Virage Logic 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)


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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006


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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-31089

VIRAGE LOGIC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		77-0416232 (I.R.S. EMPLOYER IDENTIFICATION NO.)

VIRAGE LOGIC CORPORATION
47100 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(510) 360-8000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICE)

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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ

As of August 4, 2006, there were 22,970,002 shares of the Registrant’s Common Stock outstanding.

VIRAGE LOGIC CORPORATION

FORM 10-Q

INDEX


		PAGE
	Part I. Financial Information
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2006 and September 30, 2005		3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2006 and June 30, 2005		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2006, and June 30, 2005		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures about Market Risks		24
Item 4.	Controls and Procedures		24
	Part II. Other Information
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.	Defaults upon Senior Securities		35
Item 4.	Submission of Matters to a Vote of Security Holders		35
Item 5.	Other Information		35
Item 6.	Exhibits		36
Signatures			37
Exhibit Index			38
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 32.3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	June 30,			September 30,
	2006			2005
ASSETS:
Current assets:
Cash and cash equivalents	$	36,833		$	26,841
Short-term investments		32,942			34,410
Accounts receivable, net		12,337			14,201
Costs in excess of related billings on uncompleted contracts		344			896
Prepaid expenses and other current assets		4,268			4,517
Taxes receivable		1,193			493

Total current assets		87,917			81,358
Property, equipment and leasehold improvements, net		4,931			5,093
Goodwill		9,782			9,782
Other intangible assets, net		2,086			2,375
Deferred tax assets		9,549			8,604
Long-term investments		8,039			6,587
Other long-term assets		277			695

Total assets	$	122,581		$	114,494

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	879		$	770
Accrued expenses		4,417			3,623
Deferred revenue		8,488			8,440
Income taxes payable		2,420			1,441

Total current liabilities		16,204			14,274
Deferred tax liabilities		852			852

Total liabilities		17,056			15,126
Stockholders’ equity:
Common stock, $.001 par value; Authorized shares - 150,000,000; issued and outstanding shares — 22,958,409 and 22,547,504 at June 30, 2006 and September 30, 2005, respectively		23			23
Additional paid-in capital		128,340			120,548
Accumulated other comprehensive income		73			52
Accumulated deficit		(22,911	)		(21,255	)

Total stockholders’ equity		105,525			99,368

Total liabilities and stockholders’ equity	$	122,581		$	114,494

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

VIRAGE LOGIC CORPORATION

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
License	$	11,084		$	9,253		$	31,852		$	32,424
Royalties		4,262			2,701			12,415			8,173

Total revenues		15,346			11,954			44,267			40,597
Cost and expenses:
Cost of revenues		4,151			3,373			11,367			9,512
Research and development		5,473			5,366			16,429			15,228
Sales and marketing		4,027			3,794			12,585			12,116
General and administrative		2,150			2,235			7,615			6,278

Total cost and expenses		15,801			14,768			47,996			43,134

Operating loss		(455	)		(2,814	)		(3,729	)		(2,537	)
Interest income and other income (expenses), net		924			433			2,208			1,171

Income (loss) before income taxes		469			(2,381	)		(1,521	)		(1,366	)
Income tax provision (benefit)		2,059			(1,083	)		135			(819	)

Net loss	$	(1,590	)	$	(1,298	)	$	(1,656	)	$	(547	)

Net loss per share:
Basic	$	(0.07	)	$	(0.06	)	$	(0.07	)	$	(0.02	)

Diluted	$	(0.07	)	$	(0.06	)	$	(0.07	)	$	(0.02	)

Weighted average shares used in computing per share amounts:
Basic		22,384			22,359			22,393			22,097

Diluted		22,384			22,359			22,393			22,097

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

VIRAGE LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Nine Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,656	)	$	(547	)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
Provision for (recovery of) doubtful accounts		(417	)		457
Depreciation and amortization		1,461			1,879
Amortization of intangible assets		290			290
Stock-based compensation		5,368			339
Loss on disposal of fixed assets		10			—
Changes in operating assets and liabilities:
Accounts receivable		2,281			(90	)
Costs in excess of related billings on uncompleted contracts		560			(538	)
Prepaid expenses and other assets		240			(1,464	)
Taxes receivable		(700	)		985
Deferred tax assets		(943	)		—
Other long-term assets		420			—
Accounts payable and accrued liabilities		910			1,117
Deferred revenue		48			(841	)
Income tax payable		977			(2,440	)

Net cash provided by (used in) operating activities		8,849			(853	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,195	)		(2,575	)
Purchase of investments		(28,540	)		(38,348	)
Proceeds from maturities of investments		28,616			35,380
Payment of merger-related liabilities		—			(500	)

Net cash used in investing activities		(1,119	)		(6,043	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		2,416			5,058

Net cash provided by financing activities		2,416			5,058

Effect of exchange rates on cash		(154	)		82

Net increase (decrease) in cash and cash equivalents		9,992			(1,756	)
Cash and cash equivalents at beginning of period		26,841			28,746

Cash and cash equivalents at end of period	$	36,833		$	26,990

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

VIRAGE LOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business

Virage Logic Corporation (the Company) was incorporated in California in November 1995 and subsequently reincorporated in Delaware in July 2000. The Company provides semiconductor intellectual property (IP) platforms based on memory, logic, and I/Os (input/output interface components). These various forms of IP are utilized by the Company’s customers to design and manufacture System-on-Chip (SoC) integrated circuits that are increasingly forming the foundation of today’s consumer, communications and internet infrastructure, handheld and portable devices, computer and graphics applications.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of, and for the fiscal year ended September 30, 2005 contained in the Company’s 2005 Annual Report on Form 10-K. In the opinion of the management, the unaudited interim financial statements reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and nine months ended June 30, 2006, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending September 30, 2006.

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

Amendments of Statement of Cash Flow Disclosures

The results of the amounts reported in the statement of cashflow disclosures for the nine months ended June 30, 2005, relating to the purchase of investments and proceeds from the maturity of investments have been amended for amounts previously reported in the quarterly financial reports relating to misclassifications for the nine months ended June 30, 2005.

Foreign Currency Translation

The financial position and results of operations of the Company’s certain foreign operations are measured using a currency other than U.S. dollars as their functional currency. Accordingly, for these operations all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the respective balance sheet date. Revenue and expense items are translated using the weighted average exchange rate prevailing during the period. Cumulative gains and losses from the translation of these operations’ financial statements are reported as a separate component of stockholders’ equity.

Use of Estimates

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.

Accounting for Internal-Use Computer Software

In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal-use software. SOP 98-1 permits the capitalization of certain costs, including internal payroll costs, incurred in the connection with the development or acquisition of software for internal use during the application development stage. In accordance with SOP 98-1, the Company

purchased and capitalized costs of approximately $53,000 and $1.4 million during the nine months ended June 30, 2006 and 2005, respectively. Software is amortized for financial reporting purposes using the straight-line method over the estimated useful life of three years.

Revenue Recognition

The Company’s 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 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 collectibility is reasonably assured. 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 are recognized ratably over the term of the license, which are generally twelve months in duration, 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 Statement of Position 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 hours required to complete the development or service. 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. Alternatively, 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 projects 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 the higher of the actual price stated in the contract or the stated renewal rate in each contract. 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.

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 revenues on the payment due date, as long as 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 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. Prior to the recognition of any revenue that would create an unbilled accounts receivable balance, all of the criteria under SOP 97-2 or SOP 81-1 as applicable have been met.

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 if the prepaid royalty is specifically indicated in the contract as being non-refundable and the company has collected the payment for the prepaid royalty.

Stock-Based Compensation

In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95” (“SFAS 123R”), that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for stock-based compensation transactions using the intrinsic method and generally requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statements of income. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS 123R. This interpretation provides the Staff’s views regarding interactions between SFAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of stock-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided.

Following the guidance prescribed in SAB 107, on October 1, 2005, the Company adopted SFAS 123R using the modified prospective method, and accordingly, we have not restated the unaudited consolidated statements of operations from prior interim periods and fiscal years. Under SFAS 123R, we are required to measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation expense on a straight-line basis over the service period that the awards are expected to vest. Stock options generally vest over a four-year service period. Since our adoption of SFAS 123R, there have been no changes to our equity plans or modifications to outstanding stock-based awards. At June 30, 2006, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $9.7 million and will be amortized over 1.7 years.

Prior to October 1, 2005, the Company accounted for employee stock-based compensation using the intrinsic method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as permitted by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Under the intrinsic method, the difference between the market price on the date of grant and the exercise is charged to the results of operations over the vesting period on a straight-line method. For the year ending September 30, 2005 the Company did not have any options that were granted below fair value as of the measurement date. Accordingly the Company was not required to recognize compensation cost for stock options issued to the Company’s employees or shares issued under the employee stock purchase plan.

For the three and nine months ended June 30, 2005, had the Company accounted for all employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, the Company’s net income (loss) and net income (loss) per share would have been adjusted to the following proforma amounts (in thousands, except per share data):


	Three Months			Nine Months
	Ended			Ended
	June 30,			June 30,
	2005			2005
Net loss as reported	$	(1,298	)	$	(547	)
Add: Stock-based compensation expense included in reported net loss, net of tax		—			207
Less:Fair value of stock-based compensation expense for all awards, net of tax		(775	)		(3,380	)

Proforma net loss	$	(2,073	)	$	(3,720	)

Basic and diluted net loss per share:
As reported	$	(0.06	)	$	(0.02	)

Proforma	$	(0.09	)	$	(0.17	)

Weighted average shares used in computing per share amounts:
Basic		22,359			22,097

Diluted		22,359			22,097

Upon adoption of SFAS 123R, we recognized the compensation expense associated with awards granted after October 1, 2005, and the unvested portion of previously granted awards that remain outstanding as of October 1, 2005, in our unaudited condensed consolidated statement of operations for the first nine months of fiscal 2006. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as cash flow from financing activities rather than as cash flow from operating activities as previously required under Emerging Issues Task Force (“EITF”) issue No. 00-15, “Classification in the Statement of Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.”

The estimated stock-based compensation expense related to the Company’s stock-based awards for the three months and nine months period ended June 30, 2006 was as follows (in thousands, except per share data):


	Three Months			Nine Months
	Ended			Ended
	June 30,			June 30,
	2006			2006
Cost of revenues	$	276		$	913
Research and development		351			1,357
Sales and marketing		389			1,344
General and administrative		603			1,754

Stock-based compensation expense		1,619			5,368
Related income tax benefits		(365	)		(1,123	)

Stock-based compensation expense, net of taxes benefits	$	1,254		$	4,245

Net stock-based compensation expense, per common share:
Basic	$	0.06		$	0.19

Diluted	$	0.06		$	0.19

Consistent with our valuation method for the disclosure-only provisions of SFAS 123, we are using the Black-Scholes option pricing model to value the compensation expense associated with our stock-based awards under SFAS 123R. In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through an adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
The following weighted average assumptions were used in the estimated grant date fair value calculations for stock options:


	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
Volatility		68	%		75	%		70	%		74%-79	%
Risk-free interest rate		5.1	%		4.0	%		4.6	%		3.0%-4.0	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected life (years)	4.3 years			3 – 4 years			4.3 years			3 – 5 years

The expected stock price volatility rates are based on the historical volatility of our common stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The average expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The Black-Scholes weighted average fair values of options granted during the three and nine months ended June 30, 2006 were $6.31 and $5.53, respectively. The Black-Scholes weighted average fair values of options granted during the three and nine months ended June 30, 2005 were $5.45 and $8.03, respectively.

Equity Incentive Plans

The Company has three incentive plans: 1997 Equity Incentive Plan, 2001 Incentive and Non-statutory Stock Option Plan and 2002 Equity Incentive Plan. Under our equity incentive plans, stock options generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of grant and are generally granted at prices not less than the fair value of our common stock at the time of grant. Information with respect to the Equity Incentive Plans is summarized as follows:


	Shares			Number of			Weighted
	Available			Options			Average
	for Grant			Outstanding			Exercise Price
Balance at September 30, 2003		1,057,532			5,507,916		$	10.16

Additional options authorized		1,050,000			—			—
Options granted		(1,338,750	)		1,338,750		$	9.25
Options exercised		—			(216,636	)	$	3.79
Options canceled		605,739			(605,739	)	$	12.14

Balance at September 30, 2004		1,374,521			6,024,291		$	9.99

Additional options authorized		1,000,000			—			—
Options granted		(1,159,059	)		1,159,059		$	10.38
Options exercised		—			(705,610	)	$	6.03
Options canceled		773,070			(773,070	)	$	12.61

Balance at September 30, 2005		1,988,532			5,704,670		$	10.12

Additional options authorized		—			—			—
Options granted		(967,803	)		967,803		$	9.53
Options exercised		—			(399,093	)	$	5.73
Options expired/forfeited		758,850			(758,850	)	$	10.74

Balance at June 30, 2006		1,779,579			5,514,530		$	10.25

The following table summarizes information about stock options outstanding and exercisable at June 30, 2006:


	Options Outstanding								Options Exercisable
			Weighted								Weighted
			Average				Aggregate				Average				Aggregate
			Remaining		Weighted		Intrinsic				Remaining		Weighted		Intrinsic
	Number		Contractual		Average		Value		Number		Contractual		Average		Value
Range of Exercise	of		Life (In		Exercise		(in		of		Life (In		Exercise		(in
Prices	Shares		years)		Price		thousands)		Shares		years)		Price		thousands
$0.13 - $5.61		818,519		5.60	$	3.86	$	4,530		654,193		5.26	$	3.44	$	3,892
$5.62 - $7.81		883,656		9.17	$	7.54	$	1,634		103,814		6.64	$	6.67	$	283
$7.84 - $8.95		619,077		8.26	$	8.64	$	464		268,291		7.87	$	8.71	$	183
$9.00 - $9.96		563,587		8.10	$	9.32	$	86		226,160		7.65	$	9.36	$	34
$10.00 - $10.75		598,447		8.65	$	10.34	$	—		291,525		7.68	$	10.32	$	—
$10.79 - $14.00		763,369		7.02	$	12.43	$	—		547,597		6.30	$	12.81	$	—
$14.03 - $16.00		360,334		6.36	$	15.16	$	—		293,107		5.79	$	15.13	$	—
$16.11 - $16.11		568,491		5.99	$	16.11	$	—		547,117		5.99	$	16.11	$	—
$16.56 - $22.37		338,800		6.50	$	17.13	$	—		283,830		6.05	$	17.15	$	—
$22.81 - $22.81		250		5.91	$	22.81	$	—		221		5.91	$	22.81	$	—

Total		5,514,530		7.40	$	10.25	$	6,714		3,215,855		6.33	$	11.05	$	4,392

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $9.39 as of June 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of June 30, 2006 was 1.1 million.

The total fair value of shares vested using the Black-Scholes method during the nine months ended June 30, 2006 was $5.1 million. The total intrinsic value of employee stock options exercised during the nine months ended June 30, 2006 was $1.9 million. The total cash received from employees as a result of employee stock option exercises during the nine months ended June 30, 2006 was $2.3

million. The Company issued new shares of common stock upon exercise of stock options. A summary of the status of the Company’s nonvested shares as of June 30, 2006 and changes during the nine months ended June 30, 2006 is presented below:


	Stock Options
				Weighted-
	Number of			average grant-
	shares			date fair value
Nonvested at September 30, 2005		2,862,825		$	6.33
Awards granted		967,803		$	3.38
Awards vested		(641,104	)	$	7.95
Awards expired/forfeited		(758,850	)	$	5.47

Nonvested at June 30, 2006		2,430,674		$	5.46

NOTE 2 — NET INCOME (LOSS) PER SHARE

Basic and diluted net income (loss) per share is presented in conformity with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS No. 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 earnings per share (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net loss	$	(1,590	)	$	(1,298	)	$	(1,656	)	$	(547	)

Weighted average shares outstanding,— Basic		22,384			22,359			22,393			22,097
Effect of potentially dilutive securities		—			—			—			—

Weighted average shares outstanding — Diluted		22,384			22,359			22,393			22,097

Net loss per basic share	$	(0.07	)	$	(0.06	)	$	(0.07	)	$	(0.02	)

Net loss per diluted share	$	(0.07	)	$	(0.06	)	$	(0.07	)	$	(0.02	)

For the computation of net loss per share for the three and nine months ended June 30, 2006, the Company excluded approximately 662,000 and 630,000 shares, respectively, of potentially dilutive securities from outstanding stock options as the inclusion of these securities would have been anti-dilutive. Additionally, for the three and nine months ended June 30, 2006, the Company excluded 3.5 million and 4.1 million shares, respectively, of outstanding and exercisable stock options from the computation as the exercise prices of those options were greater than the weighted average market price of the Company’s stock during the respective periods.

For the computation of net loss per share for the three and nine months ended June 30, 2005, the Company excluded approximately 379,000 and 796,000 shares, respectively, of potentially dilutive securities from outstanding stock options as the inclusion of these securities would have been anti-dilutive.

NOTE 3 — COMPREHENSIVE INCOME (LOSS)

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS No. 130) established standards for the reporting and display of comprehensive income (loss). Comprehensive income (loss) includes unrealized gain (loss) on investments and foreign currency translation adjustments.

Total comprehensive loss for the three and nine months ended June 30, 2006 and 2005, respectively, is as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Net loss	$	(1,590	)	$	(1,298	)	$	(1,656	)	$	(547	)
Foreign currency translation adjustments, net of tax		(5	)		61			(26	)		443
Changes in unrealized gain (loss) on investments, net of tax		14			40			40			(67	)

Comprehensive loss, net of tax	$	(1,581	)	$	(1,197	)	$	(1,642	)	$	(171	)

NOTE 4 — SEGMENT INFORMATION

The Company operates in one industry segment, the sale of semiconductor IP platforms based on memory, logic, and I/Os, and the sale of the individual platform components and has one reportable segment.

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.

Revenues by geographic region are based on the region in which the customers are located.

Total revenues by geography are as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Total Revenue by Geography
United States	$	5,605	$	4,432	$	16,016	$	13,229
Canada		908		225		2,623		1,502
Japan		817		820		2,698		3,616
Taiwan		4,367		3,457		11,363		9,052
Europe, Middle East and Africa (EMEA)		2,344		2,116		6,177		7,253
Other Asia (China, Malaysia, Korea and Singapore)		1,305		904		5,390		5,945

Total	$	15,346	$	11,954	$	44,267	$	40,597

Total license revenues by process node are as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Total License Revenue by Process Node
65 Nanometer technology		12	%		8	%		9	%		6	%
90 Nanometer technology		40			44			41			33
0.13 Micron technology		38			28			34			42
0.18 Micron technology		8			12			13			12
Other		2			8			3			7

Total		100	%		100	%		100	%		100	%

The Company has only one product line, and as such disclosure by product groupings is not applicable.

Long-lived assets are located primarily in the United States, with the exception of a building in Armenia, which is owned by the Company. The Armenian building and related improvements are valued at cost less accumulated depreciation and amortization, and amounted to $2.0 million as of June 30, 2006.

NOTE 5 — RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections – A Replacement of APB Opinion No. 20 and SFAS No. 3”. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS No. 154 are effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

addresses the notion of “mutual understanding,” specifically that a mutual understanding shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if, the award is a unilateral grant and therefore the recipient does not have the ability to negotiate the terms and conditions of the award with the employer and, the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period for the date of approval. The Company applied FSP FAS 123(R)-2 in conjunction with the adoption of SFAS No. 123(R) on October 1, 2005.

In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share Based Payment Awards,” which allowed a one-time election to adopt one of two acceptable methodologies for calculating the initial additional paid in capital (“APIC”) pool. In subsequent periods, the APIC pool will be increased by tax benefits from stock-based compensation and decreased by tax deficiencies caused when the recorded stock-based compensation for book purposes exceeds the allowable tax deduction. We are evaluating the two options for computing the initial APIC pool and will make an election for the transition method for our year-end September 30, 2006.

In November 2005, Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. Our adoption of FSP 115-1 did not have a material impact on our results of operations or financial condition.

In February 2006, Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140”. SFAS 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with FAS 133 along with certain other clarifications and amendments to SFAS No. 133 and SFAS No. 140. SFAS 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Adoption of this standard is not expected to have a material effect on the Company’s financial statements.

In March 2006, Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 156 (“SFAS 156”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – an amendment of FASB Statements No. 140”. SFAS 156 addresses the recognition and measurement of separately servicing assets and servicing liabilities and permit servicers that use derivative financial instruments to economically hedge fluctuations in the fair value of their servicing rights and changes how gains and losses are computed in certain transfers and securitizations. SFAS 156 is effective for financial periods beginning after September 15, 2006. The adoption of this standard will not have a material impact on the Company’s results of operations or financial position.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

NOTE 6 — COMMITMENTS AND CONTINGENCIES

Indemnifications. The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claims 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 has no history of claims and accordingly, no liabilities have been recorded for indemnification under these agreements as of June 30, 2006.

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 June 30, 2006. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that a warranty reserve will not become necessary in the future.

NOTE 7 — RELATED PARTY TRANSACTIONS

Cathal Phelan, a member of our Board of Directors, serves as Chief Executive Officer at Ubicom, Inc which is one of our customers. Revenue from Ubicom was approximately $23,000 and $65,000 for the three and nine months ended June 30, 2006, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements made in this section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. 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 semiconductor IP platforms, 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 platforms, 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 do not intend 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, 2005 filed with the Securities and Exchange Commission.

Overview

Business Environment

Virage Logic Corporation provides semiconductor intellectual property (semiconductor IP) platforms comprising memories, logic and I/Os (input/output interface components). These various forms of IP are utilized by our customers to design and manufacture system-on-chip (SoC) integrated circuits that power today’s consumer, communications, internet infrastructure, handheld and portable devices, computer and graphics applications.

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’ 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.

In the third quarter of fiscal 2006, we derived approximately 52% of license revenue from the more advanced 90-nanometer and 65-nanometer technology processes and approximately 48% from the legacy process nodes, predominantly 0.13 and 0.18 micron technologies. We expect the 90-nanometer and 65-nanometer technologies to continue to drive license revenue growth in the foreseeable future as the legacy process nodes decline. We expect growth in royalty revenues to be driven by the advanced 90-nanometer and 65-nanometer technology processes, in addition to continued production on the older process nodes.

We sell our products early in the design process, and there are time delays of 12 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 our customer’s ability to ramp such designs to substantial manufacturing volumes and the overall market acceptance of our customer’s products.

Sources of Revenues

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; and

	•		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 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, and fees for custom design 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 on a per-chip or per-wafer basis 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. Royalty revenues for the three and nine months ended June 30, 2006 were $4.2 million and $12.4 million, respectively. Royalty revenues for the three and nine months ended June��30, 2005 were $2.7 million and $8.2 million, respectively.

Our customers comprising the top 10 customer group have changed from time to time. For the three months ended June 30, 2006, one customer accounted approximately for 20% of our total revenues and for the three months ended June 30, 2005, two customers accounted approximately for 13% and 12%, respectively, of our total revenues. For the nine months ended June 30, 2006, one customer accounted approximately for 18% of our total revenues. No single customer accounted for more than 10% of our revenue for the nine months ended June 30, 2005.

Sales to customers located outside of North America accounted for approximately 58% and 61% of our total revenues for the three months ended June 30, 2006 and 2005, respectively. For the nine months ended June 30, 2006 and 2005, sales to customers located outside North America accounted approximately 58% and 64% of our total revenues. 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 sell both indirectly through distributors and directly through our 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 us:

	•		stock-based compensation;

	•		revenue recognition;

	•		valuation of accounts receivable;

	•		valuation of purchased intangibles, including goodwill; and

	•		income taxes.

Stock-based compensation

Prior to October 1, 2005, we accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The intrinsic value method of accounting resulted in compensation expense for restricted stock and restricted stock units at fair value on date of grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were subject to an exchange offer, other modifications, or performance criteria, such awards were subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed as an offset to operating expenses.

As of October 1, 2005, we adopted SFAS 123R, “Share-Based Payment”. We now use the fair value method to apply the provisions of SFAS 123R with a modified prospective application which provides for certain changes to the method for valuing stock-based compensation. The valuation provisions of SFAS 123R apply to new awards and to unvested awards that are outstanding on the effective date. Under the modified prospective application, prior periods are not revised for comparative purposes. Total SFAS 123R compensation expense recognized for the three and nine months ended June 30, 2006 was $1.6 million and $5.4 million, respectively. At June 30, 2006, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $9.7 million and will be amortized over 1.7 years.

In October 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” FSP FAS 123(R)-2 provides guidance on the application of grant date as defined in Statement of Financial Accounting Standards (“SFAS”) No. 123(R). The FASB addresses the notion of “mutual understanding,” specifically that a mutual understanding shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if, the award is a unilateral grant and therefore the recipient does not have the ability to negotiate the terms and conditions of the award with the employer and, the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period for the date of approval. The Company applied FSP FAS 123(R)-2 in conjunction with the adoption of SFAS No. 123(R) on October 1, 2005.

In addition, on November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share Based Payment Awards,” which allowed a one-time election to adopt one of two acceptable methodologies for calculating the initial additional paid in capital (“APIC”) pool. In subsequent periods, the APIC pool will be increased by tax benefits from stock-based compensation and decreased by tax deficiencies caused when the recorded stock-based compensation for book purposes exceeds the allowable tax deduction. We are evaluating the two options for computing the initial APIC pool and will make an election for the transition method for our year-end September 30, 2006.

We value our stock-based awards on the date of grant using the Black-Scholes model. Prior to the adoption of SFAS 123R, the value of each stock-based award was estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model) for the pro forma information required to be disclosed under FAS 123. The determination of the fair value of stock-based payment awards on the date of grant using an option-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 stock option exercise behaviors, risk-free interest rate and expected dividends.

For purposes of estimating the fair value of stock options granted during the nine months ended June 30, 2006 using the Black-Scholes model, 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 SAB 107.

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

Furthermore, as required under SFAS 123R, we now estimate forfeitures for options granted, which are not expected to vest. We calculate the pre-vesting forfeiture rate by using our historical option 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 option 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, such as employee stock options, 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 financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our 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 the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107) using an option-pricing model, such value may not be indicative of the fair value observed in a willing buyer /willing seller market transaction.

Revenue Recognition

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. 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 June 30, 2006, management believes no impairment of intangible assets has occurred. The carrying value of purchased intangibles, including goodwill, is $11.9 million and $12.2 million at June 30, 2006 and September 30, 2005, respectively. If the asset is deemed impaired, the maximum amount of impairment would be the full carrying value of the asset.

Income taxes

We calculate our tax provision based on an estimated annual effective tax rate in compliance with SFAS No. 109 “Accounting for Income Taxes.” However, as required by FASB Interpretation 18, “Accounting for Income Taxes in Interim Periods” (“FIN 18”), the impact of items of tax expense (or benefit) that do not relate to “ordinary income” in the current year generally should be accounted for discretely in the period in which it occurs and be excluded from the effective tax rate calculation. As a result the company reported a discrete tax benefit of approximately $64,000 relating primarily to disqualifying dispositions of Incentive Stock Options which had previously been expensed for GAAP purposes. Significant components affecting the tax rate include an increase from stock-based compensation relating to non-deductible incentive stock options and the composite state tax rate.

For financial statement purposes, we make certain estimates and judgments in determining income tax expense. These estimates and judgments occur in the calculation of tax credits, tax benefits, deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. If actual results differ from our estimates, future income tax expense could be materially affected.

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 $9.5 million and deferred tax liabilities of $0.9 million at June 30, 2006. We assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not more likely than not, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that substantially all of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not more likely than not.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are probable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is less than we expect the ultimate assessment to be.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005

Revenues

The table below sets forth the changes in revenues from the three and nine months ended June 30, 2005 to the three and nine months ended June 30, 2006 (in thousands, except percentage data):


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of total					% of total
	Amount		Revenues			Amount		revenues			Year-Over-Year Change
Revenues:
License	$	11,084		72.2	%	$	9,253		77.4	%	$	1,831	19.8	%
Royalties		4,262		27.8	%		2,701		22.6	%		1,561	57.8	%

Total revenues	$	15,346		100.0	%	$	11,954		100.0	%	$	3,392	28.4	%


	Nine Months Ended					Nine Months Ended
	June 30, 2006					June 30, 2005
			% of total					% of total
	Amount		revenues			Amount		revenues			Year-Over-Year Change
Revenues:
License	$	31,852		72.0	%	$	32,424		79.9	%		($572	)	(1.8	%)
Royalties		12,415		28.0	%		8,173		20.1	%		4,242		51.9	%

Total revenues	$	44,267		100.0	%	$	40,597		100.0	%	$	3,670		9.0	%

Revenues for the three months ended June 30, 2006 totaled $15.3 million, increasing 28.4% from $12.0 million for the three months ended June 30, 2005. The increase resulted from the increase of $1.8 million in license revenue and $1.5 million in royalty revenue.

Revenue for the nine months ended June 30, 2006 totaled $44.3 million, increasing 9.0% from $40.6 million for the nine months ended June 30, 2005. The increase resulted from the increase of $4.2 million in royalty revenue offset by a decrease of $0.5 million in license revenue.

For the three and nine months ended June 30, 2006 and 2005, total license revenues by process node are as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Total License Revenue by Process Node:
65 Nanometer technology		12	%		8	%		9	%		6	%
90 Nanometer technology		40			44			41			33
0.13 Micron technology		38			28			34			42
0.18 Micron technology		8			12			13			12
Other		2			8			3			7

Total		100	%		100	%		100	%		100	%

License revenue for the three months ended June 30, 2006 was $11.1 million, representing an increase of $1.8 million or 19.8% as compared to $9.3 million for the three months ended June 30, 2005. License revenue increased for the three months ended June 30, 2006 mainly attributed to increases of $1.6 million on the 0.13 micron, $0.5 million on the 65-nanometer and $0.3 million on the 90-nanometer technologies related to the completion and acceptance of development agreements which allowed us to recognize previously deferred revenue, partially offset by a decrease of $0.6 million on the 0.18 micron and older technologies.

License revenue for the nine months ended June 30, 2006 was $31.9 million, representing a decrease of $0.5 million or 1.8% as compared to $32.4 million for the nine months ended June 30, 2005. The decrease for the nine months was due to a $4.5 million, or 28%, decline in 0.13 micron and older technologies, partially offset by a $4.0 million, or 24%, increase in the 90- nanometer, 65-nanometer and 0.18 micron technologies. However, we expect license revenue to increase in the future as we continue to develop and deliver our 90 and 65 nanometer technologies.

Royalties increased significantly by $1.5 million, or 57.8% from $2.7 million in the three months ended June 30, 2005 to $4.2 million for the three months ended June 30, 2006. For the nine months ended June 30, 2006 and 2005, royalties were $12.4 million and $8.2 million, respectively. The increase for the three and nine months was primarily attributed to the growth in royalties associated with our 90 nanometer technology processes.

For the three and nine months ended June 30, 2006 and 2005, total revenues by geography were as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Total Revenue by Geography
United States	$	5,605	$	4,432	$	16,016	$	13,229
Canada		908		225		2,623		1,502
Japan		817		820		2,698		3,616
Taiwan		4,367		3,457		11,363		9,052
Europe, Middle East and Africa (EMEA)		2,344		2,116		6,177		7,253
Other Asia (China, Malaysia, Korea and Singapore)		1,305		904		5,390		5,945

Total	$	15,346	$	11,954	$	44,267	$	40,597

For the three and nine months ended June 30, 2006, we experienced an increase in revenues primarily due to new license agreements with certain existing customers using our memory systems substantially in the North America and Taiwan. In addition, we had an increased level of royalties from our foundry customers stemming from higher manufacturing volumes in the 90-nanometer technology.

Cost and Expenses

The table below sets forth the changes in cost and expenses from the three and nine months ended June 30, 2005 to the three and nine months ended June 30, 2006 (in thousands, except percentage data):


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of total					% of total
	Amount		Revenues			Amount		revenues			Year-Over-Year Change
Cost and expenses:
Cost of revenues	$	4,151		27.0	%	$	3,373		28.2	%	$	778		23.1	%
Research and development		5,473		35.7	%		5,366		44.9	%		107		2.0	%
Sales and marketing		4,027		26.3	%		3,794		31.7	%		233		6.1	%
General and administrative		2,150		14.0	%		2,235		18.7	%		(85	)	(3.8	%)

Total cost and expenses	$	15,801		103.0	%	$	14,768		123.5	%	$	1,033		7.0	%


	Nine Months Ended					Nine Months Ended
	June 30, 2006					June 30, 2005
			% of total					% of total
	Amount		revenues			Amount		revenues			Year-Over-Year Change
Cost and expenses:
Cost of revenues	$	11,367		25.7	%	$	9,512		23.4	%	$	1,855	19.5	%
Research and development		16,429		37.1	%		15,228		37.5	%		1,201	7.9	%
Sales and marketing		12,585		28.4	%		12,116		29.8	%		469	3.9	%
General and administrative		7,615		17.2	%		6,278		15.5	%		1,337	21.3	%

Total cost and expenses	$	47,996		108.4	%	$	43,134		106.2	%	$	4,862	11.3	%

Cost of Revenues

Cost of revenues is determined principally based on allocation of costs associated with custom contracts and maintenance contracts, which consist primarily of personnel expenses, allocation of facilities costs, and depreciation expenses of acquired software and

capital equipment. Cost of revenues for the three months ended June 30, 2006 totaled $4.2 million, representing an increase of $0.8 million or 23.1% over $3.4 million for the three months ended June 30, 2005. The increase for the quarter year over year was primarily attributable to $0.3 million stock-based compensation expense related to the adoption of SFAS 123R and $0.4 million related to previously deferred contract expenses associated with custom projects.

For the nine months ended June 30, 2006, cost of revenues totaled $11.4 million, representing an increase of $1.9 million or 19.5% over $9.5 million for the nine months ended June 30, 2005. The increase for the nine months was primarily attributable to $0.9 million stock-based compensation expense related to the adoption of SFAS 123R and $0.6 million related to previously deferred contract expenses associated with custom projects. We believe that cost of revenues will continue to fluctuate in the future, both in absolute dollars and as a percentage of revenues, based on the mix of products sold by us, the impact of the adoption of SFAS 123R and the level of license revenues.

Research and Development Expenses

Research and development expenses primarily include personnel expense, software license and maintenance fees, as well as capital equipment depreciation expenses. Research and development expenses for the three months ended June 30, 2006 were $5.5 million, an increase of $0.1 million, or 2.0%, from $5.4 million for the three months ended June 30, 2005. The increase in research and development expense was primarily due to $0.4 million expense in stock-based compensation related to the adoption of SFAS 123R, partially offset by a $0.3 million decrease in consulting expenses. Research and development expense as a percentage of total revenue for the three months ended June 30, 2006 decreased to 35.7% from 44.9% for the same period in fiscal 2005.

For the nine months ended June 30, 2006 research and development totaled $16.4 million, representing an increase of $1.2 million or 7.9% compared to $15.2 million for the same period in fiscal 2005. The increase was primarily due to $1.4 million expense in stock-based compensation related to the adoption of SFAS 123R and $0.3 million increase in software and maintenance expenses, partially offset by decreases of $0.3 million in depreciation, $0.1 million of travel expenses and $0.1 million in test chip cost. Research and development expense as a percentage of total revenue for the nine months ended June 30, 2006 was 37.1%, as compared to 37.5% for the nine months ended June 30, 2005.

Sales and Marketing Expenses

Sales and marketing expense consists mainly of personnel expenses, commissions, advertising and promotion-related costs. Sales and marketing expense for the three months ended June 30, 2006 was $4.0 million, representing an increase of $0.2 million or 6.1% over the same period in fiscal 2005. The increase in sales and marketing expense for the three months was primarily attributable to $0.4 million expense in stock-based compensation related to the adoption of SFAS 123R and an increase of $0.2 million in personnel related expenses, partially offset by a decrease of $0.4 million in marketing programs expenses related to tradeshow and advertising expenses. Sales and marketing expense as a percentage of revenue was 26.3% for the three months ended June 30, 2006, compared to 31.7% for the three months ended June 30, 2005.

Sales and marketing expense for the nine months ended June 30, 2006 totaled $12.6 million, representing an increase of $0.5 million or 3.9% over the same period in fiscal 2005. The increase in sales and marketing expense for the nine months ended June 30, 2006 was mainly attributable to $1.3 million expense in stock-based compensation related to the adoption of SFAS 123R, $0.7 million increase in personnel expenses primarily related to commission expense and additional headcount and an increase of $0.1 million in third party commission. The increase in sales and marketing expense for the nine months ended June 30 was partially offset by decreases in marketing programs of $0.9 million related to tradeshow, advertising and public relations expenses, travel expenses of $0.4 million and stock-based compensation expense under APB Opinion No. 25 of $0.3 million related to the accelerated vesting of certain stock options. For the first nine months of fiscal 2006, sales and marketing expense as a percentage of revenue was 28.4%, compared to 29.8% for the first nine months of fiscal 2005.

General and Administrative Expenses

General and administrative expense consists primarily of personnel, corporate governance and other costs associated with the management of our business. General and administrative expense for the three months ended June 30, 2006 was $2.1 million, representing a decrease of $0.1 million or 3.8% over the three months ended June 30, 2005. The decrease in general and administrative expense for the three months ended was mainly attributable to decreases of $0.5 million in bad debt expenses primarily related to the collection of previously reserved accounts receivable and $0.4 million in professional fees, partially offset by $0.6 million expense in stock-based compensation related to the adoption of SFAS 123R and increases of $0.1 million in consulting fees and $0.1 million in personnel related expenses due to an increase in headcount. General and administrative expense as a percentage of total revenue was 14.0% for the three months ended June 30, 2006, compared to 18.7% for the same period in fiscal 2005.

General and administrative expense for the nine months ended June 30, 2006 totaled $7.6 million, representing an increase of $1.3 million or 21.3% over the nine months ended June 30, 2005. The increase in general and administrative expense for the nine months ended June 30, 2006 was mainly attributable to $1.8 million expense in stock-based compensation related to the adoption of SFAS 123R, increases of $0.1 million of personnel related expenses due to increase in headcount, $0.1 million of recruiting fees and $0.1 million of professional fees primarily related to accounting fees, partially offset by a decrease of $0.8 million of bad debt expenses primarily related to the collection of previously reserved accounts receivable. General and administrative expense as a percentage of total revenue was 17.2% for the nine months ended June 30, 2006, compared to 15.5% for the same period in fiscal 2005.

Interest Income and Other Income (Expenses), net

The table below sets forth the changes in interest income and other income (expenses), net from the three and nine months ended June 30, 2005 to the three and nine months ended June 30, 2006 (in thousands, except percentage data):


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of total						% of total
	Amount		revenues			Amount			revenues			Year-Over-Year Change
Interest income and other income (expenses), net:
Interest income	$	776		5.0	%	$	456			3.8	%	$	320	70.2	%
Other income (expenses), net		148		1.0	%		(23	)		(0.2	%)		171	743.5	%

Total interest income and other income (expenses), net	$	924		6.0	%	$	433			3.6	%	$	491	113.4	%


	Nine Months Ended					Nine Months Ended
	June 30, 2006					June 30, 2005
			% of total						% of total
	Amount		revenues			Amount			revenues			Year-Over-Year Change
Interest income and other income (expenses), net:
Interest income	$	2,067		4.7	%	$	1,200			3.0	%	$	867	72.3	%
Other income (expenses), net		141		0.3	%		(29	)		(0.1	%)		170	586.2	%

Total interest income and other income (expenses), net	$	2,208		5.0	%	$	1,171			2.9	%	$	1,037	88.6	%

Interest income and other income (expenses), net, for the three months ended June 30, 2006 totaled $0.9 million compared to $0.4 million for the same period in fiscal 2005. Interest income and other income (expenses), net, for the nine months ended June 30, 2006 totaled $2.2 million, compared to $1.2 million for the same period in fiscal 2005. The increase in interest income was primarily due to the increased interest rate environment applicable to our treasury investment portfolio of marketable securities held as available-for-sale. In addition, for the nine months ended June 30, 2006, we had $0.2 million of foreign exchange gain primarily due to the relative exchange rates between U.S. dollars and Armenian currency.

Income Tax Provision


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of total						% of total
	Amount		revenues			Amount			revenues			Year-Over-Year Change
Income tax provision (benefit)	$	2,059		13.4	%	$	(1,083	)		(9.1	%)	$	3,142	290.1	%


	Nine Months Ended					Nine Months Ended
	June 30, 2006					June 30, 2005
			% of total						% of total
	Amount		revenues			Amount			revenues			Year-Over-Year Change
Income tax provision (benefit)	$	135		(0.3	%)	$	(819	)		(2.0	%)	$	954	116.5	%

For the three months ended June 30, 2006, we recorded an income tax provision of $2.1 million. For the same quarter in fiscal 2005, we recorded an income tax benefit of $1.1 million. For the nine months ended June 30, 2006, we recorded an income tax provision approximately $0.1 million and for the nine months ended June 30, 2005, we recorded an income tax benefit of $0.8 million, respectively. The provision for income taxes for the nine months ended June 30, 2006 is based on our annual effective tax rate in compliance with SFAS 109. The annual effective rate was calculated on the basis of our expected level of profitability and includes items such as the use of tax credits and income taxes on earnings of certain foreign subsidiaries. However, as required by FASB Interpretation 18, “Accounting for Income Taxes in Interim Periods” (“FIN 18”), the impact of items of tax expense (or benefit) that do not relate to “ordinary income” in the current year generally should be accounted for discretely in the period in which it occurs and

be excluded from the effective tax rate calculation. As a result the company reported a discrete tax benefit of approximately $64,000 relating primarily to disqualifying dispositions of Incentive Stock Options which had previously been expensed for GAAP purposes. Significant components affecting the tax rate include an increase from stock-based compensation relating to non-deductible incentive stock options and the composite state tax rate. In addition, to the extent our expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. The difference between the benefit for income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision actually recorded is due primarily to the impact of state and foreign taxes, non-deductible stock-based compensation relating to Incentive Stock Options as well as other miscellaneous non-deductible items.

LIQUIDITY AND CAPITAL RESOURCES


	June 30,		September 30,
	2006		2005		Change
Cash and cash equivalents	$	36,833	$	26,841	$	9,992
Short-term and long-term investments		40,981		40,997		(16	)

Total cash, cash equivalents and marketable debt securities	$	77,814	$	67,838	$	9,976

At June 30, 2006, our cash and cash equivalents totaled $36.8 million, as compared to $26.8 million at September 30, 2005. At June 30, 2006 and September 30, 2005, our short-term and long-term treasury investments totaled $41.0 million. In aggregate, cash, cash equivalents and short- and long-investments in marketable securities as of June 30, 2006 totaled $77.8 million, compared to $67.8 million at September 30, 2005.


	Nine Months Ended
	June 30,			June 30,
	2006			2005			Change
Cash provided by (used in) operating activities	$	8,849		$	(853	)	$	9,702
Cash used in investing activities		(1,119	)		(6,043	)		4,924
Cash provided by financing activities		2,416			5,058			(2,642	)
Effect of exchange rates on cash		(154	)		82			(236	)

Net increase (decrease) in cash and cash equivalents	$	9,992		$	(1,756	)	$	11,748

Net cash provided by operating activities of $8.8 million for the nine months ended June 30, 2006, representing an increase of $9.7 million over net cash used in operating activities of $0.9 million for the nine months ended June 30, 2005. The increase in cash provided by operating activities was due to increases in operating assets and liabilities of $7.1 million primarily related to increases of income taxes payable, prepaid expenses related to software license contracts and accounts receivable attributed to higher collections. In addition, we had an increase of $3.7 million in non-cash items primarily associated with stock-based compensation expense due to the adoption of SFAS 123R, partially offset by decreases in provision for (recovery of) doubtful accounts and in depreciation and amortization due to more fully depreciated assets during the current fiscal year compared to the same period in prior year. These increases were partially offset by an increase in net loss of $1.1 million.

Net cash used in investing activities was $1.1 million and $6.0 million for the first nine months of 2006 and 2005, respectively. The decrease of $4.9 million in the use of cash period over period resulted from decreases in net purchase of investments and proceeds from maturities of investments of $3.0 million, in purchases of property and equipment of $1.4 million and in payment of merger-related liabilities of $0.5 million in 2005.

Net cash provided by financing activities totaled $2.4 million and $5.1 million for the nine months ended June 30, 2006 and 2005, respectively, and was attributed to the proceeds from exercises of employee stock options and employee stock purchase plans during the respective periods.

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.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our contractual obligations and commercial commitments at June 30, 2006 (dollars in thousands):


Contractual				Less Than		1-3		4-5		After
Obligations	Total			1 Year		Years		Years		5 Years
Operating lease obligations	$	3,172		$	463	$	2,202	$	507	$	—
Purchase obligations		6,079	(1)		403		5,676		—		—

Total operating lease and purchase obligations	$	9,251		$	866	$	7,878	$	507	$	—


(1)		Reflects amounts payable under contracts primarily for product development software licenses and maintenance. We have no off-balance-sheet financing arrangements other than operating leases as defined in regulation S-K Item 303 (a)(4).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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 structures, other regulations and restrictions and foreign exchange rate volatility. Our foreign subsidiaries incur most of their expenses in the local currency. To date the expenses denominated in foreign currencies have not been material, therefore, we do not anticipate our future results to be materially adversely impacted by changes in these factors.

We maintain an investment portfolio of various issuers, types and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. Our investments primarily consist of short-term money market mutual funds, United States government obligations and mortgage-backed securities and commercial paper. Our short term investments balance of $33.0 million at June 30, 2006 consists of instruments with original maturities of less than one year. Due to the short-term nature of these investments, we do not believe our investment balance is materially exposed to interest rate risk. We also hold $7.3 million in U.S. government obligations and $0.7 million in corporate bonds with maturities greater than one year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Executive Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Executive Chairman, the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-15(b). Based upon, and as of the date of this evaluation, the Executive Chairman, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective, because the material weaknesses discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005, as amended, have not yet been fully remediated. In light of these material weaknesses, the Company performed additional analysis and other post-closing procedures to ensure that the consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

The material weaknesses identified and discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005, as amended, have resulted in changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Although not yet complete, during the quarter ended June 30, 2006, we continued the following actions to remediate the material weaknesses we identified to be present as of September 30, 2005:

	•		Hiring of additional personnel, permitting enhanced segregation of duties and additional review;

	•		Additional training of staff;

	•		Identification of procedural improvements in our accounting processes;

	•		Enhancement of standardized control procedures and independent recalculations from Softrax, the Company’s ERP system, for foreign exchange translation, and implementation of redundant review controls related to the translation of foreign currencies which are performed by an individual independent of the preparer and initial reviewer;

	•		Engagement of another third-party firm to review the income tax provision; and

	•		Expansion of standardized control procedure and checklists for quarterly control procedures related to the preparation and review of the statements of cash flows preparation.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

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

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; and

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

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

Our quarterly operating results 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 our control. Factors that could cause our revenues and operating results to vary from quarter to quarter include:

	•		large orders unevenly spaced over time and timing of our sales cycle;

	•		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;

	•		operational issues in fulfilling existing orders;

	•		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; and

	•		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.

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.

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

We currently rely on license fees from the sale of perpetual and term licenses to generate a large portion of our revenues. These licenses produce large amounts of revenue in the periods in which the license fees are recognized, but are not necessarily indicative of a commensurate level of revenue from the same customers in future periods. In addition, our agreements with our customers do not obligate them to license new or future generations of our 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 potential licensees 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. Furthermore, 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.

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 and our business will be harmed.

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 new 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, United Microelectronics Corporation, Chartered Semiconductor Manufacturing, Tower Semiconductor, Silterra Malaysia, Semiconductor Manufacturing International Corporation 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 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.

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 durations of these delays have typically been short in length so as to not materially damage our relationship with our customers. However, these delays did adversely impact our operations and our financial performance. Future failures to meet significant customer milestones could damage our reputation in our industry and harm our ability to attract new customers.

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

We have historically generated revenues almost entirely from license fees. We have agreements with certain third-party semiconductor foundries to pay us royalties on their sales of silicon chips they manufacture for our fabless customers. Beginning with our STAR Memory System, CAM technologies and 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 first nine months of fiscal 2006 and 2005, we recorded royalty revenues of $12.4 million and $8.2 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, commercial acceptance of these products, 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 and may result in lower manufacturing volumes in certain periods as a result of inventory build-up, 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.

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.

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 inability to audit all of 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.

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.

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.

As advanced process nodes become more complex we may have difficulty in delivering product specifications in similar timeframes and at comparable costs to older process nodes.

The increasing complexity of our product at advanced nodes requires different customer engagements and validation strategies. Such changes require the acceptance of different business terms and schedules by our customers. They also may require an increase of test silicon for purposes of validating performance parameters. Such changes may impact our ability to acquire new customers and could increase our operating expenses.

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

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, conditions 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 changes in the economic conditions in 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, changes in the demand for technical personnel 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; and

	•		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.

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

Sales to customers located outside North America accounted for 63% and 62% of our revenues for fiscal years ended September 30, 2005 and 2004, respectively. For the nine months ended June 30, 2006 and 2005, sales to customers located outside North America accounted for 58% and 64% 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;

	•		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.

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

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

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

We have been dependent on a limited number of customers for a substantial portion of our annual revenues in each fiscal year, although the customers comprising this group have changed from time to time. For the quarter ended June 30, 2006, Taiwan Semiconductor Manufacturing Company (TSMC) accounted for 20% of our total revenues. For the quarter ended June 30, 2005, United Microelectronics Corporation (UMC) and Taiwan Semiconductor Manufacturing Company (TSMC) accounted for 13%and 12%, respectively, of our total revenues. For the nine months ended June 30, 2006, Taiwan Semiconductor Manufacturing Company (TSMC) accounted for 18% of our total revenue. No single customer accounted for more than 10% of our revenue for the nine months ended June 30, 2005. Since fiscal year 2001, our five largest customers have represented between 25-47% of our total 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 collectibility of our accounts receivable, historical revenues recorded and our future operating results.

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

We recorded a net loss of $1.7 million for the first nine months ended June 30, 2006 and a net loss of $0.3 million for fiscal year 2005. In order to 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.

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

We believe our future success depends on our ability to attract and retain engineers and other highly skilled personnel and senior managers. In addition, in order to grow our business 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 additional capital that may not be available to us and, if raised, may dilute our stockholders’ ownership interest in us.

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

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

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

Risks Related to Our Industry

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

Our business and the adoption and continued use of our IP by semiconductor companies depends on continued 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 a decline 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. 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.

The market for semiconductor IP platforms can be highly competitive and dynamic. We may lose market share to larger competitors with greater resources and/or our customer base may choose to develop semiconductor IP platforms using their own internal design teams.

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. In addition, our existing customers may choose to develop their own technology solutions internally.

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

The semiconductor industry has been characterized by an increasingly rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater speed and functionality. Our future success depends on our ability to develop new technologies and introduce new products to the marketplace in a timely manner, and to adapt our existing 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.

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

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. Continued unrest in Israel and the Middle East may negatively impact the investments that our worldwide customers make in these geographic regions. If businesses or consumers defer or cancel purchases of new products that contain complex semiconductors, purchases by fabless semiconductor companies, integrated device manufacturers and production levels by semiconductor manufacturers could decline. This could cause our revenues to be adversely affected, which would have an adverse effect on our results of operations and financial condition.

Risk Related to Our Intellectual Property Rights

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

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. 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.

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

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.

Risks Related to Our Stock

Our stock price may be volatile and could decline substantially.

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.

We determined that we had material weaknesses in our internal control over financial reporting as of September 30, 2005. These material weaknesses could result in a loss of investor confidence in our financial reports and have an adverse impact on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we were required to furnish a report by our management on our internal control over financial reporting for our Annual Report on Form 10-K for the year ended September 30, 2005. Such report contained, among other matters, a statement as to whether or not our internal control over financial reporting is effective. This assessment included disclosure of the material weaknesses in our internal control over financial reporting identified by management. Such report also included a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal controls.

We have preformed the system and process documentation and evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which is both costly and challenging. Management had identified material weaknesses in our internal control over financial reporting as of September 30, 2005, as reported in our Annual Report on Form 10-K for the year ended September 30, 2005. Specifically, we had material weaknesses in foreign currency translations, income taxes and the preparation of the statements of cash flows. Management has begun to implement specific controls to remediate the material weaknesses in the first nine months of fiscal 2006; however, the material weaknesses have not been remediated as of June 30, 2006.

If we continue to have our current material weaknesses or assess new material weaknesses our investors could lose confidence in the accuracy and completeness of our financial reports, which could adversely affect our stock price.

Changes in financial accounting standards related to stock-based compensation are expected to continue to have a significant effect on our reported results.

On October 1, 2005, we adopted the revised statement of Financial Accounting Standards No. 123 (SFAS 123R), “Share-Based Payment,” which requires that we record compensation expense in the statement of operations for stock-based payments, such as employee stock options, using the fair value method. The adoption of this new standard is expected to continue to have a significant effect on our reported earnings and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the values of stock-based payments. 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, which could negatively affect our stock price and our stock price volatility.

Our certificate of incorporation and bylaws as well as Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.

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 three 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.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit No.		Exhibits
31.1		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.3		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

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

SIGNATURES

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


Date: August 9, 2006	VIRAGE LOGIC CORPORATION
	/s/ Adam A. Kablanian
	ADAM A. KABLANIAN
	President and Chief Executive Officer (Co-Principal Executive Officer)



	/s/ Christine Russell
	CHRISTINE RUSSELL
	Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)

EXHIBIT INDEX


31.1		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.3		Certification Pursuant to Rule 13(a)-14(a) of the Securities and Exchange Act as amended, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Virage Logic (VIRL) Inactive 10-Q2006 Q3 Quarterly report

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