Statements made in this section, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. Some of these statements relate to products, customers, business prospects, technologies, trends and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. Forward-looking statements are subject to a number of known and unknown risks and uncertainties which might cause actual results to differ materially from those expressed or implied by such statements. These risks include our ability to forecast our business, including our revenue, income and order flow outlook, our ability to execute on our strategy of being a provider of highly differentiated semiconductor IP, our ability to continue to develop new products and maintain and develop new relationships with third-party foundries, integrated device manufacturers, and fabless semiconductor companies, 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 and increases or fluctuations in the demand for their products, competition in the market for semiconductor IP, and other risks and uncertainties including those set forth below under "Risk Factors". These forward-looking statements speak only as of the date hereof, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein. The following information should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Form 10-K for the fiscal year ended September 30, 2008 filed with the Securities and Exchange Commission.

Overview

Business Environment

Virage Logic provides semiconductor intellectual property (IP) to the global semiconductor industry. These various forms of IP are utilized by our customers to design and manufacture System-on-Chip (SoC) integrated circuits that are the foundation of today's consumer, communications and networking, hand-held and portable devices, computer and graphics, automotive, and defense

applications. Our semiconductor IP offering consists of (1) compilers that allow chip designers to configure our memories, or SRAMs, into different sizes and shapes on a single silicon chip, (2) IP and development solutions for embedded test and repair of on-chip memory instances, (3) software development tools used to design memory compilers, (4) NVM instances, (5) logic cell libraries, and
(6) DDR memory controller interface IP components. We also provide design services related to our IP to the semiconductor industry.

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 smaller 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 integrated device manufacturers and foundries. Because of the high costs involved in new design starts and migration to new manufacturing processes, our customers' decisions regarding these matters are 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.

In the first quarter of fiscal year 2009, we derived 79% of our license revenue and 78% of our maintenance revenue from the more advanced processes, 90-nanometer, 65-nanometer, and 45-nanometer technologies and 21% of license revenue and 22% of maintenance revenue from the older process nodes, predominantly 0.13, 0.18, 0.25 and 0.35 micron technologies. The Company expects the 90-nanometer, 65-nanometer and 45-nanometer technologies to drive revenue growth in the foreseeable future while license revenues from the older process nodes decline. Our royalty revenue to date has been from production on the older process nodes, however we expect future growth in royalty revenues to be driven by the advanced processes, 45-nanometer, 65-nanometer and 90-nanometer technologies, in addition to continued production on the 0.13 and 0.18 micron technologies.

We sell our products early in the design process, and there are time delays of 24 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 designs, 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. 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.

Acquisition of Non-Volatile Memory Business Segment of Impinj, Inc.

In June 2008, we completed the acquisition of the logic non-volatile memory intellectual property business segment of Impinj, Inc., a provider of radio frequency identification (RFID) solutions. The acquisition extends the Company's embedded memory leadership position in the rapidly growing NVM embedded memory market for standard CMOS processes. The Company believes the acquisition of Impinj's logic NVM IP business represents another element toward attainment of its core vision of establishing the Company as a broad line supplier of highly differentiated physical and interface IP solutions to the semiconductor industry.

Stock Repurchase Program

On May 6, 2008, we announced that our Board of Directors authorized a stock repurchase program to purchase up to $20 million in shares of our common stock in the open market or negotiated transactions through May 2009. We intend to use available cash to effect any stock repurchases. At December 31, 2008, the Company's balance sheet reflected cash and investments totaling $65.3 million. On August 4, 2008, 700,000 shares were repurchased in the open market at a price per share of $6.49. On December 8, 2008, 190,000 shares were repurchased in the open market at a price per share of $2.95.

Our common stock trades on the Nasdaq Global Market. We may plan to make purchases from time to time in the open market or through privately negotiated transactions. The number, price and timing of the repurchases, which may include, without limitation round lot or block transactions, will be at our sole discretion and may be re-evaluated depending on market conditions, liquidity needs or other factors. Our board of directors may suspend, terminate, modify or cancel the program at any time without notice.

Sources of Revenues

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

• embedded memories including SRAM and NVM, logic libraries;

• IP and development infrastructure for embedded test and repair of on-chip memory instances;

• software development tools used to build memory compilers; and

• DDR memory controllers, PHYs, and DLL.

We also derive revenues from royalties, custom design services, maintenance services and library development and consulting services related to the 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, DDR memory controller, PHY and DLL 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 pure-play foundries that manufacture chips incorporating our Area, Speed and Power (ASAP TM) Memory, ASAP TM Logic, SiWare TM Memory, SiWare TM Logic and STAR Memory products for our fabless customers, and from integrated device manufacturers and fabless customers that utilize our STAR TM Memory System, NOVeA® and AEON® 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 the majority of our revenues. License revenues for the three months ended December 31, 2008 and 2007 were $6.6 million and $8.4 million, respectively. Maintenance revenues for the three months ended December 31, 2008 and 2007 were $1.9 million and $2.3 million, respectively. Royalty revenues for the three months ended December 31, 2008 and 2007 were $2.8 million and $3.3 million, respectively.

We have been dependent on a limited number of customers for a substantial portion of our revenues, although our dependence on certain customers over the long term continues to decrease. Our customers comprising the top 10 customer group have changed from time to time. We have one customer that generated 10% or more of our revenue for the three months ended December 31, 2008 and three customers that generated 10% or more of our revenue for the three months ended December 31, 2007.

Sales to customers located outside of North America accounted for approximately 54% and 42% for the three months ended December 31, 2008 and 2007, respectively. Substantially all of our direct sales representatives and field application engineers are located in North America and Europe and service 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We continually evaluate our estimates, including those related to percentage-of-completion, allowance for doubtful accounts, 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 purchased intangibles, including goodwill;

• valuation of long-lived assets;

• stock-based compensation; and

• accounting for income taxes.

Revenue Recognition

The Company's revenue recognition policy is based on the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended by SOP 98-4 and SOP 98-9. Additionally, revenue is recognized on some of our products, according to SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The Company recognizes intellectual property revenue in accordance with SOP 97-2 because the software is not incidental to the IP as the IP is embedded in the software and the intellectual property is, in essence a software product.

Revenues from perpetual licenses for the semiconductor IP products are generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is reasonably assured. The Company uses a completed performance model for perpetual licenses that do not include services to provide significant production, modification or customization of software as all of the elements have been delivered. The Company determines delivery has occurred when all the license materials that are specified in the evidence of a signed arrangement including any related documentation and the

license keys are delivered electronically through the FTP server or via Electronic mail (e-mail). If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met. Revenues from term-based licenses that do not require specific customization for the semiconductor IP and software products are recognized ratably over the term of the license, which are generally between twelve to thirty-six months in duration, provided the criteria mentioned above are met. The Company uses a proportional performance model for term-based licenses as these licenses have a right to receive unspecified additional products that are granted over the access term of the license. Consulting services represent an immaterial amount of our revenue thus are recorded as part of license revenue. These consulting services are not related to the functionality of the products licensed. Revenue from consulting services is recognized on the time and materials method or as work is performed.

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 SOP 81-1 over the period that services are performed. Revenue 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, the Company determines progress-to-completion based on labor hours incurred in comparison to the estimated total service hours required to complete the development or service or on the value of contract milestones completed. The Company believes that it is 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. If the Company cannot 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 any project is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognition are recorded as costs in excess of related revenue on uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.

For agreements that include multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or delivered. The amount of such revenues is determined by applying the residual method of accounting by deducting the aggregate fair value of the undelivered or uncompleted elements, which the Company determines 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 higher of the normal pricing for such licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is determined based on 20% of the net selling price of the license for new agreements starting in fiscal 2007 or the higher of the actual price stated in the contract or the stated renewal rate in each contract for all contracts entered into prior to fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally twelve months.

We assess 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 revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectability 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 the payment.

Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in advance of invoicing the customer are recorded as unbilled accounts receivable. 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 and unbilled accounts receivable in any given period. All of the criteria under SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.

Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from the customer or foundry, and are calculated based on actual 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. Prepaid royalties are recognized as revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.

Valuation of Accounts Receivable

We monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon 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.

Valuation of Purchased Intangibles, Including Goodwill

We periodically evaluate purchased intangibles, including goodwill, for impairment at least annually. 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. The valuation of intangible assets was based on management's estimates. Intangible assets with finite useful lives are amortized over the estimated life of each asset. As of December 31, 2008, management believes no impairment of intangible assets has occurred. The carrying value of purchased intangibles, including goodwill, is $17.7 million and $18.0 million as of December 31, 2008 and September 30, 2008, respectively. If the asset is deemed impaired, the maximum amount of impairment would be the full carrying value of the asset.

Valuation of Long-Lived Assets

We review the carrying value of our long-lived assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. This review is based upon our projections of anticipated future cash flows from such assets. 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. As of December 31, 2008 the Company had intangible assets of $5.9 million related to technology and other intangibles acquired through the acquisitions of In-Chip Systems, Inc., Ingot Systems, Inc., and the logic non-volatile memory intellectual property business of Impinj, Inc.

Stock-based compensation

In accordance with SFAS 123R, we recognized stock-based compensation of $0.1 million and $0.4 million for the three months ended December 31, 2008 and 2007, respectively. At December 31, 2008, total unrecognized estimated compensation expenses net of forfeitures related to non-vested equity awards prior to that date were $8.8 million.

We value our stock-based awards on the date of grant using the Black-Scholes option-pricing. The determination of the fair value of stock-based payment awards on the date of grant using a pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee equity awards exercise behaviors, risk-free interest rate and expected dividends.

For purposes of estimating the fair value of equity awards granted during the fiscal quarters ended December 31, 2008 and 2007, we have made an estimate regarding our stock price volatility using the historical volatility in our stock price for the expected volatility assumption input to the model. This approach is consistent with the guidance in SFAS 123R and the Securities and Exchange Commission's Staff Accounting Bulletin No. 107 (SAB 107).

The risk-free interest rate is based on the implied yield currently available on United States Treasury zero-coupon issues with a remaining term equal to the expected term of the awards on the grant date.

Furthermore, as required under SFAS 123R, we estimate forfeitures for equity awards granted which are not expected to vest. We calculate the pre-vesting forfeiture rate by using our historical equity grants cancellation information. If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using pricing models to estimate stock-based compensation under SFAS 123R. There is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined in accordance with SFAS 123R and SAB 107 using a pricing model, such value may not be indicative of the fair value observed in a willing buyer /willing seller market transaction.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007

Revenues

The table below sets forth the changes in revenues from the three months ended
December 31, 2008 to the three months ended December 31, 2007 (in thousands,
except percentage data):



                                      Three Months Ended        Three Months Ended
                                       December 31, 2008         December 31, 2007
                                                % of total                % of total
                                      Amount     revenues       Amount     revenues         Year-Over-Year Change
Revenues:
License                              $  6,561         57.8 %   $  8,443         60.0 %   $     (1,882 )        (22.3 )%
Maintenance                             1,940         17.1 %      2,318         16.5 %           (378 )        (16.3 )%
Royalties                               2,848         25.1 %      3,299         23.5 %           (451 )        (13.7 )%

Total revenues                       $ 11,349        100.0 %   $ 14,060        100.0 %   $     (2,711 )        (19.3 )%

Revenues for the three months ended December 31, 2008 totaled $11.3 million, decreasing 19.3% from $14.1 million for the three months ended December 31, 2007. The decrease resulted from a $1.9 million decrease in license revenues, $0.4 million decrease in maintenance revenues, and a decrease of $0.5 million in royalty revenues.

For the three months ended December 31, 2008 and 2007, total license revenues by process node are as follows:

                                                    Three Months Ended
                                                       December 31,
. . .