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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | ----------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



OR



| ̈ |  | 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: 000-32417



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VERISITY LTD.

(Exact name of registrant as specified in its charter)



|Israel                                                         |  | Not Applicable                      
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2041 Landings Drive, Mountain View, California                 |  | 94043                               
|(Address of principal US executive offices)                    |  | (Zip Code)                          



(650) 934-6800

(Registrants telephone number, including area code)



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



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



As of June 30, 2003, there were 20,099,745 of
registrants ordinary shares, par value NIS 0.01 per share, outstanding.



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VERISITY LTD.



Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2003



Index



|                             |  |         |  |                                                                                       |  | Page 
|---------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | -----
|Part IFinancial Information |  |        
|                             |  |         | 
|                             |  | Item 1. |  | Condensed Consolidated Financial Statements (Unaudited):                              |  |      
|                             |  |         | 
|                             |  |         |  | Balance Sheets                                                                        |  | 1    
|                             |  |         |  | Statements of Operations                                                              |  | 2    
|                             |  |         |  | Statements of Cash Flows                                                              |  | 3    
|                             |  |         |  | Notes to Condensed Consolidated Financial Statements                                  |  | 4-7  
|                             |  |         | 
|                             |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7-13 
|                             |  |         | 
|                             |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 13-14
|                             |  |         | 
|                             |  | Item 4. |  | Controls and Procedures                                                               |  | 14   
|                             | 
|Part IIOther Information    |  |        
|                             |  |         | 
|                             |  | Item 1. |  | Legal Proceedings                                                                     |  | 14   
|                             |  | Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 14   
|                             |  |         | 
|                             |  | Item 3. |  | Defaults Upon Senior Securities                                                       |  | 14   
|                             |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 14-16
|                             |  |         | 
|                             |  | Item 5. |  | Other Information                                                                     |  | 17   
|                             |  |         | 
|                             |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 17   
|                             | 
|Signature                    |  | 18     
|                             | 
|Certifications               |  |        





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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Condensed Consolidated Financial Statements



VERISITY LTD.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                 |  | June 30, 2003 |        |   | December 31,2002 |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | -
|                                                                                                                                 |  | Unaudited     |        |   |                  |  
|ASSETS                                                                                                                           |  |               |        |   |                  |  
|Current assets:                                                                                                                  |  |               |        |   |                  |  
|Cash and cash equivalents                                                                                                        |  | $             | 80,673 |   |                  | $
|Accounts receivable, net of allowance for doubtful accounts of $3 and $4 as of June 30, 2003 and December 31, 2002,
respectively |  |               | 7,720  |   |                  |  
|Prepaid expenses and other current assets                                                                                        |  |               | 2,982  |   |                  |  
|                                                                                                                                 |  |               |        |   |                  |  
|Total current assets                                                                                                             |  |               | 91,375 |   |                  |  
|                                                                                                                                 |  |              
|Property and equipment, net                                                                                                      |  |               | 2,612  |   |                  |  
|Other assets                                                                                                                     |  |               | 419    |   |                  |  
|                                                                                                                                 |  |               |        |   |                  |  
|Total assets                                                                                                                     |  | $             | 94,406 |   |                  | $
|                                                                                                                                 |  |               |        |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |  |               |        |   |                  |  
|Current liabilities:                                                                                                             |  |               |        |   |                  |  
|Accounts payable                                                                                                                 |  | $             | 764    |   |                  | $
|Accrued compensation                                                                                                             |  |               | 4,425  |   |                  |  
|Deferred revenues                                                                                                                |  |               | 21,716 |   |                  |  
|Other current liabilities                                                                                                        |  |               | 5,478  |   |                  |  
|                                                                                                                                 |  |               |        |   |                  |  
|Total current liabilities                                                                                                        |  |               | 32,383 |   |                  |  
|                                                                                                                                 |  |              
|Long-term portion of deferred revenues                                                                                           |  |               | 3,926  |   |                  |  
|Long-term portion of capital lease obligations                                                                                   |  |               |       |   |                  |  
|Other long-term liabilities                                                                                                      |  |               | 427    |   |                  |  
|                                                                                                                                 |  |              
|Shareholders equity:                                                                                                            |  |               |        |   |                  |  
|Ordinary shares and additional paid-in capital                                                                                   |  |               | 57,624 |   |                  |  
|Deferred compensation                                                                                                            |  |               | (56    | ) |                  |  
|Retained earnings (Accumulated deficit)                                                                                          |  |               | 102    |   |                  |  
|                                                                                                                                 |  |               |        |   |                  |  
|Total shareholders equity                                                                                                       |  |               | 57,670 |   |                  |  
|                                                                                                                                 |  |               |        |   |                  |  
|Total liabilities and shareholders equity                                                                                       |  | $             | 94,406 |   |                  | $
|                                                                                                                                 |  |               |        |   |                  |  



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



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VERISITY LTD.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                           |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30,
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------
|                                                                           |  | 2003                       |        |   | 2002                    
|                                                                           |  | Unaudited                  |        |   | Unaudited               
|Revenue:                                                                   |  |                            |        |   |                         
|License                                                                    |  | $                          | 7,605  |   |                         
|Maintenance                                                                |  |                            | 4,597  |   |                         
|Other services                                                             |  |                            | 301    |   |                         
|                                                                           |  |                            |        |   |                         
|Total revenue                                                              |  |                            | 12,503 |   |                         
|Cost of revenue:                                                           |  |                            |        |   |                         
|License                                                                    |  |                            | 38     |   |                         
|Maintenance                                                                |  |                            | 554    |   |                         
|Other services (1)                                                         |  |                            | 167    |   |                         
|                                                                           |  |                            |        |   |                         
|Total cost of revenue                                                      |  |                            | 759    |   |                         
|                                                                           |  |                            |        |   |                         
|Gross profit                                                               |  |                            | 11,744 |   |                         
|                                                                           |  |                            |        |   |                         
|Operating expenses:                                                        |  |                            |        |   |                         
|Research and development                                                   |  |                            | 2,626  |   |                         
|Sales and marketing                                                        |  |                            | 5,400  |   |                         
|General and administrative                                                 |  |                            | 1,458  |   |                         
|Non-cash charges related to equity issuances (1)                           |  |                            | 66     |   |                         
|                                                                           |  |                            |        |   |                         
|Total operating expenses                                                   |  |                            | 9,550  |   |                         
|                                                                           |  |                            |        |   |                         
|Operating income                                                           |  |                            | 2,194  |   |                         
|Interest income                                                            |  |                            | 208    |   |                         
|Other income (expense), net                                                |  |                            | (25    | ) |                         
|                                                                           |  |                            |        |   |                         
|Income before income taxes                                                 |  |                            | 2,377  |   |                         
|Provision for income taxes                                                 |  |                            | 190    |   |                         
|                                                                           |  |                            |        |   |                         
|Net income                                                                 |  | $                          | 2,187  |   |                         
|                                                                           |  |                            |        |   |                         
|Basic earnings per share:                                                  |  |                            |        |   |                         
|Basic net income per ordinary share                                        |  | $                          | 0.11   |   |                         
|                                                                           |  |                            |        |   |                         
|Number of shares used in per share calculation                             |  |                            | 19,740 |   |                         
|                                                                           |  |                            |        |   |                         
|Diluted earnings per share:                                                |  |                            |        |   |                         
|Diluted net income per ordinary share                                      |  | $                          | 0.10   |   |                         
|                                                                           |  |                            |        |   |                         
|Number of shares used in per share calculation                             |  |                            | 21,348 |   |                         
|                                                                           |  |                            |        |   |                         
|(1)    Non-cash charges related to equity issuances include the following: |  |                            |        |   |                         
|                                                                           |  |                           
|                                                                           |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30,
|                                                                           |  | 2003                       |        |   | 2002                    
|Cost of other services revenue                                             |  | $                          | 1      |   |                         
|                                                                           |  |                            |        |   |                         
|Research and development, net                                              |  | $                          | 7      |   |                         
|Sales and marketing                                                        |  |                            | 41     |   |                         
|General and administrative                                                 |  |                            | 18     |   |                         
|                                                                           |  |                            |        |   |                         
|Total included in operating expenses                                       |  | $                          | 66     |   |                         
|                                                                           |  |                            |        |   |                         



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



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VERISITY LTD.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                  |  | Six Months Ended June 30, |       
|--------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                  |  | 2003                      |       
|                                                                                  |  | Unaudited                 |       
|Cash flows from operating activities:                                             |  |                           |       
|Net income                                                                        |  | $                         | 4,064 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |       
|Depreciation and amortization                                                     |  |                           | 527   
|Non-cash charges related to equity issuances                                      |  |                           | (127  
|Changes in operating assets and liabilities:                                      |  |                           |       
|Accounts receivable                                                               |  |                           | 4,243 
|Prepaid expenses and other assets                                                 |  |                           | (734  
|Accounts payable                                                                  |  |                           | 76    
|Other liabilities and accrued compensation                                        |  |                           | (183  
|Deferred revenue                                                                  |  |                           | (7,119
|                                                                                  |  |                           |       
|Net cash provided by operating activities                                         |  |                           | 747   
|Cash flows from investing activities:                                             |  |                           |       
|Purchases of property and equipment                                               |  |                           | (862  
|Other assets                                                                      |  |                           | 1     
|                                                                                  |  |                           |       
|Net cash used in investing activities                                             |  |                           | (861  
|Cash flows from financing activities:                                             |  |                           |       
|Net proceeds from issuance of ordinary shares                                     |  |                           | 1,284 
|Proceeds from repayment of shareholder's loan                                     |  |                           |      
|Payments under capital lease obligations                                          |  |                           | (6    
|                                                                                  |  |                           |       
|Net cash provided by financing activities                                         |  |                           | 1,278 
|Net increase in cash and cash equivalents                                         |  |                           | 1,164 
|Cash and cash equivalents at beginning of the period                              |  |                           | 79,509
|                                                                                  |  |                           |       
|Cash and cash equivalents at end of the period                                    |  | $                         | 80,673
|                                                                                  |  |                           |       



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



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VERISITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Basis of Presentation
|-- |  | ---------------------



The Company



These unaudited interim condensed consolidated financial statements reflect the Companys financial position as of June 30, 2003. The statements also
show the Companys statements of operations for the three and six months periods ended June 30, 2003 and 2002, and the statements of cash flow for the six months periods ended June 30, 2003 and 2002. The December 31, 2002 condensed consolidated
balance sheet data was derived from the Companys audited financial statements and does not include all of the disclosures required by accounting principles generally accepted in the United States. The interim statements include all normal
recurring adjustments, which the Company believes are necessary to fairly present the Companys financial position. All material intercompany balances have been eliminated. Because all of the disclosures required by accounting principles
generally accepted in the United States are not included, these interim statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002, included in the Companys annual report on
Form 10-K filed with the Securities and Exchange Commission on March 21, 2003. The statements of operations for the periods presented are not necessarily indicative of results for any future period, nor for the entire year.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles in the United States
requires the Company to base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



|2. |  | Basic and Diluted Net Income Per Share
|-- |  | --------------------------------------



Basic net income per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income per
share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potentially dilutive ordinary shares considered outstanding during the period, in accordance with Financial Accounting Standards Board
(FASB) Statement No. 128, Earnings per Share.



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The following is a reconciliation of the denominator used in basic and diluted net income per share
computations for the second quarters and first six months of 2003 and 2002. (in thousands, except per share data):



|                                                                     |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|-------------------------------------------------------------------- |  | --------------------------- | ------ | -------------------------
|                                                                     |  | 2003                        |        | 2002                     
|                                                                     |  | Unaudited                   |        | Unaudited                
|Net income                                                           |  | $                           | 2,187  |                          
|                                                                     |  |                             |        |                          
|Shares used in computing basic net income per ordinary share         |  |                             | 19,740 |                          
|                                                                     |  |                             |        |                          
|Weighted-average number of ordinary shares under the treasury method |  |                             | 1,608  |                          
|Weighted-average number of ordinary shares subject to repurchase     |  |                             |       |                          
|                                                                     |  |                             |        |                          
|Shares used in computing diluted net income per ordinary share       |  |                             | 21,348 |                          
|                                                                     |  |                             |        |                          
|Diluted net income per ordinary share                                |  | $                           | 0.10   |                          
|                                                                     |  |                             |        |                          



|3. |  | Segment, Customers and Geographic Information
|-- |  | ---------------------------------------------



The Company operates in one industry segment which is focused on the development, marketing and support of software products that provide systems and
semiconductor companies with the ability to automate the functional verification of system and integrated circuit designs. Operations in Israel and in the United States include research and development and sales and marketing. Operations in Europe
include sales and marketing.



The following is a summary of
operations within geographic areas based on the location of the entity making the sales and the location of the long-lived assets (in thousands):



|                                               |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|---------------------------------------------- |  | --------------------------- | ------ | -------------------------
|                                               |  | 2003                        |        | 2002                     
|                                               |  | Unaudited                   |        | Unaudited                
|Revenues from sales to unaffiliated customers: |  |                             |        |                          
|United States                                  |  | $                           | 9,522  |                          
|Israel                                         |  |                             | 721    |                          
|Europe                                         |  |                             | 2,260  |                          
|                                               |  |                             |        |                          
|                                               |  | $                           | 12,503 |                          
|                                               |  |                             |        |                          



|                   |  | June 30, 2003 |       | December 31,2002
|------------------ |  | ------------- | ----- | ----------------
|                   |  | Unaudited     |       |                 
|Long lived assets: |  |               |       |                 
|United States      |  | $             | 1,091 |                 
|Israel             |  |               | 1,449 |                 
|Europe             |  |               | 72    |                 
|                   |  |               |       |                 
|                   |  | $             | 2,612 |                 
|                   |  |               |       |                 



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|4. |  | Recently Issued Accounting Standards
|-- |  | ------------------------------------



In June 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No.146 Accounting for Costs Associated with Exit or
Disposal Activities  (SFAS 146), effective for exit or disposal activities that are initiated after December 31, 2002. Under SFAS 146, a liability for the cost associated with an exit or disposal activity is recognized when the liability is
incurred. Under prior guidance, a liability for such costs could be recognized at the date of commitment to an exit plan. The Companys adoption of SFAS 146 did not have a material impact on its results of operations and financial position.



In November 2002, the FASB issued Interpretation No. 45 (FIN
45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value
guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Companys adoption of FIN 45 did not have a material impact on its results of operations and financial position.



|5. |  | Accounting for Share-Based Compensation
|-- |  | ---------------------------------------



The Company accounts for employee share option grants in accordance with APB 25 and related interpretations. Under APB 25, when the exercise price of
share options granted to employees equals the market price of the underlying shares on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure only alternative described in Statement of Financial
Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation.



For purposes of disclosures pursuant to FAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense over the options
vesting period.



The following table illustrates the effect on
reported net income and net income per share as if we had applied the fair value recognition provisions of FAS 123 to share-based compensation:



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|                                                                                                    |  | Three Months Ended June 30,           |        |   | Six Months Ended June 30,             |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | -
|                                                                                                    |  | 2003                                  |        |   | 2002                                  |  
|                                                                                                    |  | (in thousands, except per share data) |        |   | (in thousands, except per share data) |  
|Net income as reported                                                                              |  | $                                     | 2,187  |   |                                       | $
|Stock-based compensation expense included in reported net income, net of tax effect                 |  |                                       | 33     |   |                                       |  
|Total stock based compensation expense determined under fair value based methods, net of tax effect |  |                                       | (2,434 | ) |                                       |  
|                                                                                                    |  |                                       |        |   |                                       |  
|Pro forma net Income (loss)                                                                         |  | $                                     | (214   | ) |                                       | $
|                                                                                                    |  |                                       |        |   |                                       |  
|Basic net income (loss) per share:                                                                  |  |                                       |        |   |                                       |  
|As reported                                                                                         |  | $                                     | 0.11   |   |                                       | $
|                                                                                                    |  |                                       |        |   |                                       |  
|Pro forma                                                                                           |  | $                                     | (0.01  | ) |                                       | $
|                                                                                                    |  |                                       |        |   |                                       |  
|Diluted net income (loss) per share:                                                                |  |                                       |        |   |                                       |  
|As reported                                                                                         |  | $                                     | 0.10   |   |                                       | $
|                                                                                                    |  |                                       |        |   |                                       |  
|Pro forma                                                                                           |  | $                                     | (0.01  | ) |                                       | $
|                                                                                                    |  |                                       |        |   |                                       |  



The fair value of all options granted
during the three months ended June 30, 2003 and 2002 were estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                                               |  | Three Months EndedJune 30, |      
|---------------------------------------------- |  | -------------------------- | -----
|                                               |  | 2003                       |      
|Volatility                                     |  |                            | 80   
|Weighted-average expected lives                |  |                            | 4.0  
|Expected dividend yields                       |  |                            |     
|Weighted-average risk-free interest rates      |  |                            | 2.10 
|Weighted-average fair value of options granted |  | $                          | 10.16



The weighted average assumptions used
in the first quarter of 2003 and 2002, were reported in the Companys annual report on Form 10Q for the first quarter of 2003.



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated
financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. Some of the statements contained in this Form 10-Q are forward looking statements, including but not limited to those specifically identified as
such, that involve risks and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities
Act) and Section 21E of the Exchange Act of 1934, as amended (the Exchange Act), including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other
factors, which may



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cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, estimates, predicts,
potential, or continue, or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Important factors that may cause actual results to differ from expectations include those discussed in Risk Factors in our annual report on Form 10-K for the year ended December 31, 2002
filed with the Securities and Exchange Commission and elsewhere in this quarterly report on Form 10-Q.



Description of Business



We provide software products that automate the process of detecting flaws in the designs of electronic systems and integrated circuits and enable our customers to deliver higher quality electronic products, accelerate time-to-market and
reduce overall product development costs. We were founded in September 1995 and commenced operations in January 1996. In November 1999, we acquired SureFire Verification, Inc. by merging it into our wholly-owned subsidiary, Verisity Design, Inc., a
California corporation. The SureFire acquisition was accounted for under the pooling-of-interests method.



In 1996, we released our original Specman functional verification software product. In the second quarter of 1998, SureFire released our SureCov software
product. In the fourth quarter of 1998, we released Specman Elite, an enhanced version of our original Specman product. In the fourth quarter of 1999, we released our SureLint software product. In the second quarter of 2002 we introduced a major
upgrade to our Specman Elite product. We have also introduced several other products and support programs, which enhance the use of our products in the functional verification process.



We currently derive substantially all of our total revenue from the sale of licenses for a small number of software products
and related maintenance and other services. Sales of our Specman Elite and other functional verification class of products accounted for 100% of our license revenue in the past. We expect that substantially all of our revenue in 2003 will continue
to be generated from sales of licenses of our functional verification products and related maintenance and other services.



Throughout 2002 and to date in 2003 our customers have faced a difficult and unpredictable economic environment with respect to the end markets for their
products and their overall financial health. The year 2002 marked the third consecutive year of such a protracted downturn in the economic environment for the electronics industry in which our customers compete. This uncertainty has continued
through the first half of 2003 without perceptible relief. The result of this prolonged uncertainty has caused most customers, particularly the financially weakest, to scrutinize more heavily their R&D investments with spending decisions being
delayed as long as possible and, in some cases, additional development programs being further rationalized or discontinued and many smaller companies going out of business.



The rate at which new orders were received slowed in the latter half of 2002 and the first quarter of 2003 and did not keep
pace with the growth in reported revenue, due primarily to the economic environment. As a result revenue in the first quarter of 2003 declined sequentially from the fourth quarter of 2002. The rate of new orders in the second quarter of 2003
increased sequentially over the first quarter and kept pace with the reported revenue in the period, leaving backlog essentially unchanged at the end of the second quarter of 2003. Revenue in the second quarter of 2003 grew sequentially,
approximately 7%, over the first quarter revenue and slightly over the revenue reported in the second quarter of 2002. We cannot predict with any certainty if orders and future revenue will continue to increase. Please see the risk factor (in our
annual report on Form 10-K for the year ended December 31, 2002) for the effect on our revenue if our products are not adopted.



We sell our products and related maintenance and other services directly through our sales force and through indirect channels that include international
distributors and sales representatives. Revenue from sales outside North America accounted for 31.3% of our total revenue in the second quarter of 2003 and 34.7% of our total revenue in the second quarter of 2002. We believe that international
markets



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represent a significant growth opportunity for our business and we anticipate that international revenue will increase as a percent of total revenue in the
future.



In order to increase market share in international
locations and better serve our global customers, we plan to further expand our international operations. We expect that this expansion will require a substantial investment in personnel, facilities and operations, which tend to be more costly than
similar investments in domestic operations. As a result of these investments in our international operations, we may experience an increase in cost of sales and other operating expenses disproportionate to revenue from those operations.



We license our software products to customers under either perpetual or
time-based licenses. Further, with respect to these time-based license arrangements, we allocate the revenue based on our standard price list, which has resulted in approximately 70% being allocated to license revenue and 30% being allocated to
maintenance revenue. The term for our time-based licenses is typically one year. Our software products do not require customization or modification for our customers to install and use them. Customers purchasing maintenance receive Internet-based
technical support, telephone support and unspecified product updates when we choose to make updates available. Our perpetual and time-based licenses are always sold with maintenance. Maintenance for perpetual licenses may then be separately renewed.
We believe these product updates, which our customers have the right to use for the remaining term of their license, are the primary reason that a majority of our customers renew maintenance every year. Our services include training in the use of
our products and consulting services.



Three and Six months Ended June 30,
2003 Compared to Three and Six months Ended June 30, 2002



Results of
Operations



Total Revenue



Our revenue consists of license revenue, maintenance revenue and other
services revenue. License revenue consists of fees paid by our customers to license our software products. Maintenance revenue consists of fees for technical support and product updates. Other services revenue consists of training and consulting
fees. Our total revenue was $12.5 million for the three months ended June 30, 2003, and $12.5 million for the comparable quarter of 2002, and was $24.2 million for the six months ended June 30, 2003 and $24.0 million for the comparable period of
2002, representing an increase of $0.2 million, or 1.0%. Approximately 93% of revenue in both the three months and six months periods ending June 30, 2003, were derived from existing customers with the balance coming from new customers.



License revenue. Our license revenue was $7.6 million for the three
months ended June 30, 2003, and $8.0 million for the comparable quarter of 2002, representing a decrease of $0.4 million, or 5.0%, and was $14.6 million for the six months ended June 30, 2003, and $14.7 million for the comparable period of 2002,
representing a decrease of $0.1 million, or 0.8%. These decreases resulted from decreases in revenue from perpetual licenses of $1.1 million and $1.3 million, partially offset by increases in revenue from time-based licenses of $700,000 and $1.2
million in the three and six months periods ending June 30, 2003, respectively. This reflects a further shift in customers demand towards time-based licenses from perpetual licenses.



Maintenance revenue. Our maintenance revenue was $4.6 million for the
three months ended June 30, 2003, and $4.2 million for the comparable quarter of 2002, representing an increase of $0.4 million, or 10.3%, and was $9.1 million for the six months ended June 30, 2003, and $8.4 million for the



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comparable period of 2002, representing an increase of $0.7 million, or 8.6%. These increases were primarily attributable
to the recognition of revenue from maintenance services that we sold in connection with the sale of new licenses, particularly in respect to time-based licenses.



Other services revenue. Our other services revenue was $301,000 for the three months ended June 30, 2003, and
$318,000 for the comparable quarter of 2002, representing a decrease of $17,000, or 5.3%, and was $528,000 for the six months ended June 30, 2003, and $898,000 for the comparable period of 2002, representing a decrease of $370,000, or 41.2%. These
decreases were primarily attributable to lower consulting services revenue.



Cost of Revenue



Cost of revenue
consists of costs associated with generating license, maintenance and other services revenue. Cost of revenue was $759,000 for the three months ended June 30, 2003, and $675,000 for the comparable quarter of 2002, representing an increase of
$84,000, or 12.4%, and was $1,457,000 for the six months ended June 30, 2003, and $1,443,000 for the comparable period of 2002, representing a slight increase of $14,000, or 1.0%. Cost of revenue as a percentage of total revenue was 6.1% for the
three months ended June 30, 2003, and 5.4% for the comparable quarter of 2002, and was 6.0% for the six months ended June 30, 2003, and 6.0% for the comparable period of 2002.



Cost of license revenue. Cost of license revenue was $38,000 for the three months ended June 30, 2003, and $40,000
for the comparable quarter of 2002, representing a decrease of $2,000, or 5.0%, and was $73,000 for the six months ended June 30, 2003, and $73,000 for the comparable period of 2002. As a percent of license revenue, the cost of license revenue was
0.5% for the three months ended June 30, 2003, and 0.5% for the comparable quarter of 2002, and 0.5% for the six months ended June 30, 2003 and 2002.



Cost of maintenance revenue. Cost of maintenance revenue was $554,000 for the three months ended June 30, 2003, and $500,000 for the comparable
quarter of 2002, representing an increase of $54,000, or 10.8%, and was $1.1 million for the six months ended June 30, 2003, and $1.0 million for the comparable period of 2002, representing an increase of $0.1 million, or 9.8%. This increase was
primarily a result of increased resources required to support the larger volume of licenses in our installed customer base and partially offset by continued improvements in product quality. These improvements related primarily to the introduction of
upgraded versions of our software products that improved functionality and ease of use. These improvements contributed to the overall operating efficiency of our software and our customer support personnel. As a percent of maintenance revenue, the
cost of maintenance revenue increased from 12.0% for the three months ended June 30, 2002, to 12.1% for the comparable quarter of 2003, and from 11.9% for the six months ended June 30, 2002, to 12.1% for the comparable period of 2003.



Cost of other services revenue. Cost of other services revenue
consists primarily of internal and contracted personnel and other expenses related to providing training and consulting services to our customers. Cost of other services revenue was $167,000 for the three months ended June 30, 2003, and $135,000 for
the comparable quarter of 2002, representing an increase of $32,000, or 23.7%, and was $285,000 for the six months ended June 30, 2003, and $369,000 for the comparable period of 2002, representing a decrease of $84,000, or 22.8%. These changes were
primarily attributable to the demand for externally contracted services, particularly in support of our training revenue. As a percent of other services revenue, the cost of other services revenue increased from 42.5% for the three months ended June
30, 2002, to 55.5% for the comparable quarter of 2003, and from 41.1% for the six months ended June 30, 2002, to 54.0% for the comparable period of 2003. These increases reflect a slightly higher usage of contracted services to support our other
services revenue.



Operating Expenses



Research and development. Research and development expenses consist
primarily of costs related to research and development personnel, including salaries and other personnel-related expenses, sub-



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contracting fees, facilities and computer equipment used in our product and technology development. Research and
development expenses were $2.6 million for the three months ended June 30, 2003, and $2.1 million for the comparable quarter of 2002, representing an increase of $0.5 million, or 22.4%, and were $5.2 million for the six months ended June 30, 2003,
and $4.4 million for the comparable period of 2002, representing an increase of $0.8 million, or 17.9%. The increases were primarily related to the increase in the number of software developers employed in the continuing enhancement of our software
products and an increase in sub-contractors expenses. Research and development expenses as a percentage of total revenues were 21.0% for the three months ended June 30, 2003, and 17.2% for the comparable quarter of 2002, and were 21.6% for the six
months ended June 30, 2003, and 18.5% for the comparable period of 2002. We believe that significant investment in research and development has been and will continue to be required to develop new products and enhance existing products to allow us
to further penetrate our target markets. We anticipate that the absolute dollar amount of research and development expenses will increase in the future.



Sales and marketing. Sales and marketing expenses consist primarily of salaries, commissions, travel and promotional and advertising costs. Sales
and marketing expenses were $5.4 million for the three months ended June 30, 2003, and $4.7 million for the comparable quarter of 2002, representing an increase of $0.7 million, or 15.2%, and were $10.6 million for the six months ended June 30,
2003, and $9.4 million for the comparable period of 2002, representing an increase of $1.2 million, or 12.4%. These increases were primarily attributable to the hiring of additional sales and marketing personnel, including related travel and office
expenses. Sales and marketing expenses as a percentage of total revenues were 43.2% for the three months ended June 30, 2003, and 37.5% for the comparable period of 2002, and were 43.7% for the six months ended June 30, 2003, and 39.2% for the
comparable period of 2002. We expect sales and marketing expenses to increase as we expand our geographic reach, hire additional personnel and expand our strategic programs.



General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related expenses
for our administrative, legal, human resources, investor relations and finance personnel, facilities, insurance and professional services fees. General and administrative expenses remained relatively unchanged at $1.5 million for the three months
ended June 30, 2003, and for the comparable quarter of 2002, and were $2.8 million for the six months ended June 30, 2003, and $2.7 million for the comparable period of 2002, representing an increase of $167,000, or 6.2%. These increases were
primarily attributable to the increased personnel in our finance, legal and investor relations functions and an increase in insurance expenses. General and administrative expenses as a percentage of total revenue were 11.7% for the three
months ended June 30, 2003, and 11.7% for the comparable quarter in 2002, and were 11.8% for the six months ended June 30, 2003, and 11.2% for the comparable period of 2002. We expect general and administrative expenses to increase for the
foreseeable future as we expand our administrative staff and incur expenses associated with being a public company, including the costs of annual and periodic reporting, investor relations programs, insurance and additional compliance reporting
requirements.



Non-cash charges related to equity
issuances. Non-cash charges related to equity issuances reflect the amortization of the deferred share-based compensation, representing the difference between the fair value of the ordinary shares for financial reporting purposes and the
exercise price of the underlying options at the date of grant and the measurement of the fair value of the non-employee share options. Our share-based compensation expenses, reported in operating expenses, were $66,000 for the three months ended
June 30, 2003, and $60,000 for the comparable quarter of 2002, and were $32,000 for the six months ended June 30, 2003, and $209,000 for the comparable period of 2002. In addition, $1,000 was reported in cost of other services for the three months
ended June 30, 2003, and $2,000 for the six months ended June 30, 2003. The deferred share-based compensation is amortized over the vesting schedule of the underlying options, generally four years.



11



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Interest income, interest expenses and other income, net



Interest income, interest expenses and other income, net consists of
interest income on our cash and cash equivalents, net of interest expense on our obligations under capital lease and other miscellaneous expenses. Our interest income, interest expenses and other income, net decreased from $206,000 for the three
months ended June 30, 2002, to $183,000 for the comparable quarter of 2003, and from $414,000 for the six months ended June 30, 2002, to $350,000 for the comparable period of 2003. These decreases were primarily due to other expenses related to
foreign currency transactions. As a percent of total revenue, interest income, interest expenses and other income, net decreased from 1.6% for the three months ended June 30, 2002, to 1.5% for the comparable quarter of 2003, and from 1.7% for the
six months ended June 30, 2002, to 1.4% for the comparable period of 2003.



Income taxes



We recorded provisions
for income taxes of $190,000 in the three months ended June 30, 2003, and $440,000 for the comparable quarter of 2002, and $352,000 in the six months ended June 30, 2003, and $745,000 for the comparable period of 2002. The provisions for income
taxes in these periods are primarily due to income taxes in jurisdictions other than Israel and various withholding taxes. Our effective tax rate was 8% for the three and six months ended June 30, 2003, and was 12% for the comparable periods of
2002. The effective tax rate for each of these periods differs from the Israeli statutory rate primarily due to the utilization of net operating losses incurred in Israel.



We have not recognized any benefit from the future use of loss carryforwards for these periods or for any other period since
inception because of uncertainty surrounding their realization. The amount of net operating losses that we can utilize may be limited under tax regulations in some circumstances, including acquisition activities.



Liquidity and Capital Resources



Since our inception, we have financed our operations primarily through the
private sale of convertible preferred shares and the public offering of ordinary shares. We have also financed our operations through the sale of ordinary shares, pursuant to our equity incentive plans, equipment financing and cash generated from
the sale of our products and services. As of June 30, 2003, we had cash and cash equivalents of $80.7 million, retained earnings of $102,000 and working capital of $59.0 million.



On March 26, 2001, we completed our initial public offering (IPO) of ordinary shares in which we sold 3,335,000
shares at a price of $7.00 per share. In April 2001 our underwriters exercised their over-allotment option for an additional 500,250 ordinary shares at same price set in the IPO. Total net proceeds, including the exercise of the over-allotment
option, less underwriting discounts, were approximately $25.0 million.



Net cash provided by operating activities was $0.7 million for the six months ended June 30, 2003, and $4.9 million for the comparable period of 2002, a decrease of $4.2 million. Cash provided by operating activities for each period
resulted primarily from the net income and net changes in balance sheet accounts deferred revenues and accounts receivable. The decrease in net cash provided by operating activities resulted from lower net income of $1.4 million with the balance
resulting from lower orders rate in the period ending June 30, 2003.



Net cash used in investing activities was $861,000 for the six months ended June 30, 2003, and $464,000 for the comparable period of 2002. Investing activities in the six months ended June 30, 2003 and 2002, consisted mostly of capital
expenditures



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Net cash provided by financing activities was $1.3 million for the six months ended June 30, 2003, and
$1.6 million for the comparable period of 2002. Net cash provided by financing activities for both periods resulted primarily from exercise of share options by employees and the purchase of shares under our equity incentives plans.



We believe that the cash flow from operations together with our current cash
and cash equivalents balances and current credit facilities will be sufficient to meet our operating requirements for at least the next 12 months, including increased operating expenses and purchases of capital equipment.



Although we currently have no plans, commitments or agreements with respect
to any acquisitions or investments, it is possible that we may decide to undertake those activities during the next 12 months to an extent that could require additional resources. In that case, we may be required to raise additional financing
through public or private financings, strategic relationships or other arrangements. However, we cannot be certain that this funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may
be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants.



Item 3. Quantitative and Qualitative Disclosure About Market Risk



We develop products primarily in Israel, and also in North America, and sell those products primarily in North America, Israel, Europe and Eastern Asia.
As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As substantially all of our sales are currently made in United States dollars, a
strengthening of the United States dollar could make our products less competitive in foreign markets.



We incur expenses denominated in the local currencies in Israel and Europe. As exchange rates vary, these expenses, when translated into United States
dollars, may vary from expectations and adversely affect overall profitability.



Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents. We maintain a conservative investment policy, which intends to ensure the safety and preservation of our
invested funds by limiting default risk, market risk and reinvestment risk. Our cash and cash equivalents as of June 30, 2003, consists primarily of short-term U.S. government securities, demand deposits and money market funds held by institutions
in the United States.



Managements intent and current practice is to
invest funds in excess of current operating requirements in:



| |  |  | obligations of the United States government and its agencies;
| | - |  | -------------------------------------------------------------



| |  |  | investment grade state and local government obligations;
| | - |  | --------------------------------------------------------



| |  |  | securities of corporations in the United States rated A1 or P1 by Standard & Poors or Moodys Ratings; or
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | money market funds, deposits or notes issued or guaranteed by commercial banks meeting certain credit rating and net worth requirements with maturities of less than two years.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These investments, included in our cash and cash
equivalents, are exposed to short-term fluctuations in interest rates. Should interest rates fall, our cash equivalents may produce less income than expected. Our long-term liabilities, largely composed of deferred revenues, are not subject to
interest rate risk. Given the liquid nature of our cash and cash equivalents and the non-exposed nature of our long-term



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liabilities, we have concluded that we do not have material market risk exposure due to changes in interest rates.



Item 4. Controls and Procedures



Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under theExchange Act, within 90 days of the filing date of this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of
their evaluation.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Changes in Securities and Use of Proceeds



During the three months ended June 30, 2003, we issued an additional 141,849 ordinary shares as a result of the exercise of share option grants and the purchase of ordinary shares pursuant to our equity incentives
plans. The aggregate net consideration received by the Company for the issuance of the ordinary shares was $1.1 million. Certain of the ordinary shares were issued pursuant to compensatory plans registered by registration statements, filed with the
SEC, on Form S-8. Other ordinary shares were issued pursuant to compensatory plans of the Company that are compliant with Rule 701 promulgated under the Securities Act and in reliance on the exemption from the registration requirements of the
Securities Act provided by such rule.



Item 3. Default Upon Senior Securities



None.



Item 4. Submission of Matters to A Vote of Security Holders.



The 2003 Annual General Meeting of Shareholders of Verisity Ltd. was held at our registered office located at 8-10 HaMelacha Street, Rosh HaAyin, Israel, on May 29, 2003, at 10:00 a.m. Israeli time to
conduct the business described in our proxy statement. The proxy statement was filed with the United States Securities and Exchange Commission on April 28, 2003. This was a regular annual meeting. The record date for determining those shareholders
who were entitled to notice of, and to attend and vote at, the meeting and at any adjournment thereof was April 24, 2003.



The proposals voted on at the meeting, each of which were approved, are summarized below and are more fully described in the proxy statement. A table showing the votes
for, against, and abstaining for each proposal follows this list. There were no broker non-votes on any proposal. With respect to the election of



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directors, shareholders were permitted to vote for the nominee or to withhold their vote for the nominee. Shareholders
could vote for, against, or abstain from voting for each of the other proposals. Votes were cast representing 17,940,872 shares out of 19,963,921 outstanding shares. This represents 90.0% participation. The shareholders approved the following
proposals:



1. The election of (a) Moshe Gavrielov and (b)
Zohar Zisapel as our Class II director to hold office for a term that expires in 2006 at the third Annual General Meeting that follows the 2003 Annual General Meeting and until each of their successor(s) shall be elected and qualified;



2. The grant of share options for the right to purchase ordinary shares
under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the amount of 100,000 shares to Moshe Gavrielov, our Director and Chief Executive Officer, with an exercise price of $13.63, the fair market value of our ordinary shares as of the close of
business on the date of the 2003 Annual General Meeting;



3.
The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the amount of 30,000 shares to Michael McNamara, our Director and Senior Vice President of Technology, with an exercise
price of $13.63, the fair market value of our ordinary shares as of the close of business on the date of the 2003 Annual General Meeting;



4. The 2002 bonus of our executive officers who also serve as members of our Board of Directors;



5. The 2003 base salary of our executive officers who also serve as members
of our Board of Directors;



6. The compensation for the
non-employee members of our Board of Directors, including external directors;



7. The compensation plan, indemnification, insurance coverage and share option grant, each within limits, for any new or replacement directors (excluding external directors), which may be named to the Board of
Directors in accordance with the Amended and Restated Articles of Association outside of the normal cycle for an Annual General Meeting; and



8. The selection of Ernst & Young LLP as our independent auditors, with Messrs. Kost Forer & Gabbay, a member of Ernst & Young International,
as our Israeli statutory independent auditors for the fiscal year ending December 31, 2003.



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TABLE OF VOTES CAST



|Proposition |  | Votes for  |  | Votes withhold |  | Votes against |  | Votes abstained
|----------- |  | ---------- |  | -------------- |  | ------------- |  | ---------------
|1. (a)      |  | 17,847,475 |  | 39,397         |  |               |  |                
|(b)         |  | 17,845,942 |  | 94,930         |  |               |  |                
|2.          |  | 14,187,049 |  |                |  | 3,557,320     |  | 196,503        
|3.          |  | 14,182,872 |  |                |  | 3,560,797     |  | 197,203        
|4.          |  | 17,576,340 |  |                |  | 165,706       |  | 198,826        
|5.          |  | 17,605,879 |  |                |  | 139,862       |  | 195,131        
|6.          |  | 17,607,559 |  |                |  | 140,737       |  | 192,576        
|7.          |  | 14,505,197 |  |                |  | 3,424,858     |  | 10,817         
|8.          |  | 17,860,678 |  |                |  | 791,198       |  | 996            



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Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | See Exhibit Index on Page 19.
| | --- |  | -----------------------------



| | (b) |  | On April 21, 2003, we filed a current report on Form 8-K to disclose the results of operations and financial information for the quarter ended March 31, 2003 and forward-looking
statements relating to 2003 and the second quarter of 2003 as presented in a press release of April 21, 2003.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                     |  |  |  |  |  | VERISITY LTD.                         
|-------------------- |  |  |  |  |  | --------------------------------------
|                     |  |  |  |  |  | (Registrant)                          
|                     | 
|Date: August 8, 2003 |  | 
|                     |  |  |  | 
|                     |  |  |  |  |  | By:                                   
|                     |  |  |  |  |  | Charles G. Alvarez                    
|                     |  |  |  |  |  | Vice President of Finance and         
|                     |  |  |  |  |  | Administration and Chief Financial    
|                     |  |  |  |  |  | Officer (Principal Accounting Officer)



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|Number  |  | Description                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.3*    |  | Form of Amended and Restated Articles of Association.                                                                                                                                                                                                            
|3.4*    |  | Memorandum of Association, as amended.                                                                                                                                                                                                                           
|4.1*    |  | Form of Share Certificate.                                                                                                                                                                                                                                       
|4.3*    |  | Warrant to Purchase up to an aggregate of 45,618 Series D Preferred Shares.                                                                                                                                                                                      
|        | 
|10.3*   |  | Unconditional Guaranty (Verisity Ltd.) dated as of December 31, 1998.                                                                                                                                                                                            
|10.4*   |  | Lease Agreement dated as of July 29, 1997 by and between Mifalei Locky, 1Bniya Ltd. and Verisity Ltd.                                                                                                                                                           
|10.5*   |  | Rental Agreement by and between Verisity Design, EURL and IOM Business Center GmbH, dated as of October 1, 1999.                                                                                                                                                 
|10.6*   |  | Rental Agreement by and between Verisity Design, EURL and IOM Business Center GmbH, dated May 8, 2000.                                                                                                                                                           
|10.7*   |  | License by and between Chancery Court Business Center Ltd. And Verisity Design, EURL, effective as of August 1, 2000.                                                                                                                                            
|10.8*   |  | Office Services Agreement by and between Verisity Design, EURL and Vantas, effective as of November 1, 1999.                                                                                                                                                     
|10.9*   |  | Domiciliation Agreement by and between Verisity Design, EURL and BURO Club, dated May 11, 1999.                                                                                                                                                                
|10.10*  |  | Landmark Office Center Lease by and between Landmark Investments Limited and Verisity Design, Inc., dated August 10, 1998.                                                                                                                                       
|10.11*  |  | Landmark Office Center Lease by and between Landmark Investments Limited and Verisity Design, Inc., dated August 10, 1998.                                                                                                                                       
|10.12** |  | Lease Agreement dated as of November 28, 2000, by and between W9/TIB Real Estate Limited Partnership and Verisity Design, Inc.                                                                                                                                   
|10.13*  |  | Office Service Agreement effective as of October 1, 2000 by and between Austin Mopac d/b/a/ Vantos and Verisity Design, Inc.                                                                                                                                     
|10.14*  |  | Office Service Agreement dated as of November 8, 1999 by and between Plano Executive Suite, Inc. d/b/a HQ Plano, Managing Partner and Verisity Design, Inc.                                                                                                      
|10.15*  |  | Letter Distributor Agreement dated as of December 1, 1998 by and between Verisity Design, Inc. and Integrated Systems Scandinavia AB.                                                                                                                            
|10.16*  |  | International Distributor Agreement by and between Verisity Design, Inc. and Cybertec Yugen Kaisha, effective as of January 1, 1999.                                                                                                                             
|10.17*  |  | International Distributor Agreement by and between Verisity Design, Inc. and Davan Tech Company, Ltd., dated as of November 10, 1999.                                                                                                                            
|10.18*  |  | Employment Agreement effective as of October 26, 1999 by and between Verisity Design, Inc. and Michael McNamara.                                                                                                                                                 
|10.19*  |  | Employment Agreement effective as of March 23, 1998 by and among Verisity Ltd., Verisity Design, Inc. and Moshe Gavrielov.                                                                                                                                       
|10.21*  |  | Form Software License Agreement.                                                                                                                                                                                                                                 
|        | 
|10.24*  |  | Stock Option Agreement effective as of December 1, 1999 by and between Verisity Ltd. and Moshe Gavrielov.                                                                                                                                                        
|10.25*  |  | Amended and Restated Verisity Ltd. 2000 U.S. Share Incentive Plan, form of Option Agreement for Amended and Restated 2000 U.S. Share Incentive Plan and form of Option Agreement for
outside directors under Amended and Restated 2000 U.S. Share Incentive Plan.
|10.26*  |  | Verisity Ltd. 1999 Israeli Share Option Plan and form of Option Agreement for 1999 Israeli Share Option Plan.                                                                                                                                                    
|10.27*  |  | Verisity Ltd. 1999 Share Incentive Plan and form of Option Agreement for 1999 Share Incentive Plan.                                                                                                                                                              



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|10.28*    |  | Sub-Plan for the Issuance of Options to the Companys Employees created within the framework of the 1997 Israel Share and Option Incentive Plan and form of Option Agreement
for Sub-Plan.                                                                 
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.29*    |  | 1997 Israel Share and Stock Option Incentive Plan.                                                                                                                                                                                                         
|10.30*    |  | 1996 U.S. Stock Option Plan, as amended October 1999, form of Option Agreement for 1996 U.S. Stock Option Plan and form of Amended Option Agreement.                                                                                                       
|10.31*    |  | Verisity Ltd. 2000 Employee Share Purchase Plan.                                                                                                                                                                                                           
|10.32*    |  | Amendment to Amended and Restated Investor Rights Agreement dated as of July 21, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe Gavrielov and certain
investors.                                                              
|10.33*    |  | Amended and Restated Investors Rights Agreement dated as of February 26, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe Gavrielov and certain investors.                                                                      
|10.34*    |  | Technology Exchange Agreement, Addendum to Software License and Volume Purchase Agreement effective as of January 1, 2000 by and between LSI Logic Corporation and Verisity Design,
Inc.                                                                   
|10.35*    |  | Software License and Volume Purchase Agreement effective as of December 11, 1998 by and between Verisity Design, Inc. and LSI Logic Corporation.                                                                                                           
|10.36*    |  | Software License Agreement by and between Intel Corporation and Verisity Design, Inc., effective as of January 18, 1999.                                                                                                                                   
|10.37*    |  | Amendment No. 1 to Software and Related Services Agreement, effective as of May 5, 2000 and Intel Corporation Purchase Agreement, Software and Related Services, by and between
Intel Corporation and Verisity Design, Inc., effective as of June 21, 1999.
|10.38*    |  | Verisity Ltd. 2000 Israeli Share Option Plan and form of Option Agreement for 2000 Israeli Share Option Plan.                                                                                                                                              
|10.39*    |  | Verisity Ltd. 2000 Directed Share Plan.                                                                                                                                                                                                                    
|10.40*    |  | International Representative Agreement between Verisity Design, EURL and Integrated Systems Scandinavia EDA AB, effective as of June 15, 2000.                                                                                                             
|10.41*    |  | First Amendment to Verisity Ltd. 1999 Israeli Share Option Plan.                                                                                                                                                                                           
|10.42*    |  | First Amendment to Verisity Ltd. 2000 Employee Share Purchase Plan.                                                                                                                                                                                        
|10.43**   |  | Sublease Agreement dated as of February 20, 2002, between Lakewood Property Trust, I/O of Austin Inc. and Verisity Design, Inc.                                                                                                                            
|10.44***  |  | Lease Agreement dated as of October 14, 2002 by and between Luki, Construction and Development Ltd. and Verisity Ltd.                                                                                                                                      
|10.45***  |  | Verisity Ltd. 2000 Employee Share Purchase Plan Amendment and Restated October 29, 2002.                                                                                                                                                                   
|10.46**** |  | Verisity Ltd. 2000 Israeli Share Option Plan, January 2003 amendment and form of Option Agreement for 2000 Israeli Share Option Plan, January 2003 amendment.                                                                                              
|31.1      |  | Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                      
|31.2      |  | Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                      
|32.1      |  | Certification pursuant to 18.U.S.C. Section 1350 for the current period, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             
|32.2      |  | Certification pursuant to 18.U.S.C. Section 1350 for the current period, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             

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|* |  | Incorporated by reference from the like-numbered exhibit filed with the Registrants registration statement on Form S-1 (No. 333-45440) filed on September 8, 2000, as
subsequently amended.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference from the like-numbered exhibit filed with the annual report on Form 10-K (No. 000-32417) filed on March 26, 2002.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|*** |  | Incorporated by reference from the like-numbered exhibit filed with the annual report on Form 10-K (No. 000-32417) filed on March 21, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated by reference from the like-numbered exhibit filed with the quarterly report on Form 10-Q (No. 000-32417) filed on May 13, 2003.
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