VIRAGE LOGIC CORP - 10-K Annual Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

Aggregate market value of the registrant’s common stock held by non-affiliates of the Registrant as of November 30, 2004 was approximately $125 million based upon the closing price reported for such date on the Nasdaq National Market. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s Common Stock outstanding as of November 30, 2004 was 21,836,587.

Portions of the registrant’s proxy statement for its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

With the exception of statements of historical fact, all statements made in this Form 10-K, including in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements relating to strategy, products, customers, business prospects and relationships, trends and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” or “continue,” the negative of these terms or other comparable terminology. Forward-looking statements are subject to a number of known and unknown risks and uncertainties which might cause actual results to differ materially from those expressed or implied by such statements. These risks include ability to forecast our business, including our revenue, income and order flow outlook, our ability to execute on our strategy of being a leading provider of semiconductor IP platforms, our ability to continue to develop new products and maintain and develop new relationships with third-party foundries and integrated device manufacturers, our ability to overcome the challenges associated with establishing licensing relationships with semiconductor companies, our ability to obtain royalty revenues from customers in addition to license fees, our ability to receive accurate information necessary for calculation of royalty revenues and to collect royalty revenues from customers, business and economic conditions generally and in the semiconductor industry in particular, pace of adoption of new technologies by our customers, competition in the market for semiconductor IP platform, and other risks and uncertainties including those set forth below under “Risk Factors”. These forward-looking statements speak only as of the date hereof; we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein. The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the notes thereto included elsewhere in this filing.

Virage Logic Corporation provides semiconductor intellectual property (semiconductor IP) platforms based on memory, logic and I/Os (input/output interface components) that are silicon proven and production ready. These various forms of intellectual property (IP) are utilized by our customers to design and manufacture system-on-a-chip (SoC) integrated circuits that increasingly are forming the foundation of today’s consumer, communications and networking, handheld and portable, computer and graphics, and automotive applications. Our semiconductor IP offering 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, (3) memory test processor and fuse box components for embedded test and repair of defective memory cells, (4) software development tools that can be used to build memory compilers, (5) logic elements, and (6) I/ Os. We also provide custom design services to the semiconductor industry.

Historically, we were primarily engaged in the development and marketing of embedded memory products. After the acquisition of In-Chip Systems, Inc. in May 2002, we expanded our product offering to also include logic and I/ O products, and have been marketing these components as a semiconductor IP platform for our customers’ SoC designs. The expanded product offering positions us to become even more attractive to our customers’ semiconductor design efforts by providing IP across a broad spectrum of the functional elements of the chip.

Our customers include leading fabless semiconductor companies such as Altera, AMCC, ATI Technologies, Broadcom, PMC-Sierra, Sandisk, TranSwitch, and Vitesse Semiconductor, as well as leading integrated device manufacturers (IDMs) such as Agere, Agilent, AMI Semiconductor, Conexant, Freescale, IBM, Infineon, Intel, Kawasaki, LSI Logic, NEC, Philips Electronics, Sharp, Sony, STMicroelectronics and Toshiba. Finally, we have strategic commercial relationships with semiconductor foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Company (UMC), Chartered Semiconductor Manufacturing (Chartered), DongbuAnam, IBM, SilTerra Malaysia Sdn. Dhd. (SilTerra), Silicon Manufacturing International Corporation (SMIC), and Tower Semiconductor, Ltd. (Tower).

We develop our embedded memory, logic and I/ O elements to comply with the manufacturing processes used to create the silicon chips for our customers’ products. For our IDM customers, we develop our products to comply with the processes used by their internal manufacturing facilities. For our fabless semiconductor customers, we develop our products to comply with the processes of the third-party semiconductor manufacturing facilities, or foundries, which these companies rely on to manufacture the silicon chips for their products. We also pre-test our products before their release to the market by having actual chips containing our semiconductor IP produced by third-party foundries, so that we can provide our customers with test data and assurance that chips produced using our semiconductor IP will be manufacturable, while producing improved silicon wafer yields. Our products are certified for production by several of the leading third-party foundries used by fabless semiconductor companies. These include TSMC, UMC, Chartered, SilTerra, SMIC, and Tower. Because we ensure our products are silicon proven and production ready, our customers benefit from shorter design times for new product development and reduced design and manufacturing costs.

We incorporated in California on November 27, 1995. We reincorporated in Delaware on July 25, 2000. Our principal executive offices are located at 47100 Bayside 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 part of this report.

The proliferation of wireless products, the growth of the Internet, and the development of higher-speed computers and more robust visual communication systems are creating demand for electronic devices that offer lower power consumption and higher performance in order to achieve lower system operating power and faster processing capability. The designers of these products are seeking technologies that will enable them to decrease the size, reduce the manufacturing costs 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 SoC, rather than on a circuit board.

Successful SoC 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 IP is required for each component of a SoC, it is difficult for many companies to internally develop the various IP needed for these components. In addition, the designers of products that use SoCs are facing increased market pressure to rapidly introduce new products, which shortens the time available for research and development involved in the design of a SoC. In order to accommodate the continuously increasing technical expertise required for the design of a SoC and the time constraints involved in such design, many semiconductor companies are increasingly relying on external sources for the technical expertise and IP for various components of their SoC designs. The use of proven third-party IP components allows semiconductor companies to meet market pressures while continuing to focus on the components of the SoC 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 an increasingly critical element of the overall operation of SoCs used for these applications. Historically, integrated circuit designs were dominated by the logic function, while memory storage was usually provided in external devices. However, the market demand for increased system operating speed has driven the memory storage elements to be coupled with the logic inside the same silicon chip, resulting in faster and more power efficient products. This trend of embedded memory also resulted in the requirement for more customized memory elements. 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 SoC, is creating increased demand for embedded memory. It is now common for a SoC to contain many memories with different functions configured in different sizes and shapes to optimize the area and functionality of the chip. The Semiconductor Industry Association (SIA) forecasts that the

Semiconductor companies face significant challenges in designing high-performance memories that can be easily integrated with other components, including logic, for their SoC devices. Due to continuing advancements in the semiconductor manufacturing lithography processes, new circuit design elements 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 sufficient design expertise and software tools to provide custom high-performance memory for SoC designs. Similarly, suppliers of stand-alone logic and I/ O components generally lack the focus and expertise necessary to develop embedded logic and I/O elements for SoC designs. These factors have created a market need for third-party providers of highly reliable, high-performance memory, logic and I/ O IP for SoC design.

We provide IP for high-performance embedded memory, logic and I/ O elements used in SoC designs, as well as software development tools and custom design services. We offer our customers embedded memory, logic and I/ O elements that are optimized for area, low power consumption and speed and that are available for the manufacturing processes of both the leading and emerging 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 80 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.

	•	Logic Design Expertise. Our historical design expertise in carefully integrating large amounts of memory with advanced logic designs allows us to provide our customers with logic technologies for advanced manufacturing processes. We currently have a design team of over 25 engineers focused exclusively on logic design.

	•	Broad Product Line. We offer multiple types of memories, memory compilers, logic libraries and I/Os for advanced 0.25 micron, 0.18 micron, 0.15 micron, 0.13 micron and 90-nanometer processes. Our compilers allow our customers to generate the exact configuration of embedded memory needed for their SoC designs. The increasingly smaller process geometries offer the designers the opportunity for greater chip functionality as well as lower cost chips.

	•	Manufacturing-Tested Solutions. Many of our embedded memories are customized, verified and tested for a particular manufacturing process on a silicon chip, commonly referred to as silicon proven, before being delivered to a customer. This verification substantially reduces the risk that the memory element will be incompatible with the host manufacturing process and thereby reduces costly development delays which our customers might experience from using in-house or other third-party designs that are not silicon proven. Our memories have been purchased by over 250 customers and by foundries that comprise a significant portion of the third-party foundry market.

	•	Significant Design-Time Advantages. We offer silicon proven memories, logic and I/ O components that comply with the standards for specific manufacturing processes. Our memories, logic and I/O components and software tools can be easily integrated into our customers’ SoC design processes. By eliminating the need to design specific embedded memories, logic and I/O components, our customers can shorten the design time for their SoC.

	•	High-Density, High-Performance and Ultra-Low Power Consumption Embedded Memories. We have continued to expand our Area, Speed and Power (ASAP) Memory^TM compiler offering to enable the generation of high-density, high-speed and ultra-low power consumption embedded memories in


		multiple configurations. These technologies have been developed using custom memory design techniques to achieve industry-leading results in area, speed and power consumption.

	•	High-Density and Ultra- High-Density ASAP Logic Libraries. We offer an innovative and patented approach to routing and cell architecture for standard cell libraries that consistently yields smaller designs and higher routing utilization without sacrificing performance. We also provide patented metal programmable libraries that offer the flexibility to easily and quickly modify SoC designs while minimizing mask costs associated with frequent design changes.

	•	I/O Libraries. We offer highly differentiated base I/O libraries that result in smaller overall die sizes and provide an architecture that can accommodate specialty I/Os from providers of specialty I/O cells.

	•	Redundancy, Embedded Test and Repair. Our Self-Test and Repair (STAR) Memory System^TM, an embedded memory product that allows design engineers to economically embed multiple megabits of SRAM into a SoC, includes an integrated test and repair capability that enables our customers to achieve higher yields of semiconductors. The system includes one or more STAR SRAM memory blocks, a STAR Processor and a STAR Fuse Box. The STAR SRAM comes with redundant locations, the STAR Processor decides how to test and repair defective SRAMs and the STAR Fuse Box stores the repair information. We believe these potentially higher yields will provide our customers significant cost savings in recovered silicon and other raw materials, thereby substantially reducing test costs and enabling faster time-to-volume.

	•	Ease of Integration. We provide a complete set of software development tools to facilitate the integration of our memories, logic and I/Os with the other elements of a SoC design.

Our objective is to be the leading supplier of semiconductor IP platforms based on memory, logic and I/Os. We believe our customers will then choose to include an increasing amount of Virage Logic semiconductor IP when designing and manufacturing their complex SoCs. Key elements of our strategy include the following:


	•	Position Virage Logic as a Leading Provider of Semiconductor IP Platforms. We have been known historically for our expertise in providing numerous embedded memory solutions for a variety of advanced products utilizing sophisticated SoC technologies. Our memory solutions have enabled designers to choose from a broad suite of memory products based on their requirements for area, speed, power consumption, redundancy and other technical parameters. With the addition of logic and I/O products to our semiconductor IP platforms, our goal is to position Virage Logic to capture additional “real estate” on the chip, while enabling our customers to choose highly integrated, high-performance, memory, logic and I/O solutions from our product portfolio, based on their unique design requirements. We believe this will position us to pursue larger market opportunities, while further entrenching our existing position as a leading provider of embedded memories.

	•	Enable the Manufacturing of Semiconductors Using Our Semiconductor IP at Leading Third-Party Semiconductor Foundries. We work with leading third-party foundries to qualify our semiconductor IP for high-volume production in their manufacturing processes. In this manner, we are in a position to provide embedded memories, logic and I/O elements, as well as compilers that are silicon proven for a specific foundry’s manufacturing process, directly to that foundry’s entire customer base. Our close associations with these foundries also give us early access to information for advanced processes thereby enabling us to be among the first to market products on smaller process geometries.

	•	Become a Preferred IP Supplier to the Leading Fabless Semiconductor Companies. Fabless semiconductor companies, or semiconductor companies that do not internally manufacture their own silicon chips, spend substantial sums of money purchasing memory, logic and I/O elements to incorporate in their chips. These elements may be outside of their core competencies, or subject them to time-to-market constraints. As a result, they license IP from providers of semiconductor IP like us. To date, we have licensed our IP to many leading fabless semiconductor companies including Altera, AMCC, ATI


		Technologies, Broadcom, Ericsson, PMC-Sierra, Sandisk, TranSwitch and Vitesse Semiconductor. We intend to continue to target those fabless semiconductor companies that produce the largest number of chips, which will enable us to increase the royalty revenue payments we receive based on levels of production from the foundries that manufacture chips for our fabless customers.

	•	Increase our Base of Integrated Device Manufacturer Customers. Integrated device manufacturers (IDMs) produce the largest number of integrated circuits and face significant cost and product differentiation challenges. The internal design teams of these companies are facing difficulties keeping pace with the increasing demand for, and proliferation of, embedded memory and logic technologies and the rapid innovation of these technologies and integration with other SoC components for advanced manufacturing processes. To date, we have licensed our IP to many leading IDMs including Agere, Agilent, AMI Semiconductor, Conexant, Freescale, IBM, Infineon, Intel, Kawasaki, LSI Logic, NEC, Philips Electronics, Sharp, Sony, STMicroelectronics and Toshiba. In addition, several IDMs are aligning their internal design flows with leading third party foundries and outsourcing semiconductor IP for SoCs to be produced at both the third-party foundries and their own internal foundries. These types of relationships will broaden our market for silicon proven standard products which are designed to qualify for production at the leading third-party foundries. We intend to build upon our ability to reduce these customers’ design time and costs in order to attract additional IDM customers.

	•	Continue to Provide Existing Products 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 semiconductor IP components. We have assembled a team of over 200 engineers and we believe this will allow us to be the first to market with semiconductor IP platforms for advanced manufacturing processes, which will enable us to gain market share among early adopters of advanced processes.

	•	Continue to Solve Manufacturing and Yield Issues Facing Designers of Complex SoCs that Employ Multi-Megabit Embedded Memory Cells. We introduced one of the industry’s first embedded memory product that allows design engineers to economically embed multiple megabits of SRAM into a SoC. The integrated test and repair capability ensures higher yields of semiconductors and can potentially save millions of dollars in recovering chips that historically would have been rendered unrepairable, or repairable at significant cost. This capability also substantially reduces test costs and enables faster time-to-volume production. Embedded memory test and repair can take place either in the factory during the wafer probe process or in the field while the SoC is used in the end product, thereby enhancing the overall reliability of the product.

	•	Expand our Research and Development Efforts. We are focusing on developing new memory and logic architectures to support the convergence between computers, consumer products and communications markets. We intend to continue working with our foundry partners, TSMC, UMC, Chartered, DongbuAnam, IBM, SilTerra, SMIC and Tower, to define the focus of our research and development activities to best address the changing needs of our customers.

	•	Expand Distribution Channels. We intend to expand our existing distribution channels by continuing to selectively hire direct sales force members to serve key markets worldwide. In November 2002, we established a sales subsidiary in Japan. In other parts of Asia, we also continue to distribute our products through well- established independent distributors. We also intend to continue developing partnerships with value-added-resellers and other distributors of IP through our Virage Logic Intellectual Property Partner Program (VIP) to leverage their extensive U.S. and international sales organizations.


	•	embedded memory, logic and I/ O elements;

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

	•	software development tools that can be used to build memory compilers.

Our Embedded Memory Semiconductor IP. We provide embedded memory semiconductor IP in predetermined shapes, sizes and types that can be incorporated by semiconductor designers into their SoC designs. We deliver our memory semiconductor IP 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 SoC.

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


	•	STAR Memory System. The system allows the designer to embed multiple megabits of SRAM into a SoC economically without sacrificing yield and manufacturability. The system includes one or more SRAM blocks, a STAR Processor and a STAR Fuse Box. These memories are optimized for area, speed or power, incorporate self-test and repair capabilities and can generate up to eight megabits of embedded memory.

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

	•	NetCAM®. Our content-addressable memory, or CAM, compilers can be used in SoCs that are used in routers, switches and other high-bandwidth Internet infrastructure equipment to accelerate hardware-based searches. These high-speed ternary and binary CAMs are key enablers in moving high speed traffic through a network.

	•	NOVeA®. This innovative non-volatile electrically alterable embedded memory can be manufactured using standard logic processes. NOVeA can retain its data at power-off while allowing data to be reprogrammed and erased during normal operation. NOVeA provides on-chip storage of calibration data, passwords, critical access information, etc. It also helps the designer reduce overall system size, achieve lower power operation and increase system performance.

Our Logic Semiconductor IP. We provide logic libraries through our ASAP Logic^TM product line. These products are designed to improve logic block area utilization and SoC performance while decreasing the price and power consumption of the overall chip. We deliver our logic semiconductor IP to our customers through the same manner as our embedded memory semiconductor IP.


	•	ASAP Logic High-Speed Metal Programmable Cell Library. This cell library provides high mask cost savings during SoC design revision since only two to five mask layers need to be changed to reconfigure the chip.

	•	ASAP Logic High-Density Standard Cell Library. The cell architecture used in this cell library provides significantly increased pin accessibility, which along with other features, results in logic block area savings. This equates to an overall reduction in chip size and lower fabrication costs.

Our Base I/ O Library. In 2003, we added an input/output (I/ O) library to our product portfolio. It contains all necessary elements to complete an I/ O ring, a key element for the SoC’s communication with external electrical components.

Our Software Development Tools. Our primary software development tool is Embed-It!® Architect, which allows semiconductor design companies to develop their own compilers with re-characterization capabilities. We also provide a software tool called Embed-It! Integrator to facilitate the design of multiple memory configurations used with SoCs.

During fiscal year 2004, license revenues for 0.18 micron technology accounted for 16% of total license revenues, license revenues for 0.13 micron technology was 47% of total license revenues, license revenues for 90-nanometer technology was 32% of total license revenues and license revenues from the sale of other products was 5% of total license revenues. Included within the 5%, other products category, are our products on the larger process nodes, 0.25 and 0.35 micron technology. We expect royalty revenue from these products to be declining and license revenue to be insignificant in future periods. In fiscal year 2003, revenues from these product technologies were broken down as 21% for 0.18 micron technology, 53% for 0.13 micron technology, 7% for 90-nanometer technology and 19% for other products. In fiscal year 2002, revenues from these product technologies were broken down as 22% from 0.18 micron technology, 56% from 0.13 micron technology, 12% for 90-nanometer technology and 10% for other products.

We target markets and companies that utilize SoC technologies with high-performance, low-power architectures and high-density requirements where we believe our silicon proven, semiconductor IP platforms provide customers with significant time-to-market, design and manufacturing cost advantages. Examples of the markets and applications in which our IP is implemented include:


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

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

	•	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.

We believe that our future success will depend in large part on our ability to continue developing new products and expanding 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 memory and logic semiconductor IP. Currently, we are focusing our research and development efforts on development of different configurations for memories, logic and I/ O platforms that support the latest manufacturing processes: 90-nanometer and 65-nanometer. We are also developing new memory and logic architectures to support the emerging communications markets and the convergence between these markets and the computer and consumer products markets.

We have entered into agreements with TSMC, UMC, Chartered, DongbuAnam, IBM, SilTerra, SMIC and Tower for the development and licensing of various semiconductor IP platform products for certain design rules of each of these foundry’s design rules. Our relationship with these foundries assists us to develop the focus of our research and development activities. Under such agreements, each party owns its own IP and the parties to each agreement jointly own any intellectual property co-developed under such agreements. Following development, we license the developed technologies to third-parties that manufacture their silicon chips at the foundry. In exchange for our development, the foundries pay us licensing fees, as well as royalties based on silicon chips manufactured at the foundry using our semiconductor IP. In addition, both parties agree to provide technical, marketing and sales support as appropriate.

At November 30, 2004, we had 271 employees engaged in the engineering related activities of research, development and operations. We expect to identify and hire additional technical personnel in fiscal year 2005 to staff our planned research and development activities, and we expect that these costs will increase in the future in order to maintain a leading position as a third-party provider of silicon infrastructure in the form of semiconductor IP.

We focus our sales efforts through direct sales in North America, Europe and Asia. In Asia, we also derive indirect sales through distributors.

Direct Sales. We maintain a network of direct sales representatives and field application engineers serving the United States, Asia, Canada and Europe. Substantially all of our direct sales representatives and field application engineers are located in North America, Europe and Japan and serve our customers in those regions. The sales force is distributed throughout North America with employees in the following locations: Austin, Boston, Fremont, Los Angeles, Newark, West Palm Beach and Ottawa. To serve our European customers, we have a direct sales organization based in the United Kingdom with additional sales personnel in Germany and Israel. In 2003, we also added direct sales personnel for Japan. 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 products. Developing a licensee relationship typically involves a three to six month sales cycle and can extend beyond this timeframe. In the past two years, we have sold our products to more than 250 customers.

We enter into license agreements with our customers for a range of embedded memory, logic and I/ O technologies. For our ASAP Memory, ASAP Logic and I/ O products, in addition to collecting license and consulting fees from the customers, we receive royalties from third-party foundries that manufacture chips for our fabless customers. For our STAR Memory System, NetCAM and NOVeA products, we receive both license and royalty fees directly from our customers, as well as royalties from the third-party foundries that manufacture their chips. Our license agreements contain limited warranties and limit our liability for consequential damages arising from indemnification of IP infringement.

We have developed relationships through the Virage Logic IP (VIP) Partner Program 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, Chartered, DongbuAnam, IBM, SilTerra, SMIC and Tower. These relationships provide us with early access to new process technologies and endorsements from their direct sales force to our mutual customer base.

	•	EDA Vendors. We have entered into joint marketing relationships with a number of electronic design automation, or EDA vendors, including Cadence Design Systems, Magma, Mentor Graphics and Synopsys. These relationships allow us to validate our interoperability with these EDA vendors’ software design tools.

	•	Design Services. We have developed technology alliances with several design service companies who have experience with Virage Logic semiconductor IP. This allows our customers to augment their design teams or outsource their chip designs to these design service companies.

	•	IP Providers. We have established joint marketing relationships with numerous IP providers including Denali, MIPS, QualCore, and Tensilica. By working in partnership with other leading IP suppliers to test silicon and provide reference designs, we help customers access the functionality of the IP prior to committing it to their design.

Indirect Sales. In addition to the direct sales force, we also sell our technologies through a distributor in Japan and a distributor for the rest of Asia, primarily in Taiwan. These indirect sales organizations have expertise in selling semiconductor IP and software design tools. None of these relationships is exclusive.

Our customers are semiconductor companies that use our semiconductor IP platforms to design complex SoCs. Purchasers of our embedded memory, logic and I/ O elements include fabless semiconductor companies, IDMs and third-party foundries. For fabless semiconductor customers, we license our semiconductor IP on either a single or multiple project basis. For IDMs, we license our semiconductor IP on a multiple project basis and offer our Embed-It! Architect software as an option to develop and maintain their memory IP on the same software platform.

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


*	Indicates the ten customers that generated the highest level of revenues for us in fiscal 2004.

We expect a small number of companies to collectively represent between 20% and 40% of our revenues for the next few years. In fiscal 2004, 2003 and 2002, no customer generated more than 10% of our revenues. 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. We expect that our sales to fabless semiconductor companies will grow, and as a result we will become more dependent on the availability of new manufacturing process technologies and capacity from third-party foundries to manufacture our customers’ products.

On May 24, 2002, the Company acquired In-Chip Systems, Inc., a provider of logic platforms for SoC applications, thereby extending our product offerings for our semiconductor IP platform.

We rely 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.

As of November 30, 2004, we had 40 U.S. patents issued, 31 U.S. patent applications on file and five draft applications being prepared for filing with the U.S. Patent and Trademark Office (USPTO). Our patents expire at various dates between 2019 and 2023, and we expect that once granted, the duration of patents covered by patent applications will be 20 years from the 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 IP 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. We also have not secured patent protection in foreign countries, and we cannot be certain that the steps we take to prevent misappropriation of our intellectual property abroad will be effective.

In addition to patent protection, at November 30, 2004, we had four U.S. trademarks registered and four 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, but we may not have the resources to enforce such controls, and such controls may be declared invalid or unenforceable. Wide dissemination of our software makes protection of our proprietary rights difficult, particularly outside the United States, and we may not be able to assert equivalent rights with respect to source code developed by our employees in the Republic of Armenia (Armenia) and India as we could if it were developed in 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. Currently no such claims exist.

The semiconductor IP 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 IDMs that develop semiconductor IP for their own use. In addition, we face competition from other third-party providers of semiconductor IP, such as Artisan Components and Synopsys and certain DRAM IP providers, such as Monolithic System Technology, Inc. The semiconductor IP industry appears to be undergoing some significant changes with a number of recent corporate consolidation activities that will impact the competitive landscape. Additionally, the electronic design automation (EDA) companies such as Synopsys, Inc., Cadence Design Systems, Inc., Mentor Graphics Corporation and Magma Design Automation, Inc. could play a more significant role in the IP marketplace.

As we continue to introduce new technologies, we may face competition from both existing semiconductor IP 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 Semiconductor, Hynix Semiconductor, 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, logic and I/O components themselves, in addition to manufacturing chips containing third-party IP. TSMC, one of our third party foundry customers, has historically produced intellectual property components for use by third parties in designs to be manufactured at TSMC’s foundry. These components are designed to serve the same purpose as components produced by us. The intellectual property components developed by TSMC have competed and are expected to continue to compete with our products. We believe that TSMC is more aggressively developing and distributing these products to encourage its customers to use TSMC to manufacture their current and future designs. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than we do and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. If TSMC is successful in supplying its own intellectual property components to third parties either directly or through distribution arrangements with other companies, our revenue from TSMC, our revenue from other customers and our operating results could be negatively affected.

We believe that important competitive factors in our market include performance and functionality of product, the ability to customize products for customer needs, length of development cycle, price, compatibility with prevailing design methodologies, interoperability with other devices or subsystems, reputation for successful designs and installed base, and the level of technical service and support.

At November 30, 2004, we had 355 employees, including 56 in sales and marketing, 139 in research and development, 132 in engineering and operations and 28 in general and administrative functions. We have 163 of our engineers and other significant employees 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 are represented by a labor union, and we believe our employee relations are good.

The names and ages of our existing executive officers and significant employees at November 30, 2004 are set forth below

(*) Executive officer for purposes of Section 16(a) of the Securities Exchange Act of 1934.

Adam A. Kablanian co-founded Virage Logic and has served as our President, Chief Executive Officer and Chairman since January 1996. In August 2003, Mr. Kablanian resigned his position as Chairman of the Board and continues to serve as President, Chief Executive Officer and a member of the Board as a Director. Before co-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 Research and Development and Chief Technical Officer and as a Director since January 1996. Before co-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 fourteen 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.

Michael E. Seifert has served as our Vice President of Finance and Chief Financial Officer since February 2004. Prior to joining Virage Logic, Mr. Seifert served as CFO and corporate secretary at Southwall

Technologies, Inc., a manufacturer of thin-film coatings for electronic, automotive and architectural applications from December 2002 to January 2004. From May 2001 to December 2002, Mr. Seifert served as an independent consultant. From March 2000 to May 2001, Mr. Seifert served as the Chief Financial Officer of SiteSmith, Inc. From July 1998 to January 2000, Mr. Seifert served as the Chief Financial Officer of SmartDB Corporation, Inc. Mr. Seifert also spent 10 years at Ernst & Young, where he became a senior manager and principal in the firm’s San Jose, California office. Mr. Seifert is a Certified Public Accountant and a magna cum laude graduate of Santa Clara University with a B.S. in Commerce with a major in Accounting.

James J. Ensell, joined Virage Logic as our Vice President of Marketing in October 2003. Before joining Virage Logic, Mr. Ensell served as Vice President, Business Development and Chief Information Officer for fabless custom integrated circuit maker eSilicon from August 2000 to October 2003. Before joining eSilicon, Mr. Ensell held positions as Senior Vice President of Products and Services at Zland, an internet eBusiness provider, from July 1999 to August 2000, and served as Vice President of Marketing at Cadence Design Systems’ Deep Submicron Business Unit from April 1997 to January 1999. Mr. Ensell also serves as chairman of the IP Committee of the Fabless Semiconductor Association (FSA). Mr. Ensell holds a B.S. in Electrical Engineering from Villanova University and an M.S. in Electrical Engineering from the University of Pennsylvania.

Raj Singh has served as our Vice President of Worldwide Sales since March 2002. Before joining Virage Logic, Mr. Singh was Executive Vice President and General Manager and previously, Vice President of Worldwide Sales at 3Dlabs where he worked from April 1994 to March 2002. From February 1989 to March 1994, Mr. Singh held various positions with Dupont including Business Manager and Vice President of its Dupont Pixel operation. Mr. Singh holds a B.A. and an M.A. in English Literature from Kings College, Aberdeen University of Scotland.

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, Mr. Palumbo worked in various management positions at RCA, General Electric and Harris Semiconductor from December 1983 to September 1990. Mr. Palumbo 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.

Greer Person has served as our Vice President of Business Development since July 2003. Before joining Virage Logic, Mr. Person served as Senior Director and Head of Business Development at LSI Logic from November 2000 to July 2003, as Director of Business Development from June 1998 to November 2000, and previously in Product Line Management and Marketing Management for LSI Logic from August 1993 to February 1998. Before joining LSI Logic, Mr. Person held several engineering and operations management positions at Intergraph Corporation. Mr. Person holds a BSEE from the University of Mississippi and an M.B.A. from Santa Clara University.

Yervant Zorian served as a Director from November 1997 to March 2001 and joined our management team as Vice President and Chief Scientist in May 2000. From November 1996 to June 2000, Dr. Zorian served as Chief Technical Advisor of LogicVision. Before that Mr. Zorian served as a Distinguished Member of the Technical Staff at Lucent Technologies, Bell Laboratories. Since August 2000, Dr. Zorian has served as a board member of HPL Technologies, Inc. Dr. Zorian holds a B.S. in Electrical Engineering from the University of Aleppo in Syria, an M.Sc. in Computer Engineering from the University of Southern California and a Ph.D. in Electrical Engineering from McGill University.

Ehsan Rashid has served as our Vice President of Operations since October 2004. Prior to that he acted as Sr. Director of Operations since joining Virage Logic in April 2003. From January 2000 to April 2003, Mr. Rashid served as Senior Vice President and General Manager, Access Product Division, at Com21, Inc. From May 1999 to January 2000, Mr. Rashid served as Senior Director at Philips Semiconductor after it acquired VLSI Technology in May 1999. From December 1997 to May 1999, Mr. Rashid served as senior director of hardware and software engineering, and system applications in the Consumer Digital Entertainment Division of VLSI Technology. Prior to VLSI/ Philips, Mr. Rashid served as the Director of Engineering

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

In October 2002, our principal administrative, sales, marketing and research and development facility moved to a new building in Fremont, California and occupies approximately 61,500 square feet. This facility is leased through December 2006. We also lease additional offices in Bellevue, Washington and Clinton, New Jersey that are occupied mainly by research and development and engineering personnel. The Bellevue office, which occupies approximately 4,100 square feet, is leased through March 2005. The Clinton office, which occupies approximately 10,900 square feet, is leased through July 2005. In addition, we have development centers in Armenia and India. In September 2003, our development center in Armenia moved into our new building owned by us. The office space is approximately 40,000 square feet and the total cost of the building and leasehold improvements is approximately $1.8M. The development center in India is located in Noida, near Delhi, and occupies approximately 26,000 square feet in a building leased with a lease term under which the company has the right to but not the obligation to occupy the facility through July 2008.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Virage Logic Corporation’s common stock is traded on the Nasdaq National Market under the symbol “VIRL” since our initial public offering on August 1, 2000. The following table sets forth, for the periods indicated, the high and low closing prices for the common stock as reported on the Nasdaq National Market.

As of November 30, 2004, there were approximately 91 stockholders of record of our common stock.

The Company has never paid or declared any cash dividends on our common stock or other securities and does not anticipate paying cash dividends in the foreseeable future.

The equity compensation plan information required to be provided in this Annual Report on Form 10-K is incorporated by reference to the Company’s proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The selected consolidated financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this filing. The consolidated statement of operations data for each of the fiscal years ended September 30, 2004, 2003 and 2002 and the consolidated balance sheet data at September 30, 2004 and 2003 have been derived from our audited consolidated financial statements included elsewhere in this filing. The consolidated statement of operations data for the fiscal years ended September 30, 2001 and 2000 and the consolidated balance sheet data at September 30, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements not included in this filing. The historical financial information may not be an accurate indicator of our future performance.


(1)	Fiscal 2004, 2003 and 2002 results included the impact of revenues and expenses from the operations of In-Chip Systems, Inc. subsequent to the date of its acquisition. See Note 9 of the Notes to Consolidated Financial Statements for discussion of the acquisition of In-Chip Systems, Inc., which was consummated on May 24, 2002.

Item 7. 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 filing.

Our customers include fabless semiconductor companies, integrated device manufacturers and foundries. As semiconductor companies face increasing pressures to bring products to market faster and semiconductors have shorter product cycles, we focus on providing our customers a broad product offering as a means to satisfy a larger portion of our customers’ semiconductor IP needs, while positioning ourselves to offer advanced products as the semiconductor industry migrates to lower geometries.

The timing of customer purchases of our products is typically related to new design starts by fabless companies and migration to new manufacturing processes by IDMs and foundries. Because of the high costs involved in new design starts and migration to new manufacturing processes, our customers’ decision regarding these matters is heavily dependent on their long-term business outlook. As a result, our business, and specifically our license revenues, is likely to grow at times of positive outlook for the semiconductor industry. While in the first part of fiscal 2004 we have seen signs of a moderate recovery in the semiconductor industry, we believe that our customers remain cautious in their long-term business outlook.

We did see an increase in design starts in 0.13 micron and 90 nanometer process nodes during fiscal 2004. Furthermore, the capabilities offered by our STAR Memory System to improve yield and time-to-market and help reduce our customers’ overall costs became more important in these lower geometries, which contributed to an increase in our license revenues.

In fiscal 2004, we derived 79% of license revenue from the more advanced processes, 0.13 micron and 90nm technologies, and 21% from the older process nodes, predominantly 0.18, 0.25 and 0.35 micron technologies. The Company expects the 0.13 micron and 90nm technologies to drive revenue growth in the foreseeable future while license revenues from the older process nodes decline. The Company’s royalty revenue to date has been from production on the older process nodes and we expect future growth in royalty revenues to be driven by the advanced processes, 0.13 micron and 90nm technologies, in addition to continued production on the 0.18 micron technology.

We sell our product early in the design process, and there are time delays of 18 to 36 months between the sale of our products and the time we expect to receive royalty revenues. These time delays are due to the length of time required for our customers to implement our semiconductor IP into their design, and then to manufacture, market and sell a product incorporating our products. As a result, we expect our royalty revenues to increase in periods in which manufacturing volumes of semiconductors are growing as was the case during fiscal 2004. Future growth of our royalty revenue is dependent on our ability to increase the number of designs incorporating our products and on such designs achieving substantial manufacturing volumes.

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


	•	embedded memory, logic and I/ O elements;

	•	standard and custom memory compilers;


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

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

The license of our semiconductor IP typically covers a range of embedded memory, logic and I/ O products. Licenses of our semiconductor IP products can be either perpetual or term-based. In addition, maintenance can be purchased for both types of licenses.

We derive our royalty revenues from third-party foundries that manufacture chips incorporating our Area, Speed and Power (ASAP) memory products for our fabless customers, and from integrated device manufacturers and fabless customers that utilize our STAR Memory System^TM, NetCAM^TM and NOVeA^TM technologies. Royalty payments are in addition to the license fees we collect from our customers, and are calculated based on production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry.

Currently, license fees represent a significant portion of our revenues, although over the last few years royalties have represented an increased percentage of our revenues. Royalty revenues for the years ended September 30, 2004, 2003 and 2002 were $8.2 million, $3.5 million and $1.7 million, respectively.

We have been dependent on a limited number of customers for a substantial portion of our annual revenues, although that dependency continues to decrease. Customers comprising our top 10 customer group have changed from time to time. In each of fiscal 2004, 2003, and 2002, no single customer generated more than 10% of our revenues.

Sales to customers located outside North America accounted for 62%, 52%, and 44% of our revenues in fiscal 2004, 2003, and 2002, respectively. Substantially all of our direct sales representatives and field application engineers are located in North America and Europe and serve those regions. In Japan and the rest of Asia, we use both indirect sales through distributors and direct sales through sales representatives. All revenues to date have been denominated in U.S. dollars.


	•	We achieved revenue of $53.0 million during fiscal year 2004, up 30 percent from $40.7 million for fiscal year 2003. GAAP net income for fiscal year 2004 was $1.9 million, or $0.09 per share, compared with a GAAP net loss for fiscal year 2003 of $3.9 million, or $0.19 per share. We also achieved record quarterly revenues of $15.3 million during the fourth quarter of fiscal 2004, up 55 percent from $9.9 million for the fourth quarter of fiscal 2003, and up 11 percent from $13.9 million for the third quarter of fiscal 2004.

	•	Our royalty revenues continued to improve, increasing from $3.5 million in fiscal year 2003 to $8.2 million in fiscal year 2004 mainly as a result of a significant increase in manufacturing volumes by foundries in Asia, particularly of 0.13 micron technology.

	•	We continue to create and build relationships with emerging foundries and have entered into agreements with DongbuAnam, SilTerra and SMIC. This expands the number of technologies for which we sell our products and has the potential to increase our future royalties from customers that use these foundries.

	•	We introduced the IPrima Mobile^TM Ultra-Low-Power memories as the first offering in our IPrima family of application-optimized semiconductor IP platforms designed to address the requirements for


		such markets as consumer, communications and networking, computer and graphics, and portable and handheld and as part of our strategy of offering our customers advanced products that address the costs, yield and technical challenges of smaller geometries.

	•	We continued to penetrate our market, and during fiscal 2004 we signed a total of 30 agreements for our 90 nanometer product offerings, 41 direct royalty-bearing agreements for the STAR Memory System , 7 direct royalty-bearing agreements for the NOVeA® memory product and received orders from 37 new customers.

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

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


	•	revenue recognition

	•	valuation of accounts receivable

	•	valuation of long-lived assets and investments

	•	valuation of purchased intangibles, including goodwill

	•	accounting for stock options

	•	income taxes.

Our revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” as amended by Statement of Position 98-4 and Statement of Position 98-9. Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

Revenues from perpetual licenses for our semiconductor IP products are generally recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is reasonably assured. If any of these criteria are not met, we defer recognizing the revenue until such time as all criteria are met. Revenues from term-based licenses, which are generally twelve months in duration, are recognized ratably over the term of the license, provided the criteria mentioned above are met.

License of custom memory compilers and logic libraries may involve customization to the functionality of the software, therefore revenues from such licenses are recognized in accordance with the provisions of Statement of Position 81-1, over the period that we perform services. Revenues derived from library development services are recognized using a percentage-of-completion method, and revenues from technical consulting services are recognized as the services are performed. For all license and service agreements accounted for using the percentage-of-completion method, we determine progress-to-completion based on labor hours incurred. We believe we are able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method. Alternatively, for customers’ transactions for which we can not reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed at which time revenues are recognized. 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. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria is met.

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

The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company recognizes the revenue on the payment due date, assuming collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

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

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

While we believe our estimates used in calculating percentage-of-completion for certain agreements involving customization are reasonable, however different assumptions could materially affect the timing of our revenue recognition.

We perform ongoing credit evaluations of our customers and adjust customers’ credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their then-current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection risks that we have identified. While such credit losses have historically been within our expectations and the allowance we have established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively small number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the quality of our accounts receivables and our future operating results.

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

We periodically evaluate purchased intangibles, including goodwill, for impairment. An assessment of goodwill is subjective by nature, and significant management judgment is required to forecast future operating results, projected cash flows and current period market capitalization levels. If our estimates or related assumptions change in the future, these changes in conditions could require material write-downs of net intangible assets, including impairment charges for goodwill. In connection with the acquisition of In-Chip Systems Inc., the valuation of intangible assets was based on management’s estimates. Such estimates included cash flow projections, discount rates and estimated life of technology, which management believes are reasonable under the circumstances. Use of other estimates or assumptions may have resulted in a different valuation for such intangible assets acquired leading to changes in recorded asset values. Intangible assets with finite useful lives are amortized over the estimated life of each asset. As of September 30, 2004, management believes no impairment of intangible assets has occurred.

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

The Company accounts for stock options or warrants granted to non-employees, excluding non-employee directors, under SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under SFAS 123.” We record the expense of such services based upon the estimated fair value of the equity instrument using the Black-Scholes pricing model. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees. We charge the value of the equity instrument to earnings over the term of the service agreement. At the time all non-employee options and warrants were valued, the instruments were immediately exercisable and there were no ongoing obligations from the holders. There were no stock options grants to non-employees and no expense recorded in the year ended September 30, 2004. Expenses recorded for stock options granted to non-employees for the years ended September 30, 2003, and 2002 were $790,000 and $635,000, respectively.

We make estimates and assumptions for the inputs used in the fair value calculation. Material differences in amounts of expense may result if different estimates and assumptions are used. The Financial Accounting Standards Board (“FASB”) has recently proposed an accounting standard that will require the fair value of all equity-based awards granted to employees be recognized in the income statement as compensation expense. FASB is expected to issue final rules on stock option expensing in December 2004 with an effective date of June 2005. We will continue to monitor FASB’s progress on the issuance of this standard.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets. These differences resulted in deferred tax assets of $5.2 million at September 30, 2004. The carrying value of the Company’s net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. Management evaluates the recoverability of the deferred tax assets and assesses the need, if any, for additional valuation allowances. Taxes payable was $3.6 million and $309,000 at September 30, 2004 and 2003, respectively.

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

Revenues increased $12.3 million in 2004 from 2003 and decreased $4.9 million from 2002 to 2003. The 2004 increase in revenue was the result of increases in both license revenue and royalty revenue. The 2003 decline in revenues was due to a decline in license revenues, partially offset by an increase in royalties.

The following table lists the percentage of license revenues by geometry for the years ended September 30, 2004, 2003, and 2002.

License revenues increased $7.6 million in 2004 from 2003 and declined $6.8 million from 2002 to 2003. From a product perspective, the increase in license revenue in 2004 was primarily due to increased sales on the 90-nanometer technology from 7% to 32% of total license revenues from 2003 to 2004. These sales were derived from all categories of our customers: IDM (integrated device manufacturers), fabless and foundry

semiconductor customers. During 2004, the percent of our license revenues derived from 0.13 micron technology decreased from 53% for fiscal 2003 to 47% for fiscal 2004, while the overall license revenue earned from 0.13 micron technology in fiscal 2004 increased by $1.2 million. The 2003 decrease in license revenues was primarily due to fewer project design starts by fabless semiconductor customers on the 0.13 micron technology as evidenced by the decrease in sales of the 0.13 micron technology from 56% to 53% of total license revenues from 2002 to 2003, the lower than projected industry adoption of the 90-nanometer technology as evidenced by the decrease in sales of the 90-nanometer technology from 12% to 7% of total license revenues from 2002 to 2003, and entering into agreements with select IDM customers, who have purchased a full suite of products, which include higher future royalties in exchange for lower upfront license fees.

Royalties increased $4.7 million from 2003 to 2004 and $1.8 million from 2002 to 2003. The 2004 increase resulted primarily from significant increase in manufacturing volumes by foundries in Asia, particularly of 0.13 micron technology. The 2003 increase was due to increased royalties from foundries as a result of higher manufacturing volumes, entry of higher numbers of products into production incorporating our IP and the receipt of our first wafer-based royalties directly from customers using our STAR Memory System product family that was expanded in fiscal 2002.

For the years ended September 30, 2004, 2003 and 2002, total revenues by geography are as follows:

From a geographic perspective, the increase in license revenue in 2004 from 2003 primarily resulted from a significant increase in sales outside of North America, which was driven by significant sales growth in global IDM accounts, by growth in Japan, and by a successful strategy of penetrating emerging foundries in the Pacific Rim. This 2004 increase was evidenced by IDM revenue increasing to 44% from 17% of revenue, and foundry revenue increasing to 27% from 18% of revenue. Japan revenue also increased to 11% from 10% of revenue on an expanding base. The 2003 decrease in license revenues was due to the global downturn in the semiconductor industry. The Company experienced decreases in revenue ranging from 12% to 49% in all geographic locations with the exception of Asia (excluding Japan) where revenues increased in 2003 as compared to 2002.

We have experienced increased revenues from Asia year over year as we continue to build customer relationships and expand sales with emerging foundries. In Europe, we also experienced increased revenues due to higher volumes of product purchased by IDM’s and increasing royalty revenue. Sales to Canada and the U.S. were modestly higher from 2003 to 2004 due to an expanding customer base, partially offset by continued weakness in the U.S. semiconductor industry. Sales to Canada and EMEA were lower in fiscal 2003 as compared to fiscal 2002 due to the timing of certain customer orders and the limited number of customers in those regions. Sales to the United States were lower in fiscal 2003 as compared to fiscal 2002 due to the extended poor economic environment in the U.S. semiconductor industry.

Cost of Revenues. Cost of revenues in fiscal 2004, 2003 and 2002 were as follows:

Cost of revenues consists primarily of personnel expenses, the allocation of facilities, software maintenance/licensing fees and equipment expenses. Cost of revenues increased 21% from 2003 to 2004 and 2% from 2002 to 2003. The increase between 2003 and 2004 was due primarily to a $0.8 million increase in labor cost associated with bonus compensation consistent with our profitable operations as well as increased headcount, and $0.6 million increase in maintenance/license fees for third party software utilized in our product development. The increase between 2002 and 2003 was primarily due to the increase in personnel expenses which could not be deployed in a timely manner to research and development projects and the overhead expense due to higher rent expense. Cost of revenues as a percentage of revenues was 21%, 23% and 20% for fiscal year 2004, 2003 and 2002, respectively. The decrease in cost of revenues as a percentage of revenues from 2004 to 2003 was attributable to improved labor utilization during a period of higher revenues on a year-over-year basis. Cost of revenues excludes $29,000, $255,000 and $986,000 of amortization of stock-based compensation for the years ended September 30, 2004, 2003 and 2002, respectively.

Research and Development Expense. Research and development expenses in fiscal 2004, 2003 and 2002 were as follows:

Research and development expense decreased 1% from 2003 to 2004 and increased 42% from 2002 to 2003. The decrease in research and development expense from 2003 to 2004 was due to lower personnel and consulting expenses of $0.3 million, which was the result of shifting personnel to activities associated with the development and delivery of our products, and a decrease in depreciation expense of $0.5 million, offset by an increase of $0.4 million in software license and maintenance fees and an increase in travel expenses of $0.1 million. Headcount earmarked for research and development responsibilities was higher on a year-over-year basis. The increase in research and development expense between 2002 and 2003 was primarily due to personnel and related expense of $3.1 million, much of which was associated with the growth of the logic engineering organization, as well as an increase of $1.3 million in software license and maintenance fees. Research and development expense excludes $48,000, $499,000 and $1.4 million of amortization of stock-based compensation for the years ended September 30, 2004, 2003 and 2002, respectively

Sales and Marketing Expense. Sales and marketing expenses in fiscal 2004, 2003 and 2002 were as follows:

Sales and marketing expense increased 14% from 2003 to 2004 and 11% from 2002 to 2003. The increase in sales and marketing expense in 2004 was primarily due to costs of hiring more senior personnel and related higher compensation expense of $1.3 million, commensurate with revenue growth and growth in operations, an increase in advertising expense of $0.1 million, an increase in travel cost of $0.2 million, an increase in overhead expenses of $0.4 million, partially offset by a decrease in consulting expenses of $0.2 million related to market research. In 2003, the increase was primarily due to the cost of hiring additional personnel of

$0.9 million and increased consulting expenses of $0.3 million. The number of employees decreased from 57 to 52 from 2003 to 2004 and increased from 51 to 57 from 2002 to 2003 in sales and marketing. Sales and marketing as a percentage of revenues was 28% in fiscal 2004, down from 31% in fiscal 2003. Sales and marketing expense excludes $37,000, $322,000 and $1.3 million of amortization of stock-based compensation for the years ended September 30, 2004, 2003 and 2002, respectively.

General and Administrative Expense. General and administrative expenses in fiscal 2004, 2003 and 2002 were as follows:

General and administrative expense increased 36% from 2003 to 2004 and decreased 6% from 2002 to 2003. The increase in general and administrative expense between 2003 and 2004 was primarily due to the increase in personnel related expense of $0.9 million, increased bad debt provision of $0.3 million, an increase in consulting expense of $0.3 million, increased rent costs of $0.4 million, offset by the decrease in legal and accounting fees of $0.2 million. The decrease in general and administrative expense between 2002 and 2003 was primarily the result of reduced bad debt expense of $0.5 million. General and administrative expense excludes $16,000, $128,000 and $579,000 of amortization of stock-based compensation for the years ended September 30, 2004, 2003 and 2002, respectively.

Stock-Based Compensation. With respect to the grant of stock options and restricted stock to employees, our balance sheet reflects an aggregate deferred stock-based compensation of approximately $0 and $130,000 for the years ended September 30, 2004 and 2003. This stock-based compensation balance for September 30, 2003 resulted from the grant of stock options to employees prior to our initial public offering that were determined to have been granted at an exercise price that was lower than the fair market value of our common stock for accounting purposes and to a lesser extent related to equity instruments acquired in connection with the acquisition of In-Chip Systems, Inc. in May 2002. The amount of deferred stock-based compensation is presented as a reduction of stockholders’ equity and is amortized under the multiple option approach, which results in recognizing expense on an accelerated basis over the vesting period of the applicable options, generally four years. Amortization, net of cancellations, was $130,000, $1.2 million and $4.2 million for the years ended September 30, 2004, 2003 and 2002, respectively.

Interest Income. Interest income was $719,000, $812,000 and $1.2 million for the years ended September 30, 2004, 2003 and 2002, respectively. Interest income has continued to decrease due to the declining interest rate environment.

Interest and Other Expenses. Interest and other expenses resulted in a net other income of $37,000 in the year ended September 30, 2004, and net other expense of $73,000 and $81,000 for the years ended September 30, 2003, and 2002, respectively. The net other income in 2004 is primarily due to foreign exchange gain on foreign currencies in the amount of $27,000. The net other expense in 2003 and 2002 primarily includes interest expense paid on capital leases of $58,000 and $49,000, respectively.

Income Tax Provision. For fiscal 2004, we recorded a provision of $859,000 on a pre-tax income of $2.8 million, yielding an effective tax rate of 31%. For fiscal 2003, we recorded an income tax benefit of $1.5 million on a pre-tax loss of $5.4 million, yielding an effective tax rate of 28%. For fiscal 2002 we recorded a provision for income taxes of $2.3 million on pre-tax income of $2.5 million, yielding an effective tax rate of 91%. The rates differ from the U.S. statutory rates primarily due to the impact of stock-based compensation related charges that are non-deductible for tax purposes, as well as in-process research and development charges for fiscal 2002. The change in the effective tax rate from fiscal 2003 to fiscal 2004 is primarily the result of the company’s pre-tax income position after its pre-tax loss of $5.4 million due to lower than expected revenues in fiscal 2003.

Additionally, the Company’s India branch office has received a tax assessment from the Government of India, Income Tax Department, for the tax year 2000-2001 claiming the Company owes an additional approximately $1.0 million in income taxes. The Company asserts that the claim is baseless but, in October 2004, has made a deposit of approximately $200,000 with the Indian tax authorities as required and is appealing the tax assessment with the Indian government’s Commissioner of Income Tax Appeals. In the unlikely event that an unfavorable outcome of the tax appeal process occurs, the Company believes it will not have a material impact on our financial position, cash flows or results of operations.

At September 30, 2004, cash, cash equivalents and investments were $63.1 million compared to $59.1 million as of September 30, 2003. Of that, $28.7 million was held in cash and cash equivalents, a decrease of $10.2 million from cash and cash equivalents held at September 30, 2003 primarily as a result of the purchase of short-term and long-term government and marketable fixed income securities. We held $34.3 million in investments at September 30, 2004, as compared to $20.2 million at September 30, 2003. In fiscal 2004, 2003 and 2002, operations were funded primarily from revenues received.

Net cash provided by operating activities was $3.5 million, $2.9 million and $8.5 million for fiscal 2004, 2003 and 2002, respectively. Net cash provided by operating activities in 2004 resulted from net income of $1.9 million in fiscal 2004, adjusted for aggregate non-cash charges associated with depreciation and amortization of $3.6 million and the amortization of stock-based compensation of $130,000. Increased business volume and the associated increased revenues and billings in 2004 from 2003 led to significant increases in accounts receivable of $7.6 million and deferred revenue in the amount of $4.9 million. The increase in both categories is primarily due to several large arrangements requiring upfront payments for licensing agreements from which the Company will be generating revenues in subsequent periods. The increases were also the result of annual maintenance renewals with foundries and integrated device manufacturers in the final month of fiscal 2004. Days sales outstanding for the fiscal fourth quarter of 2004, based on revenues of $15.3 million and net accounts receivable of $17.8 million, was 104, up from 95 days in the fourth quarter of fiscal 2003. Significant increases in taxes receivable of $1.3 million from prior year tax refunds and deferred tax assets of $2.3 million from tax credits and differences in timing of payments was offset by an increase in income tax payable of $3.3 million resulting from the Company’s net income position in 2004. Additional offsets to the increase in cash provided by operating activities were increases in accrued expenses of $1.2 million consisting of accrued payroll and related expenses of $800,000 due to increased headcount and deferred rent of $400,000 related to the Company’s increased facility lease obligations in 2004.

Net cash provided by operating activities in 2003 resulted from a net loss of $3.9 million in fiscal 2003, adjusted for aggregate non-cash charges associated with depreciation and amortization of $4.2 million and the amortization of stock-based compensation of $1.2 million. Reduced revenue levels and timing of customer payments from 2002 to 2003 led to significant decreases in accounts receivable of $5.2 million partially offset by increases in prepaid expenses of $1.3 million resulting from purchases of software maintenance, a decrease in income taxes payable of $1.7 million due to the Company’s loss position, an decrease in deferred revenue of $0.3 million and a decrease in accrued expenses of $0.5 million due to timing of payments. Days sales outstanding for the fiscal fourth quarter of 2003, based on revenues of $9.9 million and accounts receivable of $10.5 million, was 95, down from 108 days in the fourth quarter of fiscal 2002. The decrease was primarily due to the timing of customer payments.

In fiscal 2002, net cash provided by operating activities resulted from net income of $225,000, adjusted for aggregate non-cash charges associated with depreciation and amortization of $4.1 million and the amortization of stock-based compensation of $4.2 million. The increase in cash provided by operating activities from 2001 to 2002 is due to decreases in income tax receivable of $1.6 million for the receipt of tax refunds received during the year resulting from tax credits and differences in timing of payments, increases in accrued payroll and related expenses of $1.4 million due to increased headcount from 202 to 284 employees, an increase in deferred revenues of $1.9 million from greater deferred maintenance revenue and an increase in income tax payable of $2.0 million from continued earnings growth and a reduction of the amount of amortization of stock-based compensation. The increase in cash provided from operating activities from 2001

to 2002 was partially offset by increases in accounts receivable of $5.7 million related to higher revenues, prepaid expenses of $590,000 related to purchases of software maintenance and deferred tax assets of $1.7 million. Days sales outstanding for the fiscal fourth quarter of 2002, based on revenues of $13.1 million and accounts receivable of $15.7 million, was 108, up from 98 days in the fourth quarter of fiscal 2001. The increase was primarily due to some large milestone shipments in agreements with integrated device manufacturers late in the year.

Net cash used in investing activities was $15.8 million, $995,000 and $2.0 million for fiscal 2004, 2003 and 2002, respectively. The increase in cash used for investing activities from 2003 to 2004 is due primarily to increased treasury investing activities. The decrease in cash used for investing activities from 2002 to 2003 is due primarily to reduced treasury investment activity and no significant technology investment or merger and acquisition activity. As a result of lower interest rates, management elected to maintain cash as cash equivalents or shorter term instruments rather than commit funds to longer term instruments at the then current low interest rates. The cash used for investing activities in 2002 is due primarily to the disposition of the investment in Atmos Corporation and the net maturities of our investments in government securities, offset by the acquisition of In-Chip Systems, Inc. and acquisitions of property and equipment, primarily computer software and hardware.

Net cash provided by financing activities was $2.1 million, $1.6 million and $1.0 million for fiscal 2004, 2003 and 2002, respectively. Net cash provided by financing activities in fiscal 2004 and 2003 primarily reflects proceeds from the issuance of common stock of $2.1 million and $1.7 million, respectively associated with our employee stock options and employee stock purchase plans. In 2002, the proceeds from issuance of common stock totaling $1.6 million and the repayment of notes payable by stockholders of $1.0 million further contributed to the net cash provided but was offset by the repayment to stockholder of $1.5 million.

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 levels of 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 our current capital resources and cash generated from operations will be sufficient to meet our needs for at least the next twelve months, although we may seek to raise additional capital during that period and there can be no assurance that we will not require additional financing beyond this time frame.


(1)	Includes $799,000, $1.3 million and $277,000, respectively, payable under the lease agreement for our corporate office lease in Fremont, California, which was extended through fiscal year 2006.

(2)	Reflects amounts payable under: 1) an agreement with a third party for the right to market certain semiconductor I/ O technology developed by such third party and create, modify and market derivatives of this technology, and 2) contracts for product development software licenses and maintenance.

The following tables contain unaudited consolidated statement of operations data for our eight most recent quarters. The first table contains revenue and expense data expressed in dollars, while the second table contains the same data expressed as a percentage of our revenues for the periods indicated. This data has been derived from unaudited consolidated financial statements that, in our opinion, include all adjustments necessary for a fair statement 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.

From inception to May 2002, primarily all of our revenues resulted from licenses to our embedded memory products. After our acquisition of In-Chip Systems, Inc. in May 2002, we were able to expand our product offering to also include logic products. In 2003, we added I/Os to our product offering to enable us to offer what we define as a semiconductor IP platform. If our strategy to be a provider of semiconductor IP platforms is not broadly accepted by potential customers or acceptance is delayed for whatever reason, our revenues and profitability could be adversely affected. In addition, our profitability could also be adversely affected due to investment of resources towards the development and/or acquisition of logic and I/O products and lower than anticipated revenues from the sale of such products. Factors that could prevent us from gaining market acceptance of our semiconductor IP platform include:


	•	Difficulty convincing customers of our memory products to purchase other products from us;

	•	Competition resulting in minority market share;

	•	Inability to migrate technologies to new foundries due to less design experience;

	•	Limited experience in sales and marketing of the platform strategy and knowledge of the market; and

	•	Difficulties and delays in expanding our logic and I/O product offerings.

Our quarterly operating results are likely to fluctuate in the future from quarter to quarter and on an annual basis due to a variety of factors, many of which are outside of Virage Logic’s control. Factors that could cause our revenues and operating results to vary from quarter to quarter include:


	•	large orders unevenly spaced over time;

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

	•	pace of adoption of new technologies by customers;

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

	•	fluctuations in the demand for products that incorporate our IP;

	•	constrained or deferred spending decisions by customers;

	•	inability to collect trade receivables;

	•	the timing and completion of milestones under customer agreements;

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

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

	•	difficulties in forecasting royalty revenues because of factors out of our control, such as the timing of manufacturing of semiconductors subject to royalty obligations, the number of such semiconductors actually manufactured and the timing and results of audits of royalty reports received from our customers;

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


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

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

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

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

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


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

	•	competition with the customers’ internal design teams and other providers of semiconductor IP as our customers may evaluate these alternatives for each design; and

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

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

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, to provide referrals to their customer base and to define the focus of our research and development activities. We currently have agreements with Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Corporation (UMC), Chartered Semiconductor Manufacturing (Chartered), Tower Semiconductor (Tower), Silterra Malaysia (Silterra), Semiconductor Manufacturing International Corporation (SMIC) and DongbuAnam Semiconductor. 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 and our ability to develop products for emerging technologies will be hampered. We would then be unable to license our IP to fabless semiconductor companies that use these foundries to manufacture their silicon chips, which is a significant source of our revenues.

We have historically generated revenues almost entirely from license fees. We have agreements with certain third-party semiconductor foundries to pay us royalties on their sales of silicon chips they manufacture for our fabless customers. Beginning with our STAR Memory System, CAM technologies and more recently with the introduction of our NOVeA technology, in addition to collecting royalties from third-party semiconductor foundries, we intend to increase our royalty base by collecting royalties directly from our integrated device manufacturer and fabless customers. However, we may not be successful in convincing all customers to agree to pay us royalties. For the quarters ended September 30, 2004 and 2003, we recorded royalty revenues of approximately $3.2 million and $1.3 million, respectively. For the fiscal years ended September 30, 2004 and 2003, we recorded royalty revenues of approximately $8.2 million and $3.5 million, respectively. The continued growth of our revenues depends in part on increasing our royalty revenues, but we may not be successful in increasing our royalty revenues as expected and we face difficulties in forecasting our royalty revenues because of many factors beyond our control, such as fluctuating sales volumes of products that incorporate our IP, short or unpredictable product life cycles for some customer products containing our IP, potential slow down for manufacturing of certain newer process technology, foundry rate adjustments, the cyclical nature of the semiconductor industry that affects the number of designs, commercial acceptance of these products, accuracy of revenue reports and difficulties in the royalty collection process. In addition, occasionally we have completed agreements whereby significant upfront license fees are reduced or limited in exchange for higher royalty rates, which should result in future royalty revenues, but these royalty arrangements may not provide us with the anticipated benefits as sales of products incorporating our IP may not offset lower license fees.

The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. While standard license terms give us the right to audit the books and records of our licensees to verify this information, audits can be expensive, time consuming and potentially detrimental to our ongoing business relationship with our licensees. Our failure to audit our licensees’ books and records may result in us receiving more or less royalty revenue than we are entitled to under the terms of our license agreements. The results of such audits could also result in an increase, as a result of a licensees’ underpayment, or decrease, as a result of a licensees’ overpayment, to royalty revenues. Such adjustments are recorded in the period they are determined. Any adverse material adjustments resulting from royalty audits may cause our revenues and operating results to be below market expectations, which could cause our stock price to decline. The royalty audit may also trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts and attention of our management from normal operations and impact our business operations.

The complexity and ongoing development of our products could lead to design or manufacturing problems. Our semiconductor IP products may fail to meet our customers’ technical requirements, or may contain defects, which may cause our customers to fail to complete the design and manufacturing of their products in a timely manner. Any of these problems may harm our customers’ businesses. If any of our products fail to meet specifications or have reliability or quality problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in net revenue, an increase in product returns and the loss of existing customers or failure to attract new customers. These problems may adversely affect customer relationships, as well as our business, financial condition and results of operations.

We currently have subsidiaries or branches in Armenia, India, the United Kingdom, Israel, Germany and Japan. In addition, a significant portion of our IP is being developed in development centers located in the Republic of Armenia and India. Israel continues to face an increased level of violence and terror, India is experiencing rising costs and Armenia, only independent since 1991, has suffered significant political and economic instability. Accordingly, continued and heightened unrest in areas of the world in which we operate may adversely affect our business in a number of ways, including the following:


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

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

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

Sales to customers located outside North America accounted for 62%, 52% and 44% of our revenues for fiscal years 2004, 2003, and 2002, respectively. For the three months ended September 30, 2004 and 2003, sales to customers located outside North America accounted for 66% and 52% of our revenues, respectively. We anticipate that sales to customers located outside North America will increase and will continue to represent a significant portion of our total revenues in future periods. In addition, most of our customers that do not own their own fabrication plants rely on third-party foundries located outside of North America. Accordingly, our operations and revenues are subject to a number of risks associated with doing business in international markets, including the following:


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

	•	staffing and managing foreign branch offices and subsidiaries;

	•	political and economic instability;

	•	international conflicts or other crises, such as the outbreak of Severe Acute Respiratory Syndrome, or SARS;

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

	•	foreign currency exchange fluctuations;

	•	changes in tax laws and tariffs;

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

	•	timing and availability of export licenses;

	•	inadequate protection of IP rights in some countries; and

	•	obtaining governmental approvals for certain technologies.

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

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

We have been dependent on a limited number of customers for a substantial portion of our annual revenues in each fiscal year, although the customers comprising this group have changed from time to time. No single customer generated more than 10% of our revenues for the years ended September 30, 2004 and 2003. Since fiscal year 2001, our five largest customers have represented between 25-45% of our revenues. The license agreements we enter into with our customers do not obligate them to license future generations of our IP and, as a result, we cannot predict if and when they will purchase additional products from us. As a result of this customer concentration, we could experience a dramatic reduction in our revenues if we lose one or more of our significant customers and are unable to replace them. In addition, since our accounts receivable are concentrated in a relatively small number of customers, a significant change in the liquidity, financial position, or issues regarding timing of payments of any one of these customers could have a material adverse impact on the collectability of our accounts receivable, historical revenues recorded and our future operating results.

Although we recorded net income of $1.9 million for fiscal 2004 and $2.3 million for the last three quarters of fiscal 2004, respectively, this followed five quarters of consecutive net losses. The losses recorded in fiscal 2003 and the first quarter of 2004 were due principally to fewer project design starts by fabless semiconductor customers on the 0.13 micron technology and the slow-down in industry adoption of the 90-nanometer process technology. In order to maintain and improve our profitability, we will need to continue to generate new sales while controlling our costs. As we plan on continuing the growth of our business while implementing cost control measures, we may not be able to successfully generate enough revenues to remain profitable with this growth. Any failure to increase our revenues and control costs as we pursue our planned growth would harm our profitability and would likely negatively affect the market price of our stock. In addition, if we incurred losses for a sustained period we may be prevented from being able to fully utilize our deferred tax asset which will result in the need for a valuation allowance to be recorded.

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

We believe that one of our significant competitive advantages is the size and quality of our engineering team. Our future success also depends on our ability to attract and retain engineers and other highly skilled personnel and senior managers. In addition, in order to meet our planned growth we must increase our sales

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

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

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

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.

Our historical growth, international expansion, and our strategy of being a provider of semiconductor IP platforms, have placed, and are expected to continue to place, a significant strain on our managerial and financial resources as well as our 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. Our inability to manage any future growth effectively would be harmful to our revenues and profitability.

We acquired In-Chip Systems, Inc. in May 2002, and we may continue to acquire businesses or technologies that we believe are a strategic fit with our business. The In-Chip acquisition as well as other future acquisitions may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. In addition, the integration of acquisition targets may prove to be more difficult than expected, and we may be unsuccessful in maintaining and developing relations with the employees, customers and business partners of In-Chip and other acquisition targets. Since we will not be able to accurately predict these difficulties and

expenditures, it is possible that these costs may outweigh the value we realize from a future acquisition. Future acquisitions could result in issuances of equity securities that would reduce our stockholders’ ownership interest, the incurrence of debt, contingent liabilities, deferred stock based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs.

Our business and the adoption and continued use of our IP by semiconductor companies depends on the demand for products requiring complex semiconductors, embedded memories and logic elements, such as cellular and digital phones, pagers, PDAs, digital cameras, DVD players, switches and modems. The demand for such products is uncertain and difficult to predict, and it depends on factors beyond our control such as the competition faced by each customer, market acceptance of products that incorporate our IP and the financial and other resources of each customer. A reduction in the demand for products incorporating complex semiconductors and semiconductor IP or in the general economic environment which results in the cutback of research and development budgets or capital expenditures would likely result in a reduction in demand for our products and could harm our business. In addition, with increasing complexity in each successive generation of semiconductors, we face the risk that the rate of adoption of smaller technology processes may slow.

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

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

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

The semiconductor industry has been characterized by an increasingly rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater speed and functionality. Our future success depends on our ability to develop new technologies and introduce new products to the marketplace in a timely manner, and to adapt our existing IP to satisfy the requirements of new processes and our customers. If our development efforts are not successful or are significantly delayed, or if the enhancements or new generations of our products do not achieve market acceptance, we may be unable to attract or retain customers and our operating results could be harmed.

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


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

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

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

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

	•	new technologies introduced by our competitors.

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

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

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

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

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

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

Any litigation regarding patents or other IP 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 IP 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 IP, which may result in significant expenditures. We may not be able to obtain such agreements on terms acceptable to us or at all, and thus, may be prevented from licensing or developing our technology.

The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline. Fluctuations or a decline in our stock price may occur regardless of our performance. Among the factors that could affect our stock price, in addition to our performance, are:


	•	variations between our operating results and the published expectations of securities analysts;

	•	changes in financial estimates or investment recommendations by securities analysts following our business;

	•	announcements by us or our competitors of significant contracts, new products or services, acquisitions, or other significant transactions;

	•	sale of our common stock or other securities in the future;

	•	the inclusion or exclusion of our stock in various indices or investment categories, especially as compared to the investment profiles of our stockholders at a given time;

	•	changes in economic and capital market conditions;

	•	changes in business regulatory conditions; and

	•	the trading volume of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required, beginning with our fiscal year ending September 30, 2005 to include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of fiscal 2005. Furthermore, our independent registered public accounting firm will be required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005. We have not yet completed our assessment of the effectiveness of our internal controls. If we fail to timely complete this assessment, or if our independent registered public accounting firm cannot attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations. Any of these failures could have a negative effect on the trading price of our stock.

The Financial Accounting Standards Board (“FASB”) has recently proposed an accounting standard that will require the fair value of all equity-based awards granted to employees be recognized in the income statement as compensation expense. The various methods for determining the fair value of stock options are based on, among other things, the volatility of the underlying stock. Our stock price has historically been volatile. Therefore, the adoption of an accounting standard requiring companies to expense stock options could negatively affect our profitability and may adversely affect our stock price. Such adoption could also limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. FASB is expected to issue final rules on stock option expensing in December 2004 with an effective date of June 2005. We will continue to monitor FASB’s progress on the issuance of this standard.

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

Our certificate of incorporation, our bylaws and Delaware law contain provisions that might enable our management to discourage, delay or prevent change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. These provisions include:


	•	our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;

	•	our board of directors is staggered into 3 classes, only one of which is elected at each annual meeting;

	•	stockholder action by written consent is prohibited;

	•	nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements;

	•	certain provisions in our bylaws and certificate may only be amended with the approval of stockholders holding 80% of our outstanding voting stock;

	•	the ability of our stockholders to call special meetings of stockholders is prohibited; and

	•	our board of directors is expressly authorized to make, alter or repeal our bylaws.

We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15% or more of our outstanding voting stock.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing

revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

Our core business, the sale of semiconductor IP for the design and manufacture of system-on-a-chip integrated circuits, has 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 all of our license agreements provide for payment in U.S. dollars.

Our international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax environments, other regulations and restrictions and foreign exchange rate volatility. Our foreign subsidiaries incur most of their expenses in the local currency. To date these expenses were not significant, therefore, we do not anticipate our future results to be materially adversely impacted by changes in factors affecting international operations.

We are exposed to the impact of interest rate changes and changes in the market values of our marketable securities. We maintain an investment portfolio of various issuers, types and maturities. We are averse to principal loss and seek to preserve our invested funds by limiting default risk, market risk and reinvestment risk. Our investments primarily consist of short-term money market mutual funds, United States government obligations and mortgage-backed securities and commercial paper. Cash, cash equivalents and marketable securities in both fixed and floating rate interest-earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to rising interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sells securities that have declined in market value due to change in interest rates.

The table below presents the carrying values and related weighted average interest rates for our cash, cash equivalents and marketable securities. The carrying values approximate fair values at September 30, 2004 and 2003. At September 30, 2004, marketable securities consisted of $27.1 million with a maturity date of less than one year and $7.2 million with a maturity date of greater than one year.

The Consolidated Financial Statements required by this Item are set forth on the pages indicated at Item 15(a). The unaudited quarterly results of our operations for our two most recent fiscal years are incorporated herein by reference under Item 6 “Selected Consolidated Financial Data.”

An evaluation was performed under the supervision and with the participation of our management, including the President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer along with the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our disclosure controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

Effective October 2004, the Company changed the enterprise resource planning (ERP) system that it uses in its daily operations. It converted its database, and operational processing systems to the Softrax Operations and Financials Suite. In addition to providing the same information that the previous system provided, the Company believes that the new ERP system will improve its operational efficiency, automate its information process and expand its software revenue recognition, deferred revenue tracking and backlog tracking capabilities. Additionally, the new ERP system should allow the Company to retain the control and integrity of its information systems as it grows in the future. Although the transition has proceeded to date without material adverse effects, the possibility exists that our migration to the new ERP information system could adversely affect our internal controls over financial reporting, our disclosure controls and procedures or our operations in future periods. The process of implementing a new information system could adversely impact our ability to do the following in a timely manner: accept and process customer orders, ship products, invoice and collect receivables, place purchase orders and pay invoices, and all other business transactions related to the finance, order entry, revenue recognition and purchasing processes within the new ERP system. There were no other significant changes in the Company’s internal controls or, to the knowledge of management of the Company, in other factors that could materially affect internal controls over financial reporting that occurred during the Company’s fourth quarter of fiscal 2004.

The information required by this item concerning our directors is incorporated by reference to the information in the section entitled “Proposal No. 1 — Election of Directors” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

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

The information required by this item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to information in the section entitled “Security Ownership of Certain Holders-Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The Company’s Code of Ethics is filed as exhibit 14.1 of this Annual Report. The information required by this item concerning the Company’s Code of Ethics is incorporated by reference to the section entitled “Code of Ethics” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The information required by this item regarding executive compensation is incorporated by reference to the information in the section entitled “Executive Compensation” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information in the section entitled “Security Ownership By Certain Beneficial Holders” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information in the section entitled “Certain Relationships and Related Transactions” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information in the section entitled “Fees of Accountants” in our Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended September 30, 2004.

The registrant furnished Current Reports on a Form 8-K on July 20, 2004 to provide its earnings release for the third quarter of fiscal 2004.


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

(2)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2000.

(3)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.

(4)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(5)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2001.

(6)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.

(7)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(8)	Incorporated by reference to Virage Logic’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2002.

(9)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2002.


(10)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2003.

(11)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.


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

In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Virage Logic Corporation and its subsidiaries at September 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Virage Logic Corporation (the Company) was incorporated in California in November 1995 and subsequently reincorporated in Delaware in July 2000. The Company provides semiconductor intellectual property (semiconductor IP) platforms based on memory, logic and I/ Os (input/output interface components) that are silicon proven and production ready. These various forms of IP are utilized by the Company’s customers to design and manufacture system-on-a-chip (SoC) integrated circuits that power today’s consumer, communications and networking, handheld and portable, computer and graphics, and automotive applications.

The accompanying consolidated financial statements include the accounts of Virage Logic Corporation and its wholly-owned subsidiaries conducting business in the Republic of Armenia, Germany, India, Israel, Japan and the United Kingdom. All significant intercompany balances and transactions have been eliminated in consolidation.

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 re-measured using the foreign exchange rate at the balance sheet date. Accounts related to operations and non-monetary balance sheet items are re-measured at the rate in effect at the date of the transaction. The effects of foreign currency re-measurement are reported in current operations.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.

License of custom memory compilers and logic libraries may involve customization to the functionality of the software, therefore revenues from such licenses are recognized in accordance with the provisions of Statement of Position 81-1 over the period that we perform services. Revenues derived from library development services are recognized using a percentage-of-completion method, and revenues from technical consulting services are recognized as the services are performed. For all license and service agreements accounted for using the percentage-of-completion method, we determine progress-to-completion based on labor hours incurred. We believe we are able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method based on historical experience of similar project requirements. Alternatively, if the Company can not reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed at which time revenues and related costs are recognized. 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. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria is met.

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

The Company’s financial instruments, including cash equivalents, investments, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Cash and cash equivalents include all highly liquid investments purchased with an original maturity of three months or less. Cash equivalents are invested in money market funds custodied with major financial institutions. Investments with original maturities of greater than ninety days are recorded as short-term or long-term investments. Those with maturities of less than one year are included in current assets and

classified as short-term investments. Those with maturities greater than one year are considered long-term investments. The Company classified all investments as of September 30, 2004 and September 30, 2003 as available-for-sale securities. Such investments consist of United States government obligations, mortgage backed securities and commercial paper which are stated at fair value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income. Realized gains and losses on investments are included in earnings.

In July 2001, the Company completed its investment in Atmos Corporation (Atmos) totaling approximately $5.3 million through the purchase of 3,333,333 shares of Class D Preference Shares for cash consideration. This represented approximately a 17.5% interest in Atmos Corporation. The Company had accounted for this investment under the cost method. Atmos Corporation, later acquired by Monolithic System Technology Inc. (MoSys), was a provider of embedded dynamic random access memory (DRAM) products and associated electronic design automation tools to system-on-a-chip and integrated circuit designers. The Company recorded an impairment charge to its investment in Atmos for the third quarter of 2002 because the information available to the Company prior to the issuance of its third quarter financial statements indicated that it was probable that Atmos lacked the capital and other resources necessary to continue operating, the entire board of directors of Atmos had resigned in the preceding weeks, the intellectual property assets of Atmos were pledged to MoSys and claims the Company believed it had against Atmos, MoSys and other related parties were under dispute. As a result, the Company believed it was probable that the investment was impaired and the Company estimated the loss to be a total loss of the investment. In September 2002, in connection with the subsequently announced acquisition of Atmos by MoSys, Virage Logic entered into agreements with Atmos, the other shareholders of Atmos and MoSys pursuant to which the Company received approximately $5.3 million in cash consideration in exchange for all of its investment in the Class D preferred stock and a release by the Company of its claims against the parties to the acquisition that allowed the Company to recover the value of the Atmos investment.

Other long-term investments include government agency and corporate bonds of $7.2 million and $4.1 million with maturity dates greater than one year for the fiscal years ended September 30, 2004 and 2003, respectively.

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 three years, or the shorter of the lease term or the estimated useful lives of the assets, if applicable. The office building in the Republic of Armenia (Armenia) is being depreciated over a life of twenty years.

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 $147,000 and $890,000 during the years ended September 30, 2004 and 2003, respectively, of internal use software. Software is amortized for financial reporting purposes using the straight-line method over the estimated useful life of three years.

In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”, and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, goodwill and intangible assets deemed to have indefinite lives are no longer to be amortized, but instead are subject to annual impairment tests. SFAS 141 was effective for acquisitions subsequent to June 30, 2001, and SFAS 142 was effective for fiscal years beginning after December 30, 2001. At September 30, 2004 the Company had a net intangible balance of $162,000 related to goodwill and customer list purchased on December 1, 1999, a net intangible value of $2.6 million related to technology acquired through the acquisition of In-Chip Systems, Inc. (In-Chip) and $9.8 million of goodwill related to the acquisition of In-Chip Systems, Inc. In accordance with SFAS 142, the Company did not amortize goodwill related to the In-Chip acquisition. No impairment charge or amortization of goodwill is recorded during the years ended September 30, 2004 and 2003.

A reconciliation of reported net income (loss) and net income (loss) per share to amounts adjusted for goodwill amortization, net of tax, is as follows (in thousands, except per share amounts):

The Company evaluates the recoverability of long-lived assets with finite lives in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets” (SFAS 144). Finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives of five to ten years. SFAS 144 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.

The Company evaluates goodwill and intangible assets deemed to have indefinite lives in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). The Company assesses these assets for impairment on an annual basis. On adoption of SFAS 142, the Company determined its operations represent a single reporting unit. To assess goodwill for impairment, the Company performs the following procedures:

Step 1: The Company compares its fair value to the carrying value, including goodwill. The fair value considers two components 1) the Company’s market capitalization during the reporting period and 2) the expected present value of future cash flows and future operating trends. If the Company’s fair value exceeds the carrying value, no impairment charge is necessary. Where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to step two as described below.

Step 2: The Company performs an allocation of the fair value of its identifiable tangible and non-goodwill intangible assets and liabilities. This derives an implied fair value for its goodwill. The Company then compares the implied fair value of goodwill with the carrying amount of its goodwill. If the carrying amount of the goodwill is greater than the implied fair value of its goodwill, an impairment loss is recognized for the excess of such amount.

As required by the provisions of SFAS No. 142, the Company evaluates goodwill for impairment on an annual basis or more frequently if impairment indicators arise. A significant impairment could have a material adverse effect on the Company’s financial position and results of operations.

The Company accounts for stock-based compensation arrangements in accordance with the provision of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations in accounting for its employee stock options and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The Company accounts for stock options or warrants granted to non-employees, excluding non-employee directors, under SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under SFAS 123,” (EITF 96-18). We record the expense of such services based upon the estimated fair value of the equity instrument using the Black-Scholes pricing model. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees. We charge the value of the equity instrument to earnings over the term of the service agreement. At the time all non-employee options and warrants were valued, the instruments were immediately exercisable and there were no ongoing obligations from the holders. Expenses for the years ended September 30, 2004, 2003 and 2002, were $0, $790,000 and $635,000, respectively.

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-based Compensation Transition and Disclosure, an Amendment of FASB 123.” Had compensation expense for the Company’s stock option plan and stock purchase plan been determined on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company’s net income/(loss) would have been increased to the following approximate SFAS 123 amounts:

The SFAS 123 adjusted impact of options on the net loss for the years ended September 30, 2004, 2003 and 2002 is not representative of the effects on net income (loss) for future years.

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

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

In fiscal 2004, 2003 and 2002, no individual customer accounted for 10% or more of total revenues.

The Company expenses costs of producing advertisements at the time production occurs and expenses promotional advertising in the period during which the promotion is distributed or aired. Advertising costs totaled approximately $793,000, $649,000 and $780,000 for the years ended September 30, 2004, 2003 and 2002, respectively.

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 significant and, therefore, have been expensed.

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). Accordingly, 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.

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

The Company has excluded all outstanding warrants, stock options and shares subject to repurchase by the Company from the calculation of diluted net loss per share because these securities are antidilutive for the year ended September 30, 2002. Options and warrants to purchase 6,024,211, 5,594,169 and 5,026,060 shares of common stock have been excluded for the years ended September 30, 2004, 2003 and 2002, respectively. There were no shares subject to repurchase for the year ended September 30, 2004 and shares subject to repurchase total 86,253 and 558,094 for the years ended September 30, 2003, and 2002, respectively.

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). Comprehensive income includes unrealized gains and losses on investments and is presented in the Statement of Stockholders’ Equity.

Income taxes are accounted for using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for expected future tax events that have been recognized differently in the Company’s consolidated financial statements and tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law and the effects of future changes in tax laws

or rates. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

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 technology-optimized semiconductor IP platforms based on memory, logic and I/ Os.

In November 2003, the Emerging Issues Task Force reached consensus on Issue No. 03-01 (“EITF 03-01”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 requires that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations” that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Company has assessed the impact of EITF 03-01 and concluded that the adoption of this issue will have no material impact on its financial statements and included any required disclosures in its financial statements.

In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104). SAB 104 revises or rescinds portions of the interpretative guidance related to revenue recognition included in Topic 13 of the codificaton of the staff accounting bulletins. The Company has assessed the impact of SAB 104 and concluded that the adoption of SAB 104 by the Company did not have a material impact on its financial statements.

In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46-R). FIN 46-R provides a deferral of FIN 46 for certain entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company believes that the adoption of this standard will have no material impact on its financial statements.

In April 2004, the EITF issued Statement No. 03-06 “Participating Securities and the Two — Class Method Under FASB Statement No. 128, Earnings Per Share” (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the calculation of earnings per share of the Company.

The Company operates only in one segment, the sale of technology-optimized semiconductor IP platforms based on memory, logic and I/ Os.

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 are based on the region the customers are located. They are as follows:

Long-lived assets are located primarily in the United States, with the exception of the building in Armenia. The building and leasehold improvements are valued at a cost of approximately $1.8 million.

The Company has only one product line, therefore disclosure by product groupings is not applicable.

Marketable securities, classified as available-for-sale securities, included the following (in thousands):

Write-offs against the allowance for doubtful accounts of $366,000 and $96,000 were recorded in the years ended September 30, 2004 and 2002. No write-offs were recorded in the years ended September 30, 2003.

Depreciation and amortization expense related to property, equipment and leasehold improvements totaled $3.2 million, $3.8 million and $3.9 million for the years ended September 30, 2004, 2003 and 2002, respectively.

Historically, the Company leased certain computer equipment and software under long-term capital leases. Capitalized costs of approximately $821,000 are included in property and equipment at September 30, 2004 and 2003. Accumulated depreciation amounted to approximately $821,000 at September 30, 2004 and 2003.

Except for the new Armenia building, the Company leases its facilities under operating leases. Rent expense under operating leases was approximately $2.3 million, $1.2 million and $1.2 million for the years ended September 30, 2004, 2003 and 2002, respectively.

Aggregate future minimum lease payments under operating leases as of September 30, 2004 are as follows (in thousands):

In September 2003, our development center in Armenia moved into our new building. Substantially all the leasehold improvements have been completed and these assets are being depreciated over their respective useful lives.

Indemnifications. The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. These agreements generally have perpetual terms. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company estimates the fair value of its indemnification obligation as insignificant, based upon its history of litigation concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of September 30, 2004.

The Company has agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Agreements entered into prior to December 31, 2002 were grandfathered under the provisions of FIN No. 45. Currently, we have no liabilities recorded for these agreements as of September 30, 2004.

Warranties. The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of September 30, 2004. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that a warranty reserve will not become necessary in the future.

The Company is authorized to issue up to 150,000,000 shares of common stock. As of September 30, 2004, 21,580,437 shares of common stock were issued and outstanding.

In March 2001, the stockholders approved an amendment to the Company’s 1997 Equity Incentive Plan (1997 Plan) and in February 2002, the stockholders approved the adoption of the 2002 Equity Incentive Plan (2002 Plan). In May 2002, in connection with Virage Logic’s acquisition of In-Chip, Virage Logic assumed In-Chip’s 2001 Incentive and Non-statutory Stock Option Plan (2001 Plan), and all options outstanding under the plan. Under the 2001 Plan, the maximum number of options that can be exercised for common stock shares is 585,520. The plans provide for the granting of incentive stock options, nonstatutory stock options and stock awards as determined by the administrators of such plans. Under the terms of the plans, 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. Under the 1997 Plan, the exercise price of options granted to an employee or a service provider and, under the 2002 Plan, the grant of incentive stock options granted to an employee, who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of the stock of the Company, shall be no less than 110% of the fair market value of the common stock on the date of grant. All option grants may be exercisable 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 these plans are subject to repurchase by the Company at the original exercise price until the underlying options have vested. At September 30, 2004, there were no shares issued and outstanding under the plans that were subject to repurchase.

Consulting expense of $136,000 was recorded for options granted to a non-employee for the year ended September 30, 2002. No such options or warrants were granted to non-employees for the years ended September 30, 2004 and 2003.

Rights to immediately purchase stock may also be granted under these plans with terms, conditions, and restrictions determined by the administrators of the 1997 Plan and the 2002 Plan. Under the 1997 Plan, except for shares purchased by officers, directors and consultants, shares acquired through stock purchase rights vest over a period not to exceed five years with 20% vesting each year. Any unvested shares acquired are subject to repurchase by the Company. As of September 30, 2004, no such shares have been granted.

Information with respect to the Equity Incentive Plans is summarized as follows:

The following table summarizes information about stock options outstanding and exercisable at September 30, 2004:

The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following assumptions: a risk-free interest rate of 2.83% for 2004, 2.25% for 2003 and, 3.25% for 2002, no dividend yield for all years, expected stock price volatility of 100% in 2004 and 90% in 2003 and 2002 and a weighted average expected option life of four to five years.

The options’ weighted average fair value, which is the value assigned to the options under SFAS 123, was $7.57, $5.35 and $11.73 for options granted during 2004, 2003 and 2002, respectively.

In April 2000, the Company’s board of directors approved the adoption of the 2000 Employee Stock Purchase Plan (2000 Purchase Plan). A total of 507,419 shares of common stock has been reserved for issuance under this plan. In July 2001, the board of directors approved the adoption of the 2001 Foreign Subsidiary Employee Stock Purchase Plan (2001 Foreign Plan) as a sub-plan of the 2000 Purchase Plan and allocated 30,000 shares of common stock previously reserved for issuance under the 2000 Purchase Plan for issuance under the 2001 Foreign Plan. As of September 30, 2004, a total of 73 shares were reserved for issuance under both plans. During fiscal 2004, an additional 716 shares were transferred from the 2000 Purchase Plan share reserve to the 2001 Foreign Plan reserve to meet the requirements of the February 13, 2004 and August 13, 2004 purchases. During fiscal 2003, an additional 1,700 shares were transferred from the 2000 Purchase Plan share reserve to the 2001 Foreign Plan reserve to meet the requirements of the August 15, 2003 purchase. On each October 1, starting in 2001, the number of shares is automatically increased by the lesser of: 0.75% of the then outstanding shares of common stock, 200,000 shares or a number determined by the board of directors. Each offering period will consist of six months. The initial offering period began on October 1, 2000. Offering period end dates were changed from March 31 and September 30 of each year to February 15 and August 15 starting in fiscal year 2002.

Under the Company’s 2000 Purchase Plan and 2001 Foreign Plan, the employees purchased 163,642, 285,405 and 121,885 shares during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.

The 2000 Purchase Plan and 2001 Foreign Plan permit eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of the participant’s compensation, at a price equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or the end of each offering period. Employees who work at least five months in any calendar year and at least 20 hours per week are eligible to participate in the 2000 Purchase Plan and 2001 Foreign Plan. Stockholders who own more than 5% of outstanding common stock are excluded from participating in the 2000 Purchase Plan and 2001 Foreign Plan. Each eligible employee is limited to purchase no more than 1,500 shares per offering period and no more than $25,000 worth of stock per year.

In June 2000, the Company entered into a license agreement with Credence and its wholly-owned subsidiary, Fluence Technology, under which the Company licenses from Fluence memory built-in self test logic for integration into the Company’s compilers. In exchange for this license, the Company issued a warrant to purchase 50,000 shares of common stock at $4.00 per share to Credence and its affiliates. The Company determined the fair value of the warrant, using the Black-Scholes valuation model and the following assumptions: volatility factor of 80%, life of 3.0 years, fair value of the Company’s common stock on date of grant of $11.00, expected dividend yield of 0.0% and risk-free rate of 6.00%. The resulting valuation was: $8.44 per share. The fair value of the warrant for 50,000 shares was $422,000 and was reflected in the financial statements as an acquisition of software which was amortized over a three-year period, in accordance with the Company’s capitalization policy for perpetual software licenses, ending in June 2003. The credit was recorded in stockholders’ equity. The warrant was exercised in June 2003.

In connection with the Company’s initial public offering, the Company reevaluated the fair value of its common stock used to record stock-based compensation for employee stock options and the valuation of the warrants issued for professional services, the purchase of assets and in obtaining a line of credit. In connection

with the Company’s acquisition of In-Chip Systems, Inc., the Company included in the purchase price the fair value of common stock and stock options and recorded the intrinsic value of the stock options as deferred stock-based compensation. In connection with all such stock option grants, during the years ended September 30, 2004, 2003 and 2002, the Company recorded a non-cash charge for stock-based compensation of $130,000, $1.2 million and $4.2 million, respectively.

During fiscal year 2001, the Company sold software totaling $200,000 to Atmos Corporation, in which the Company had held a 17.5% equity interest. The Company sold its interest in Atmos Corporation in fiscal 2002.

At September 30, 2004, the Company held a promissory note from an executive officer in the principal amount of $200,000 issued in March 2002. The promissory note’s outstanding principal and interest is due in fiscal 2006.

Management believes the rates and terms of the agreements are comparable with those entered into with independent third parties.

The Company has entered into agreements with third-party semiconductor foundries in Asia, under which the Company has agreed to develop memory, logic and I/O elements for certain of the foundries’ manufacturing processes and in return the foundries are obligated to pay the Company royalties on sales of silicon chips manufactured by the foundries for the Company’s fabless customers. For the years ended September 30, 2004, 2003 and 2002, total royalty revenues were $8.2 million, $3.5 million and $1.7 million, respectively.

The domestic and foreign components of income (loss) before provision for income taxes are as follows:

The provision for income taxes for the years ended September 30, 2004, 2003 and 2002 consists of the following:

The income tax expense differed from the amounts computed at the US statutory federal income tax rate of 34% in 2004, 2003 and 2002 to pre-tax income (loss) as a result of the following:

The Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company recorded a deferred tax asset at September 30, 2004 based on availability of taxable income in the carryback periods for federal purposes. Management believes that it is more likely than not that the deferred tax assets will be realized and has determined that no valuation allowance is considered necessary. The Company has used all of its federal net operating loss carryforwards.

For the year ended September 30, 2004, the Company also has research and development tax credit carryforwards of approximately $185,000 and $814,000 for federal and state income tax purposes, respectively. The Company also has manufacture’s credits of $863,000 for state income tax purposes. If not utilized, the federal carryforwards will expire in various amounts beginning in 2023. The state tax credits can be carried forward indefinitely.

The Company has not provided US income taxes on $188,000 of foreign earnings as management intends to indefinitely reinvest these earnings offshore.

The earnings from foreign operations in India are subject to a tax holiday from a grant effective through 2009. The grant provides for tax relief if certain conditions are met. The Company asserts that it continued to be in compliance with these conditions as of September 30, 2004. Indian earnings are taxed in the current year at a rate of 10%. The Company’s India branch office has received a tax assessment from the Government of India, Income Tax Department, for the tax year 2000-2001 claiming the Company owes an additional approximately $1.0 million in income taxes. The Company asserts that the claim is baseless however, in October 2004, it has made a deposit of approximately $200,000 with the Indian tax authorities as required and is appealing the tax assessment with the Indian government’s Commissioner of Income Tax Appeals. In the unlikely event that an unfavorable outcome of the tax appeal process occurs, the Company believes it will not have a material impact on our financial position, cash flows or results of operations.

On May 24, 2002, the Company acquired In-Chip Systems, Inc., a privately-held corporation based in Sunnyvale, California. Under the terms of the agreement, all outstanding shares of In-Chip common stock were exchanged for an aggregate of 528,547 shares of the Company’s common stock. All outstanding options of In-Chip were exchanged for options to purchase an aggregate of 150,991 shares of the Company’s common

stock under terms that are consistent with the original grant terms. The In-Chip options which were initially granted by In-Chip on June 30, 2001, vest annually on the anniversary of the grant date with full vesting by June 30, 2004 and expire on June 30, 2011. As of the date of acquisition, 50,679 shares were vested. The acquisition is expected to strengthen the Company’s position in the semiconductor IP market by providing customers logic platforms along with embedded memory technology. In addition, the acquisition brings to the Company complementary technology and a skilled workforce. The transaction was accounted for under the purchase method of accounting and accordingly the results of operations of In-Chip have been included in the Company’s financial statements since the date of acquisition.

The unaudited pro forma combined financial statements reflect a purchase price of approximately $17.0 million, measured using the average fair market value of Virage Logic’s common stock from May 3, 2002 to May 9, 2002, the five trading days surrounding the date the acquisition agreement with In-Chip was announced, plus the fair value of the options to be issued by Virage Logic in the acquisition, and other costs directly related to the acquisition as follows (in thousands):

The purchase price of $17.0 million has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date. Deferred compensation is the intrinsic value associated with the 0.2 million unvested options and 0.2 million shares of unvested restricted stock that were assumed and is being amortized over the instruments’ vesting period. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.

The purchase price includes $5.5 million of cash, of which $4.0 million, net of acquisition costs of $151,000 paid by the Company on behalf of the In-Chip shareholders, was paid out to the In-Chip shareholders at the closing of the acquisition with the remaining $1.5 million to be paid out over 3 years in accordance with the acquisition agreement. As of September 30, 2004, $1.0 million of the $1.5 million has been paid out. Deferred compensation recorded in connection with the acquisition will be amortized over the original vesting period of the options assumed.

Tangible assets were valued at their respective carrying amounts as the Company believes that these amounts approximate their current fair values. The acquired intangible assets, which included patented technology that supports all of the logic semiconductor IP products, allows semiconductor manufacturers to enhance IC design productivity by reducing the space required on the physical architecture of the chip. While

products in the semiconductor industry are typically subject to rapid technological evolution, the nature of this patented technology is estimated to have a significant life because the patent forms a basis for process improvements of each successive generation. This technology is valuable for currently available products and continues to be the basis for products under development at smaller dimensions. Intangible assets were valued based on interviews and management’s estimates. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the acquired patented technology. Key assumptions included estimates of revenue growth, cost of revenues, operating expense and taxes. Discount rates used in the valuation of intangible assets ranged from 27% to 32%. These assets are amortized over their useful life estimated to be five to ten years.

Approximately $1.1 million of the purchase price represents the estimated fair value of an acquired in-process research and development project that at the time of the acquisition had not reached technological feasibility. The project involved the development of a standardized version of In-Chip’s custom logic semiconductor IP product. The value assigned to the in-process technology represents primarily the engineering costs incurred to the date of the acquisition in the development of this product, which was approximately 30% complete as of the date of acquisition. The remaining 70% of the development work was completed by Virage Logic prior to September 30, 2002 at an incremental cost to Virage Logic of approximately $420,000. A commercially viable product was made available to Virage Logic’s customers in October 2002.

The value of the purchased in-process research and development was determined by estimating the projected net cash flows related to the products, including costs to complete the development of the technology and the future revenues to be earned upon commercialization of the products. These cash flows were then discounted using a rate of 42% back to their net present value. The projected net cash flows from the projects were based on management’s estimates of revenues and operating profits related to the projects.

The following pro forma summary is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had the Company and In-Chip been a consolidated entity during the periods presented. The following unaudited proforma information presents a summary of the results of operations of the Company assuming the acquisition of In-Chip occurred at the beginning of the earliest period presented (unaudited, in thousands, except per share amounts):

In November 2003, the Company adopted the Virage Logic Fiscal Year 2004 Variable Incentive Pay Plan (the VIP Plan). All United States employees, other than sales employees, are eligible to participate in the VIP Plan. Payments to participants in the VIP Plan are based on the Company’s fiscal year 2004 revenue and operating results as compared to the planned results. Eligible participants may receive additional compensation of 5% to 50% of base salary, depending on the Company’s financial results.

For the years ended September 30, 2004, 2003 and 2002, approximately $815,000, $212,000 and $758,000 of compensation was expensed under all of the Company’s bonus plans.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on this 14th day of December 2004.


	By:	/s/ ADAM A. KABLANIAN



	Adam A. Kablanian
	President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Adam A. Kablanian and Michael E. Seifert, jointly and severally, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report of Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.

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


(1)	Incorporated by reference to Virage Logic’s Registration Statement on Form S-1, as amended (File No. 333- 36108).
(2)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2000.
(3)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(4)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(5)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2001.
(6)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.
(7)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(8)	Incorporated by reference to Virage Logic’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2002.
(9)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2002.


(10)	Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2003.
(11)	Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.


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


*	Management contract or compensatory plan or arrangement.


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the fiscal year ended September 30, 2004

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

		For the transition period from to .


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


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		13
Item 3.	Legal Proceedings		13
Item 4.	Submission of Matters to a Vote of Security Holders		13
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		14
Item 6.	Selected Consolidated Financial Data		15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A.	Qualitative and Quantitative Disclosures about Market Risks		38
Item 8.	Financial Statements and Supplementary Data		40
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Issues		40
Item 9A.	Controls and Procedures		40
PART III
Item 10.	Directors and Executive Officers of the Registrant		40
Item 11.	Executive Compensation		41
Item 12.	Security Ownership of Certain Beneficial Owners and Management		41
Item 13.	Certain Relationships and Related Transactions		41
Item 14.	Principal Accountant Fees and Services		41
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		41

Signatures			70
EXHIBIT 14.1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Fabless Semiconductor Companies		Altera Corporation, ATI Technologies, General Dynamics, PMC-Sierra, Sandisk, Via Technologies, Sigmatel, Thomson
Integrated Device Manufacturers		Agere, Agilent Technologies, AMI Semiconductor, Analog Devices, Atmel, Conexant, Freescale, Infineon, Intel, Kawasaki, LSI Logic, Philips Electronics, Sony, ST Microelectronics*
Third-Party Foundries		Chartered, DongbuAnam, IBM, SilTerra, SMIC, Tower, TSMC, UMC*


		High		Low

Fiscal year 2002
	First quarter	$	20.30	$	9.43
	Second quarter	$	22.81	$	14.00
	Third quarter	$	18.99	$	11.45
	Fourth quarter	$	14.10	$	7.38
Fiscal year 2003
	First quarter	$	14.29	$	6.26
	Second quarter	$	10.07	$	4.90
	Third quarter	$	8.56	$	4.05
	Fourth quarter	$	12.50	$	7.19
Fiscal year 2004
	First quarter	$	10.95	$	7.41
	Second quarter	$	12.25	$	7.86
	Third quarter	$	10.35	$	6.63
	Fourth quarter	$	12.93	$	8.25


Name	Age		Position(s)

Adam A. Kablanian*		45	President, Chief Executive Officer and Director
Alexander Shubat*		42	Vice President of Research and Development, Chief Technical Officer and Director
Michael E. Seifert*		46	Vice President of Finance and Chief Financial Officer
James J. Ensell*		43	Vice President of Marketing
Raj Singh*		50	Vice President of Worldwide Sales
William J. Palumbo		46	Vice President and General Manager of New Jersey Operations
Greer Person		42	Vice President of Business Development
Ehsan Rashid		39	Vice President of Operations
Yervant Zorian		48	Vice President and Chief Scientist
Alok Singh		44	Vice President and General Manager of India Operations


Item 4.	*Submission of Matters to a Vote of Security Holders*



			Year Ended September 30,

			2004(1)		2003(1)			2002(1)			2001			2000


			(In thousands, except per share data)
Revenues			$	53,003	$	40,657		$	45,613		$	31,763		$	19,666
Cost and expenses:
	Cost of revenues (exclusive of amortization of deferred stock compensation of $29, $255, $986, $1,389 and $1,307 respectively)			11,215		9,256			9,059			6,424			4,903
	Research and development (exclusive of amortization of deferred stock compensation of $48, $499, $1,433, $2,095 and $2,408, respectively)			18,428		18,678			13,135			9,577			6,737
	Sales and marketing (exclusive of amortization of deferred stock compensation of $37, $322, $1,250, $1,909 and $1,393, respectively)			14,615		12,781			11,485			8,257			4,790
	General and administrative (exclusive of amortization of deferred stock compensation of $16, $128, $579, $956 and $1,690, respectively)			6,602		4,859			5,191			4,364			2,402
	Stock-based compensation			130		1,204			4,248			6,349			6,798
	In-process research and development			—		—			1,100			—			—

		Total cost and expenses		50,990		46,778			44,218			34,971			25,630

Operating income (loss)				2,013		(6,121	)		1,395			(3,208	)		(5,964	)
Interest income				719		812			1,217			3,155			850
Interest and other expenses				37		(73	)		(81	)		(62	)		(255	)

Income (loss) before taxes				2,769		(5,382	)		2,531			(115	)		(5,369	)
Income tax provision (benefit)				859		(1,532	)		2,306			1,939			293

Net income (loss)				1,910		(3,850	)		225			(2,054	)		(5,662	)
Deemed dividend on Series C redeemable convertible preferred stock				—		—			—			—			(10,104	)

Net income (loss) attributable to common stockholders			$	1,910	$	(3,850	)	$	225		$	(2,054	)	$	(15,766	)

Basic and diluted net income (loss) per share			$	0.09	$	(0.19	)	$	0.01		$	(0.11	)	$	(1.98	)

Shares used in computing basic net income (loss) per share				21,391		20,750			19,902			18,819			7,952

Shares used in computing diluted net income (loss) per share				22,139		20,750			21,157			18,819			7,952



	September 30,

	2004			2003			2002			2001			2000


	(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	28,746		$	38,930		$	35,422		$	27,868		$	58,596
Investments		34,366			20,180			24,037			30,084			—
Working capital		63,055			62,453			49,691			61,798			61,285
Total assets		109,188			96,562			100,354			77,796			72,121
Debt obligations		—			—			96			245			556
Accumulated deficit		(20,940	)		(22,850	)		(19,000	)		(19,225	)		(17,171	)
Total stockholders’ equity		91,511			87,373			88,252			73,317			66,922


Fiscal Year	Total Revenues

2004	$	53.0 million
2003		40.7 million
2002		45.6 million


Fiscal Year	Cost of revenues

2004	$	11.2 million
2003		9.3 million
2002		9.1 million


	Research and
Fiscal Year	Development Expenses

2004	$	18.4 million
2003		18.7 million
2002		13.1 million


	Sales and
Fiscal Year	Marketing Expenses

2004	$	14.6 million
2003		12.8 million
2002		11.5 million


	General and
Fiscal Year	Administrative Expenses

2004	$	6.6 million
2003		4.9 million
2002		5.2 million


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

Operating lease obligations	$	3,793	(1)	$	1,317	(1)	$	2,143	(1)	$	255	$	78
Merger-related obligations		500			500			—			—		—
Purchase obligations		8,119	(2)		4,712	(2)		3,407	(2)		—		—

Total contractual obligations	$	12,142		$	6,529		$	5,550		$	255	$	78


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


	Business Environment



		Quarter Ended

		Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,			Dec. 31,
		2004			2004			2004			2003			2003			2003			2003			2002


		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues		$	15,314		$	13,852		$	12,977		$	10,860		$	9,903		$	9,564		$	9,625		$	11,565
Cost and expenses:
	Cost of revenues (exclusive of amortization of deferred stock compensation of $0, $7, $11, $11, $10, $27, $86, $132, respectively)		3,040			2,872			2,867			2,436			2,142			2,224			2,239			2,651
	Research and development (exclusive of amortization of deferred stock compensation of $0, $12, $17, $19, $20, $56, $193, $230, respectively)		4,731			4,645			4,639			4,413			4,350			4,678			5,021			4,629
	Sales and marketing (exclusive of amortization of deferred stock compensation of $0, $9, $14, $14, $16, $40, $112, $154, respectively)		3,784			3,869			3,714			3,248			3,424			3,344			2,930			3,083
	General and administrative (exclusive of amortization of deferred stock compensation of $0, $4, $6, $6, $5, $14, $50, $59, respectively)		1,762			1,759			1,636			1,445			1,230			1,135			1,309			1,185
	Stock-based compensation		—			32			48			50			51			137			441			575

Total cost and expenses			13,317			13,177			12,904			11,592			11,197			11,518			11,940			12,123

Operating income (loss)			1,997			675			73			(732	)		(1,294	)		(1,954	)		(2,315	)		(558	)
Interest income			255			158			144			162			203			179			176			254
Interest and other expenses			33			6			(8	)		6			3			(34	)		(37	)		(5	)

Income (loss) before taxes			2,285			839			209			(564	)		(1,088	)		(1,809	)		(2,176	)		(309	)
Income tax provision (benefit)			777			268			19			(205	)		(401	)		(596	)		(611	)		76

Net income (loss) attributable to common stockholders		$	1,508		$	571		$	190		$	(359	)	$	(687	)	$	(1,213	)	$	(1,565	)	$	(385	)

Basic net income (loss) per share		$	0.07		$	0.03		$	0.01		$	(0.02	)	$	(0.03	)	$	(0.06	)	$	(0.08	)	$	(0.02	)

Diluted net income (loss) per share		$	0.07		$	0.03		$	0.01		$	(0.02	)	$	(0.03	)	$	(0.06	)	$	(0.08	)	$	(0.02	)

As a Percentage of Revenues:
Revenues			100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost and expenses:
	Cost of revenues		19.9			20.8			22.1			22.4			21.6			23.2			23.3			22.9
	Research and development		30.9			33.5			35.7			40.6			43.9			48.9			52.2			40.0
	Sales and marketing		24.7			27.9			28.6			29.9			34.6			35.0			30.4			26.7
	General and administrative		11.5			12.7			12.6			13.3			12.4			11.9			13.6			10.2
	Stock-based compensation		—			0.2			0.4			0.5			0.5			1.4			4.6			5.0

Total cost and expenses			87.0			95.1			99.4			106.7			113.0			120.4			124.1			104.8

Operating income (loss)			13.0			4.9			0.6			(6.7	)		(13.0	)		(20.4	)		(24.1	)		(4.8	)
Interest income			1.7			1.1			1.1			1.6			2.1			1.9			1.8			2.2
Interest and other expenses			0.2			—			(0.1	)		(0.1	)		—			(0.4	)		(0.3	)		—

Income (loss) before taxes			14.9			6.0			1.6			(5.2	)		(10.9	)		(18.9	)		(22.6	)		(2.6	)
Income tax provision (benefit)			5.1			1.9			0.1			(1.9	)		(4.0	)		(6.2	)		(6.3	)		0.7

Net income (loss)			9.8	%		4.1	%		1.5	%		(3.3	)%		(6.9	)%		(12.7	)%		(16.3	)%		(3.3	)%


	*Inability or delayed execution on our strategy to be a leading provider of semiconductor IP platforms could adversely affect our revenues and profitability.*


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


	*If we are unable to continue establishing relationships on favorable contractual terms with semiconductor companies to license our IP, our business will be harmed.*


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


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


	*It is difficult for us to verify royalty amounts owed to us under our licensing arrangements, and this may cause us to lose revenues or inaccurately report revenues.*


	*Products that do not meet customer specifications or contain defects that harm our customers could damage our reputation and cause us to lose customers and revenue.*


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


	*Problems associated with international business operations could affect our ability to license our IP.*


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


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


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


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


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


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


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


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


	*If demand for products incorporating complex semiconductors and semiconductor IP platforms does not increase, our business may be harmed.*


	The market for semiconductor IP platforms is highly competitive, and we may lose market share to larger competitors with greater resources and to companies that develop their semiconductor IP platforms using internal design teams.