<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    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 September 30, 2001 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

                                  VERISITY LTD.
             (Exact name of registrant as specified in its charter)

              Israel                                Not Applicable
(State or other Jurisdiction of                     (I.R.S. Employer
Incorporation or Organization)                      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)

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 [_]

As of September 30, 2001, there were 18,929,738 of registrant's ordinary shares,
par value .01 NIS per share, outstanding.

<PAGE>

                                  VERISITY LTD.

                          Quarterly Report on Form 10-Q
                    For the Quarter Ended September 30, 2001

                                      Index

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                                                                                              <C>
Part I - Financial Information

         Item 1.           Condensed Consolidated Financial Statements (Unaudited):

                               Balance Sheets                                                    1
                               Statement of Operations                                           2
                               Statement of Cash Flows                                           3
                               Notes                                                             4-6
         Item 2.           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations                                             7-11

         Item 3.           Quantitative and Qualitative Disclosures About Market Risk            11-12

Part II - Other Information

         Item 1.           Legal Proceedings                                                      12

         Item 2.           Changes in Securities and Use of Proceeds                              12

         Item 3.           Defaults Upon Senior Securities                                        12

         Item 4.           Submission of Matters to a Vote of Security Holders                    12

         Item 5.           Other Information                                                      13

         Item 6.           Exhibits and Reports on Form 8-K                                       13

Signature
</TABLE>

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

                                  VERISITY LTD.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,      DECEMBER 31,
                                                                                2001             2000
                                                                            ------------------------------
                                                                              UNAUDITED
                                                                            -------------
                               ASSETS
<S>                                                                         <C>                <C>
Current assets:
    Cash and cash equivalents                                               $     52,325       $    18,388
    Short-term investments                                                           100               387
    Accounts receivable                                                            9,425             7,854
    Prepaid expenses and other current assets                                      3,005             3,837
                                                                            -------------------------------
      Total current assets                                                        64,855            30,466

   Property and equipment, net                                                     2,148             1,623
   Other assets                                                                      235               198
                                                                            -------------------------------
      Total assets                                                          $     67,238       $    32,287
                                                                            -------------------------------

                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                        $        565       $       902
    Bank loan                                                                                          265
    Accrued compensation                                                           3,745             3,485
    Deferred revenues                                                             24,382            16,989
    Other current liabilities                                                      3,217             2,302
                                                                            -------------------------------
      Total current liabilities                                                   31,909            23,943

   Accrued severance pay, net                                                        179               149
   Long-term portion of deferred revenues                                          3,877             3,110
    Long-term portion of capital lease obligations                                    15                10
                                                                            -------------------------------
      Total long-term  liabilities                                                 4,071             3,269

Shareholders' equity:
   Preferred shares, ordinary shares and additional paid-in capital               51,362            28,190
   Deferred  compensation                                                           (665)             (853)
   Shareholders' loans                                                              (252)             (252)
   Accumulated deficit                                                           (19,187)          (22,010)

                                                                            -------------------------------
  Total shareholders' equity                                                      31,258             5,075

                                                                            -------------------------------
  Total liabilities and shareholders' equity                                $     67,238       $    32,287
                                                                            -------------------------------
</TABLE>

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

                                       -1-

<PAGE>

                                  VERISITY LTD.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                 SEPTEMBER 30,                 SEPTEMBER 30,
                                                           -------------------------      -----------------------
                                                               2001         2000            2001           2000
                                                           ------------  -----------      ---------      --------
                                                             UNAUDITED                    UNAUDITED
                                                           -------------------------      -----------------------
<S>                                                        <C>            <C>             <C>            <C>
Revenue :
   License                                                 $     6,525    $    4,074      $  17,918      $  9,147
   Maintenance                                                   2,956         1,557          7,903         3,853
   Other  services                                                 308           366          1,539           939
                                                           -----------    ----------      ---------      --------
        Total  revenue                                           9,789         5,997         27,360        13,939
Cost of revenue :
   License                                                         179           114            557           240
   Maintenance                                                     478           384          1,292         1,180
   Other  services (1)                                             226           142            924           317
                                                           -----------    ----------      ---------      --------
        Total cost of  revenue                                     883           640          2,773         1,737

                                                           -----------    ----------      ---------      --------
Gross profit                                                     8,906         5,357         24,587        12,202
                                                           -----------    ----------      ---------      --------
Operating expenses:
   Research and development                                      2,216         1,876          6,392         5,405
   Sales and marketing                                           4,352         2,483         12,198         8,112
   General and administrative                                    1,306           962          3,661         2,560
   Non-cash charges related to equity issuances (1)                110           281            492           716
                                                           -----------    ----------      ---------      --------
        Total operating expenses                                 7,984         5,602         22,743        16,793
                                                           -----------    ----------      ---------      --------
Operating income (loss)                                            922          (245)         1,844        (4,591)
Interest income                                                    420            77          1,142           206
Interest expense and other income                                  (11)          (26)           (12)          (99)
                                                           -----------    ----------      ---------      --------
Net income (loss) before income taxes                            1,331          (194)         2,974        (4,484)
Provision for income taxes                                          66            --            151            --
                                                           -----------    ----------      ---------      --------
Net income (loss)                                          $     1,265    $     (194)     $   2,823      $ (4,484)
                                                           ===========    ==========      =========      ========
Basic earnings per share :
     Basic net income (loss) per ordinary share            $      0.07    $    (0.03)     $    0.20      $  (0.66)
                                                           ===========    ==========      =========      ========
     Shares used in per share calculation                       17,563         7,088         14,424         6,749
                                                           ===========    ==========      =========      ========
Diluted earnings per share :
     Diluted net income (loss) per ordinary share          $      0.06    $    (0.03)     $    0.15      $  (0.66)
                                                           ===========    ==========      =========      ========
     Shares used in per share calculation                       20,668         7,088         19,294         6,749
                                                           ===========    ==========      =========      ========
</TABLE>

 (1) Non-cash charges related to equity issuance include the following :

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                 SEPTEMBER 30,                 SEPTEMBER 30,
                                                           -------------------------      -----------------------
                                                               2001         2000            2001           2000
                                                           -----------    ----------      ---------      --------
<S>                                                        <C>            <C>             <C>            <C>
Cost of other services revenue                             $         3    $        7      $      12      $     18
                                                           ===========    ==========      =========      ========
   Research and development, net                           $        55    $       70      $     156      $    165
   Sales and marketing                                              (2)          107            164           257
   General and administrative                                       57           104            172           294
                                                           ------------   ----------      ---------      --------
Total included in operating expenses                       $       110    $      281      $     492      $    716
                                                           ===========    ==========      =========      ========
</TABLE>

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

                                       -2-

<PAGE>

                                  VERISITY LTD.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED
                                                                   SEPTEMBER 30,
                                                             ------------------------
                                                               2001            2000
                                                             ------------------------
                                                                     UNAUDITED
                                                             ------------------------
<S>                                                          <C>            <C>
Cash flows from operating activities:
Net income (loss)                                            $  2,823       $ (4,484)
Adjustments to reconcile net income ( loss) to
 net cash used  in operating activities :
 Depreciation                                                     660            575
 Non-cash charges related to equity issuances                     544            817
 Changes in operating assets and liabilities:
  Accounts receivable                                          (1,571)           564
  Prepaid expenses and other and other current assets             832         (1,486)
  Other current liabilities and accrued compensation            1,188            712
  Accrued severance pay, net                                       30             33
  Accounts payable                                               (337)           313
  Deferred revenue                                              8,160          7,903
                                                             ------------------------
  Net cash provided by  operating activities                   12,329          4,947

Cash flows used in investing activities:

Purchases of property and equipment                            (1,177)          (583)
Selling (Purchases) of short-term investments                     287           (383)
Other assets                                                      (45)           (63)
                                                             ------------------------
  Net cash used in investing activities                          (935)        (1,029)

Cash flows provided by (used in) financing activities:

Net proceeds from issuance of ordinary shares                  22,816            234
Loan to share holder                                                             (50)
Repayment of bank loan                                           (265)          (198)
Payments under capital lease obligations                           (8)            (5)
                                                             ------------------------
  Net cash provided by (used in) financing activities          22,543            (19)

Net increase in cash and cash equivalents                      33,937          3,899
Cash and cash equivalents at beginning of the period           18,388         10,811
                                                             ------------------------
Cash and cash equivalents at end of the period                 52,325         14,710
                                                             ========================
</TABLE>

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


                                       -3-

<PAGE>

                                  VERISITY LTD.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.       Basis of Presentation

The Company

         These unaudited interim consolidated financial statements reflect our
condensed consolidated financial position as of September 30, 2001. The
statements also show our statements of operations for the three and nine months
periods ended September 30, 2001 and 2000, and the statements of cash flow for
the nine months periods ended September 30, 2000 and 2001. These interim
statements include all normal recurring adjustments that we believe are
necessary to fairly present our financial position. All material intercompany
balances have been eliminated. Because all of the disclosures required by
generally accepted accounting principles are not included, these interim
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2000, included in our Registration
Statement on Form S-1 declared effective by the Securities and Exchange
Commission on March 20, 2001. The year end condensed consolidated balance sheet
data was derived from our audited consolidated financial statements and does not
include all of the disclosures required by generally accepted accounting
principles. The income statements for the periods presented are not necessarily
indicative of results that we expect for any future period, nor for the entire
year.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.

2.       Basic and Diluted Net Income (Loss) Per Share

         Basic net income (loss) per share is computed based on the weighted
average number of ordinary shares outstanding during each period. Diluted net
income (loss) per share is computed based on the weighted average number of
ordinary shares outstanding during each period, plus dilutive potential ordinary
shares considered outstanding during the period, in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings per Share", ("SFAS 128"). The
potential ordinary shares excluded from the earnings per share calculation
because they were antidilutive totaled 8,824,868 and 8,739,462 ordinary shares
for the three and nine months ended September 30, 2000, respectively. The
potential ordinary shares excluded from the earnings per share calculation
because they were antidilutive totaled 176,522 and 74,460 ordinary shares for
the three and nine months ended September 30, 2001, respectively.

                                       -4-

<PAGE>

     The following table presents the calculation of unaudited basic and diluted
net income (loss) per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED              NINE MONTHS ENDED
                                                         SEPTEMBER 30,                 SEPTEMBER 30,
                                                ----------------------------  -----------------------------
                                                   2001              2000         2001             2000
                                                -------------     ----------  ------------     ------------
                                                           UNAUDITED                   UNAUDITED
                                                ----------------------------  -----------------------------
<S>                                             <C>              <C>          <C>              <C>
Net income (loss)                               $      1,265      $    (194)  $     2,823      $    (4,484)
                                                =============     ==========  ============     ============
Shares used in computing basic
net income (loss) per ordinary share                  17,563          7,088        14,424            6,749
                                                -------------     ----------  ------------     ------------
Effect of conversion of preferred
 shares prior to the IPO                                   -              -         1,775                -
Weighted average number of ordinary
 shares under the treasury method                      3,007              -         2,955                -
Weighted average number of ordinary
 shares subject to repurchase                             98              -           140                -
                                                -------------     ----------  ------------     ------------
Shares used in computing diluted
  net income (loss) per ordinary share                20,668          7,088        19,294            6,749
                                                =============     ==========  ============     ============
Diluted net income (loss) per ordinary share    $       0.06      $   (0.03)  $      0.15      $     (0.66)
                                                =============     ==========  ============     ===========
</TABLE>

3.   Initial Public Offering

     On March 26, 2001, we completed our initial public offering in which we
sold 3,335,000 ordinary shares at $7.00 per share. The net proceeds we received
from this offering after deducting underwriting discounts were approximately
$21.7 million. All preferred shares were automatically converted into ordinary
shares on a share for share basis on the first day that our ordinary shares
began trading on the Nasdaq National Market, which was March 21, 2001.

     In April 2001, the underwriters of our initial public offering exercised
their over-allotment option to purchase an additional 500,250 ordinary shares at
$7.00 per share, the initial public offering price of our ordinary shares. The
net proceeds we received after deducting underwriting discounts were
approximately $3.3 million.

4.   Segment, Customers and Geographic Information

     We operate in one industry segment, the development, marketing and
supporting of software products that provide systems and semiconductor companies
with the ability to automate the functional verification of electronic system
and complex integrated circuit designs. Operations in Israel and in the United
States include research and development, sales and marketing. Operations in
Europe include sales and marketing.

                                       -5-

<PAGE>

      The following is a summary of operations within geographic areas based
upon our operating locations:

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED                  NINE MONTHS ENDED
                                        SEPTEMBER 30,                       SEPTEMBER 30,
                              --------------------------------    --------------------------------
                                  2001              2000               2001             2000
                              --------------   ---------------    ---------------  ---------------
                                         UNAUDITED                            UNAUDITED
                              --------------------------------    --------------------------------
<S>                           <C>              <C>                <C>              <C>    <C>    <C>
Revenue from sales to
unaffiliated customers:
      United States                   6,666             4,819             21,397           10,647
      Israel                          1,482               478              2,432            1,767
      Europe                          1,641               700              3,531            1,525
                              --------------   ---------------    ---------------  ---------------
                                      9,789             5,997             27,360           13,939
                              ==============   ===============    ===============  ===============
</TABLE>

                                       SEPTEMBER 30,
                              --------------------------------
                                  2001              2000
                              --------------   ---------------
                                         UNAUDITED
                              --------------------------------
Long lived assets :
      United States                   1,063               759
      Israel                          1,031               816
      Europe                             54                24
                              --------------   ---------------
                                      2,148             1,599
                              ==============   ===============


5.  Recently Issued Accounting Standards

      We adopted Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133"), as
of January 1, 2001. The implementation of SFAS 133 did not have a significant
effect on our financial condition or results of operations.

      In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". The new rules require
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. Companies are required to adopt SFAS No. 142 for fiscal years beginning
after December 15, 2001. We did not complete any business combinations through
the nine months ended September 30, 2001, and as a result these standards are
not expected to have a material impact on our financial position or operating
results.

                                       -6-

<PAGE>

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 financial
statements and the related notes included elsewhere in this Quarterly Report on
Form 10-Q.

Description of Business

         We provide proprietary technologies and software products used to
efficiently verify designs of electronic systems and complex integrated
circuits, known as ICs that are essential to the communications and other high
growth segments of the electronics industry. Our products automate the process
of detecting flaws in the designs of electronic systems and ICs 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, and the
operations of SureFire are therefore included in our results of operations for
all periods presented and the discussions thereof.

         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. We have also introduced several other
products and support programs that enhance the use of our products in the
functional verification process.

Forward-Looking Statements

         This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934. To the extent statements contained
herein are not purely historical, they are forward-looking statements.

         Words such as "anticipate," "estimate," "expects," "projects,"
"intends," "plans," "believes" and words and terms of similar substance used in
connection with any discussion of future operating or financial performance
identify forward-looking statements. All forward-looking statements represent
only management's present expectations of future events and are subject to a
number of factors and uncertainties that could cause actual results or
performance to differ materially from those described in the forward-looking
statements. These factors include: the market acceptance of new product
offerings; fluctuations in the sale of licenses for our products due to seasonal
factors; our ability to attract and retain key personnel; risks associated with
management of growth; we being held liable for potential defects or errors in
our products; political, economic and business fluctuations in Israel and our
international markets; risks of downturns in economic conditions generally and
in the communication, semiconductors and intellectual property industries
specifically and other factors set forth under "Risk Factors" in our
Registration Statement on Form S-1 declared effective by the Securities and
Exchange Commission on March 20, 2001, and elsewhere in this Quarterly Report on
Form 10-Q.

         We are not under any obligation, and expressly disclaim any obligation,
to update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise.

                                       -7-

<PAGE>

Three and Nine months ended September 30, 2001 Compared to Three and Nine Months
Ended September 30, 2000

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 $9.8 million for the three
months ended September 30, 2001, and $6.0 million for the comparable quarter of
2000, representing an increase of $3.8 million, or 63.2%, and was $27.4 million
for the nine months ended September 30, 2001, and $13.9 million for the
comparable period of 2000, representing an increase of $13.5 million, or 96.3%.
Just over 80% of the increase in each period was attributable to additional
sales to our existing customers with the balance coming from an increase in our
customer base.

         License revenue. Our license revenue was $6.5 million for the three
months ended September 30, 2001, and $4.1 million for the comparable quarter of
2000, representing an increase of $2.4 million, or 60.2%, and was $17.9 million
for the nine months ended September 30, 2001, and $9.1 million for the
comparable period of 2000, representing an increase of $8.8 million, or 95.9%.
Approximately 70% of these increases were attributable to additional sales to
our existing customers, with the balance of the increase representing sales to
new customers.

         Maintenance revenue. Our maintenance revenue was $3.0 million for the
three months ended September 30, 2001, and $1.6 million for the comparable
quarter of 2000, representing an increase of $1.4 million, or 89.9%, and was
$7.9 million for the nine months ended September 30, 2001, and $3.9 million for
the comparable period of 2000, representing an increase of $4.0 million, or
105.1%. These increases were primarily attributable to the recognition of
maintenance revenue that we sold in connection with the sale of new licenses.

         Other services revenue. Our other services revenue was $308,000 for the
three months ended September 30, 2001, and $366,000 for the comparable quarter
of 2000, representing a decrease of $58,000, or 15.8%, which was primarily due
to lower consulting revenue. Other services revenue was $1.5 million for the
nine months ended September 30, 2001, and $939,000 for the comparable period of
2000, representing an increase of $0.6 million or 63.9%, which was primarily
attributable to an increase in training services.

Cost of Revenue

         Cost of revenue consists of costs associated with generating license,
maintenance and other services revenue. Cost of revenue was $883,000 for the
three months ended September 30, 2001, and $640,000 for the comparable quarter
of 2000, representing an increase of $243,000, or 38.0%, and was $2.8 million
for the nine months ended September 30, 2001, and $1.7 million for the
comparable period of 2000, representing an increase of $1.1 million or 59.6%.
Cost of revenue as a percentage of total revenue was 9.0% for the three months
ended September 30, 2001, and 10.7% for the comparable quarter of 2000, and was
10.1% for the nine months ended September 30, 2001, and 12.5% for the comparable
period of 2000.

         Cost of license revenue. Cost of license revenue consists primarily of
royalties that we pay to third parties, primarily the Israeli Office of the
Chief Scientist, or OCS. The OCS royalties reflect our obligation to repay the
research and development grants we received from the OCS in support of our
software products developed in Israel. These royalties are payable at a rate of
3.0-3.5% of the license, maintenance and other services revenue attributable to
the sale of our products which were developed from

                                       -8-

<PAGE>

the funded research. These royalty obligations will terminate upon the payment
in full of the amounts due under the OCS grants. Until repaid, original grants
approved after January 1, 1999 accrue interest at the 12-month LIBOR rate. As of
September 30, 2001, approximately $845,000 of this contingent repayment
obligation remained outstanding. Cost of license revenue was $179,000 for the
three months ended September 30, 2001, and $114,000 for the comparable quarter
of 2000, representing an increase of $65,000, or 57.0%, and was $557,000 for the
nine months ended September 30, 2001, and $240,000 for the comparable period of
2000, representing an increase of $317,000 or 132.1%. As a percent of license
revenue, the cost of license revenue decreased from 2.8% for the three months
ended September 30, 2000, to 2.7% for the comparable quarter of 2001, and
increased from 2.6% for the nine months ended September 30, 2000, to 3.1% for
the comparable period of 2001. This latter increase was primarily due to an
increase in the royalty rate to 3.5% in the 2001 periods from 3.0% in the
comparable periods of 2000.

         Cost of maintenance revenue. Cost of maintenance revenue was $478,000
for the three months ended September 30, 2001, and $384,000 for the comparable
quarter of 2000, representing an increase of $94,000, or 24.5%, and was $1.3
million for the nine months ended September 30, 2001, and $1.2 million for the
comparable period of 2000, representing an increase of $0.1 million, or 9.5%. As
a percent of maintenance revenue, the cost of maintenance revenue decreased from
24.7% for the three months ended September 30, 2000, to 16.2% for the comparable
quarter of 2001, and from 30.6% for the nine months ended September 30, 2000, to
16.3% for the comparable period of 2001. These decreases were a result of an
increased volume of maintenance renewals and 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.

         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 $226,000 for the three months ended September 30, 2001, and
$142,000 for the comparable quarter of 2000, representing an increase of $84,000
or 59.2%, and was $924,000 for the nine months ended September 30, 2001, and
$317,000 for the comparable period of 2000, representing an increase of $607,000
or 191.5%. As a percent of other services revenue, the cost of other services
revenue increased from 38.8% for the three months ended September 30, 2000, to
73.4% for the comparable quarter of 2001, and from 33.8% for the nine months
ended September 30, 2000, to 60.0% for the comparable period of 2001. These
increases are primarily attributable to externally contracted training services
to support the growth in related 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-contracting fees, facilities
and computer equipment used in our product and technology development. Research
and development expenses were $2.2 million for the three months ended September
30, 2001, and $1.9 million for the comparable quarter of 2000, representing an
increase of $0.3 million, or 18.1%, and were $6.4 million for the nine months
ended September 30, 2001, and $5.4 million for the comparable period of 2000,
representing an increase of $1.0 million, or 18.3%. These increases were
primarily related to the increase in the number of software developers employed
in the continuing enhancement of our software products. Research and development
expenses as a percentage of total revenues were 22.6% for the three months ended
September 30, 2001, and 31.3% for the comparable quarter of 2000 and were 23.4%
for the nine months ended September 30, 2001, and 38.8% for the comparable
period of 2000. 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 for sales and marketing personnel and promotional
and advertising costs. Sales and marketing

                                       -9-

<PAGE>

expenses were $4.4 million for the three months ended September 30, 2001, and
$2.5 million for the comparable quarter of 2000, representing an increase of
$1.9 million, or 75.3%, and were $12.2 million for the nine months ended
September 30, 2001, and $8.1 million for the comparable period of 2000,
representing an increase of $4.1 million, or 50.4%. These increases are
primarily attributable to the hiring of additional sales and marketing
personnel, including related travel and office expenses and to commission
related expenses resulting from higher revenue levels. Sales and marketing
expenses as a percentage of total revenues were 44.5% for the three months ended
September 30, 2001, and 41.4% for the comparable period of 2000, and were 44.6%
for the nine months ended September 30, 2001, and 58.2% for the comparable
period of 2000. 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, human resources and finance personnel, facilities, insurance,
and professional services fees. General and administrative expenses were $1.3
million for the three months ended September 30, 2001, and $962,000 for the
comparable quarter of 2000, representing an increase of $0.3 million, or 35.8%,
and were $3.7 million for the nine months ended September 30, 2001, and $2.6
million for the comparable period of 2000, representing an increase of $1.1
million, or 43.0%. The increases for the nine month periods were primarily
attributable to the increased personnel in our finance, legal and human
resources functions of $370,000 and professional fees and insurance of $666,000
associated with becoming a public company in the period. General and
administrative expenses as a percentage of total revenue were 13.3% for the
three months ended September 30, 2001, and 16.0% for the comparable quarter in
2000, and were 13.4% for the nine months ended September 30, 2001, and 18.4% for
the comparable period of 2000. 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 and insurance.

         Non-cash charges related to equity issuance. Our share-based
compensation expenses, reported in operating expenses, were $110,000 for the
three months ended September 30, 2001, and $281,000 for the comparable quarter
of 2000, and were $492,000 for the nine months ended September 30, 2001, and
$716,000 for the comparable period of 2000. In addition, $3,000 was reported in
cost of other services for the three months ended September 30, 2001, and
$12,000 for the nine months ended September 30, 2001. The deferred share-based
compensation is amortized over the vesting schedule of the underlying options,
generally four years.

Other income (expenses), net

         Other income (expense), net consists of interest income, interest
expense and other miscellaneous expenses. Our other income, net increased from
$51,000 for the three months ended September 30, 2000, to $409,000 for the
comparable quarter of 2001, and from $107,000 for the nine months ended
September 30, 2000, to $1.1 million for the comparable period of 2001. These
increases were primarily due to interest earned on our higher balances of cash,
cash equivalent and short term investments. As a percent of total revenue, other
income, net increased from 0.9% for the three months ended September 30, 2000,
to 4.2% for the comparable quarter of 2001, and from 0.8% for the nine months
ended September 30, 2000, to 4.1% for the comparable period of 2001.

Liquidity And Capital Resources

         Since our inception, we have financed our operations primarily through
the private sale of convertible preferred shares. We have also financed our
operations through the sale of ordinary shares, equipment financing and cash
generated from the sale of our products and services. As of September 30, 2001,
we had cash, cash equivalents and short term investments of $52.4 million, an
accumulated deficit of $19.2 million and working capital of $32.9 million.

                                       -10-

<PAGE>

         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 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, were
approximately $25.0 million.

         Net cash provided by operating activities was $12.3 million for the
nine months ended September 30, 2001, and $4.9 million for the comparable period
of 2000. Net cash provided by operating activities for each period resulted
primarily from the net losses or income and an increase in deferred revenue in
those periods.

         Net cash used in investing activities was $935,000 for the nine months
ended September 30, 2001, and $1.0 million for the comparable period of 2000.
Investing activities in the nine months ended September 30, 2001, consisted of
capital expenditures and net sales of short-term investments. Investing
activities in the nine months ended September 30, 2000, consisted mainly of
capital expenditures and net purchases of short-term investments.

         Net cash provided by financing activities was $22.5 million for the
nine months ended September 30, 2001, resulting primarily from our IPO,
partially offset by the repayment in full of our bank term loan.

         Net cash used in financing activities was $19,000 for the nine months
ended September 30, 2000, resulting primarily from installment payments related
to our bank term loan partially offset by the issuance of ordinary shares upon
exercise of employee share options.

         We believe that cash flow from operations will continue to be positive,
and together with our current cash and short term investments 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 property and 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 financial 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.  Qualitative And Quantitative 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 Japan. 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.

         Our interest income is sensitive to changes in the general level of
interest rates in the United States, particularly since the majority of our
investments are in short-term bank and U.S. government instruments. Due to the
nature of our short-term investments, we have concluded that we do not have
material market risk exposure.

         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;

                                       -11-

<PAGE>

   .     investment grade state and local government obligations;

   .     securities of corporations in the United States rated A1 or P1 by
         Standard & Poors' or the Moody's equivalents; 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.

As of September 30, 2001, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by institutions in the United
States.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 2.  Changes In Securities and Use of Proceeds

         In the nine months ended September 30, 2001, we issued an additional
313,125 ordinary shares as a result of the exercise of share option grants and
46,759 ordinary shares as a result of exercises under our Employee Share
Purchase Plan.

         We priced our initial public offering on March 20, 2001, pursuant to a
Registration Statement on Form S-1 (File No. 333-45440), which was declared
effective by the Securities and Exchange Commission on March 20, 2001.

         In our initial public offering, we sold an aggregate of 3,335,000
ordinary shares at $7.00 per share. We also sold an additional 500,250 ordinary
shares at $7.00 per share on April 12, 2001 pursuant to the exercise of the
underwriters' over-allotment option. The sale of the 3,835,250 ordinary shares
generated aggregate gross proceeds of approximately $26.8 million. The aggregate
net proceeds were approximately $22.3 million, after deducting underwriting
discounts and commissions of approximately $1.9 million and directly paying
expenses of the offering of approximately $2.6 million.

         Robertson Stephens, Inc., Dain Rauscher Wessels Incorporated and SG
Cowen Securities Corporation were the managing underwriters for our initial
public offering.

         We intend to use the aggregate net proceeds from our initial public
offering for general corporate purposes, capital expenditures and potential
acquisitions of complementary businesses, products and technologies. Pending
these uses, the net proceeds of the offering will be invested in interest
bearing, investment grade securities.


Item 3.  Default Upon Senior Securities.

None.

Items 4. Submission of Matters to a Vote of Security Holders.

None.

                                       -12-

<PAGE>

Item 5.  Other Information.

None.

Item 6.  Exhibits and Reports on Form 8-K.

         (a)    See Exhibit Index on Page 14.
         (b)    None.


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: November 13, 2001                  By: /s/ Charles G. Alvarez
      --------------------------             --------------------------
                                         Charles G. Alvarez
                                         Vice President of Finance and
                                         Administration and Chief Financial
                                         Officer (Principal Accounting Officer)

                                       -13-

<PAGE>

                                  EXHIBIT INDEX

Number                     Description
------                     -----------

3.1*    Articles of Association, as amended.
3.2*    Amendment to the Articles of Association
3.3*    Form of Amended and Restated Articles of Association.
3.4*    Memorandum of Association, as amended.
4.1*    Form of Share Certificate.
4.2*    Warrant to Purchase up to an aggregate of 18,150 Series A Preferred
Shares, as adjusted.
4.3*    Warrant to Purchase up to an aggregate of 45,618 Series D Preferred
Shares.
4.4*    Warrant to Purchase up to an Aggregate of 19,551 Series D Preferred
Shares.
10.1*   Loan Modification Agreement dated as of December 30, 1999, by and
between Verisity Design, Inc. and Silicon Valley Bank.
10.2*   Amended and Restated Loan and Security Agreement by and between Silicon
Valley Bank and Verisity Design, Inc., dated as ofvDecember 31, 1998.
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*  Form of Sublease by and between Guy F. Atkinson Construction Corporation
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.
10.20*  Secured Promissory Note from Moshe Gavrielov to Verisity Design, Inc.
dated March 23, 1998.
10.21*  Form Software License Agreement.
10.22*  Form of Indemnification Agreement between Verisity Ltd. and its officers
and directors.

                                       -14-

<PAGE>

10.23* Share Restriction Agreement effective as of March 23, 1998 by and between
Verisity Ltd. and Moshe Gavrielov.
10.24* Stock Option Agreement effective as of December 1, 1999 by and between
Verisity Ltd. and Moshe Gavrielov.
10.25* Verisity Ltd. 2000 U.S. Share Incentive Plan, form of Option Agreement
for 2000 U.S. Share Incentive Plan and form of
Option Agreement for outside directors under 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.
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.
21.1*  List of subsidiaries.


--------
* 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.

                                       -15-