30, 1999, the Company
had approximately $1,000,000 outstanding under the line of credit, and no amount
outstanding as of March 31, 2000.

In connection with the line of credit agreement, the Company issued a
warrant for 30,000 shares of Series C preferred stock (see Note 9). The warrant
is exercisable at any time prior to its expiration on July 28, 2004. Upon the
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 a fair value of

F-21
<PAGE> 86
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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 March 31, 2000, the Company had amortized approximately $50,000.

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 $97,500, $317,500,
$450,500 and $337,500 for the years ended September 30, 1997, 1998, 1999 and the
six months ended March 31, 2000, respectively. Included in these amounts are
$47,500, $132,500, $67,500 and $227,500 received from Tower Semiconductor for
compiler development services for the years ended September 30, 1997, 1998, 1999
and the six months ended March 31, 2000 respectively. As of March 31, 2000,
$416,000 included in accounts receivable was due from these stockholders.

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. Through March 31, 2000, royalty revenues have been immaterial.

Under two separate agreements with one of the foundries, TSMC, TSMC has
contracted to pay the Company non-recurring engineering fees for the development
of compilers. The Company has not recorded any revenue for such services through
March 31, 2000.

8. INCOME TAXES

Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the years ended September
30, 1997 and 1998.

The provision for income taxes for the year ended September 30, 1999 and
the six months ended March 31, 2000 consists of the following:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1999 MARCH 31, 2000
------------------ --------------
<S> <C> <C>
Federal:
Current...................................... $ 355,500 $ 439,847
Deferred..................................... (260,000) (411,033)
State:
Current...................................... 800 71,986
Deferred..................................... -- --
Foreign:
Current...................................... 58,000 12,600
Deferred..................................... -- --
--------- ---------
Total.......................................... $ 154,300 $ 113,400
========= =========
</TABLE>

F-22
<PAGE> 87
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal rate primarily due to the
benefit of prior year net operating losses, research and development credits,
and the adjustment of the valuation allowance.

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, SIX MONTHS
-------------------------------- ENDED
1997 1998 1999 MARCH 31, 2000
--------- --------- -------- --------------
<S> <C> <C> <C> <C>
Computed expected tax
(benefit)...................... $(126,956) $(289,400) $(10,753) $(681,711)
Non-deductible stock-based
compensation................... -- -- 238,328 759,843
Current year net operating losses
and/or temporary differences
for which no tax benefit is
recognized..................... 126,956 289,400 (55,000)
State taxes...................... -- -- -- 47,511
Foreign taxes.................... -- -- 58,000 12,600
R&D credit....................... -- -- (93,968) (50,000)
Other............................ -- -- (17,693) 25,157
--------- --------- -------- ---------
Total income tax provision $ -- $ -- $154,300 $ 113,400
========= ========= ======== =========
</TABLE>

There were no provisions for income taxes for fiscal 1997 and 1998 because
the Company generated net losses in those years. The provision for income taxes
for the six months ended March 31, 1999 was calculated using the actual
effective tax rate for fiscal 1999.

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS
----------------------------------- ENDED
1997 1998 1999 MARCH 31, 2000
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating losses................... $ 100,000 $ 279,000 $ --
Deferred revenue....................... -- -- 431,000 432,000
Compensation accrual................... -- -- 124,129 182,086
Other accruals/reserves not currently
deductible.......................... -- 21,000 167,871 644,391
--------- --------- ---------
Total deferred tax assets................ 100,000 300,000 723,000 1,258,477
Valuation allowance.................... (100,000) (300,000) (407,000) (545,444)
--------- --------- ---------
Net deferred tax assets.................. -- -- 316,000 713,033
Deferred tax liabilities:
Depreciation........................... -- -- (49,000) (42,000)
Other.................................. -- -- (7,000) --
--------- --------- --------- ---------
Net deferred tax assets.................. $ -- $ -- $ 260,000 671,033
========= ========= ========= =========
</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. Because of the uncertainty of future earnings, a full valuation
allowance was provided at September 30, 1997 and 1998. The Company recorded a
deferred tax asset at September 30, 1999 and March 31, 2000 based on
availability of taxable income in the carryback

F-23
<PAGE> 88
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

period. Due to the uncertainty of future earnings, management has determined
that the valuation allowance continues to be necessary. The net valuation
allowance increased by $100,000, $200,000, $107,000 and $138,444 during the
years ended September 30, 1997, 1998, 1999 and the six months ended March 31,
2000, respectively.

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.

Revenues by geographic region were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS
------------------------------------ ENDED
1997 1998 1999 MARCH 31, 2000
-------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Revenues:
United States.......................... $321,300 $1,017,540 $5,393,026 $4,056,079
Japan.................................. -- 440,000 1,970,100 1,580,922
Canada................................. -- 280,000 2,148,320 1,493,052
Other.................................. 47,500 232,500 77,500 1,676,434
-------- ---------- ---------- ----------
Total............................... $368,800 $1,970,040 $9,588,946 $8,806,487
======== ========== ========== ==========
</TABLE>

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 three-month period ended March 31, 2000, amortization of the
intangible assets and the software amortization was approximately $55,000 and
$42,000, respectively.

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

F-24
<PAGE> 89
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

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. Approximately $65,000 of bonuses were expensed in the six
months ended March 31, 2000.

12. RESTATEMENT

The Company has revised its financial statements for the year ended
September 30, 1999 and the six months ended March 31, 2000 to account for a
beneficial conversion feature embedded in the Series C redeemable convertible
preferred stock and a reassessment of the estimated value of its common stock
used to record stock-based compensation charges in connection with stock option
grants and the valuation of its warrants issued in connection with professional
services and in obtaining a line of credit.

Beneficial Conversion Feature

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 six months ended March 31, 2000 to accrete the value of the 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, which was the period in which the
shares became eligible for conversion.

Common Stock Valuation

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 and in obtaining a line of credit. In
connection with such stock option grants, during the year ended September 30,
1999 and the six-month period ended March 31, 2000, the Company recorded a
non-cash charge for stock-based compensation of $700,966 and $2,234,831,
respectively. In connection with warrants, during the year ended September 30,
1999 and the six-month period ended March 31, 2000, the Company recorded
non-cash charges of $11,500 and $285,601, respectively.

F-25
<PAGE> 90
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1999 SIX MONTHS ENDED MARCH 31, 2000
--------------------------- -------------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Stock-based compensation................. $278,595 $ 700,966 $1,024,220 $ 2,234,831
Net income(loss)......................... 236,444 (185,927) (674,166) (2,148,432)
Deemed dividend on Series C redeemable
convertible preferred stock............ -- -- -- 10,104,044
Net income (loss) available to common
stockholders........................... 236,444 (185,927) (674,166) (12,252,476)
Basic net income (loss) per share
available to common stockholders....... $ 0.04 $ (0.04) $ (0.12) $ (2.22)
Diluted net income (loss) per share
available to common stockholders....... $ 0.02 $ (0.04) $ (0.12) $ (2.22)
Basic and diluted Pro forma net income
(loss) per share available to common
stockholders........................... $ 0.02 $ (0.02) $ (0.05) $ (0.96)
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, 1999 MARCH 31, 2000 MARCH 31, 2000
------------------------- -------------------------- --------------------------
AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED
----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Additional paid in
capital............ $5,229,534 $ 6,999,120 $12,999,025 $ 29,586,367 $23,098,852 $ 39,686,144
Deferred stock based
compensation....... (853,560) (2,200,775) 6,446,080 (10,746,220) 6,446,080 (10,746,220)
Accumulated
deficit............ (982,155) (1,404,526) (1,656,321) (13,657,002) (1,656,321) (13,657,002)
Total stockholders'
equity............. 3,323,329 3,323,329 4,106,701 4,393,222 14,210,745 14,497,266
</TABLE>

13. SUBSEQUENT EVENTS

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 is expected to begin on October 1, 2000 and 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 fair market value of the Company's
common stock at the beginning of each offering period or at the end of each
purchase 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.

F-26
<PAGE> 91
VIRAGE LOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

Delaware Reincorporation

In July 2000, the Company completed its reincorporation in the State of
Delaware. The par value of the preferred and common stock is $.001 per share.
The Company's reincorporation has been reflected in the September 30, 1997, 1998
and 1999 and March 31, 2000 financial statements.

Additional Options Authorized

In April 2000, the board of directors increased the number of shares
available for grant under the 1997 Equity Incentive Plan by 1.5 million shares.

F-27
<PAGE> 92
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Virage Logic Logo

Text:

Partners:

Avant!
Cadence
Chartered
Credence
Mentor Graphics
Mosys
Nurlogic
Synopsis
TSMC
UMC
<PAGE> 93

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3,750,000 SHARES

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JULY 31, 2000
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