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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended
March 31, 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)



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|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)



---



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 ̈No  x



As of April 30, 2003, there were 20,061,769 of registrants ordinary shares, par value NIS 0.01 per share, outstanding.



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##### Table of Contents

VERISITY LTD.



Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 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 |  | 8-12 
|                            
|                             |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 12-13
|                            
|                             |  | Item 4. |  | Controls and Procedures                                                               |  | 13   
|                            
|Part IIOther Information    |  |        
|                            
|                             |  | Item 1. |  | Legal Proceedings                                                                     |  | 13   
|                            
|                             |  | Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 13-14
|                            
|                             |  | Item 3. |  | Defaults Upon Senior Securities                                                       |  | 14   
|                            
|                             |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 14   
|                            
|                             |  | Item 5. |  | Other Information                                                                     |  | 14   
|                            
|                             |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 14   
|                            
|Signature                   
|                            
|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)



|                                                                                                             |  | March 31, 2003 |        |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | - | ----------------- | -
|                                                                                                             |  | Unaudited      |        |   |                   |  
|ASSETS                                                                                                       |  |                |        |   |                   |  
|                                                                                                            
|Current assets:                                                                                              |  |                |        |   |                   |  
|Cash and cash equivalents                                                                                    |  | $              | 81,608 |   |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $4 as of March 31, 2003
and December 31, 2002 |  |                | 5,677  |   |                   |  
|Prepaid expenses and other current assets                                                                    |  |                | 3,059  |   |                   |  
|                                                                                                             |  |                |        |   |                   |  
|Total current assets                                                                                         |  |                | 90,344 |   |                   |  
|                                                                                                            
|Property and equipment, net                                                                                  |  |                | 2,290  |   |                   |  
|Other assets                                                                                                 |  |                | 457    |   |                   |  
|                                                                                                             |  |                |        |   |                   |  
|Total assets                                                                                                 |  | $              | 93,091 |   |                   | $
|                                                                                                             |  |                |        |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                         |  |                |        |   |                   |  
|                                                                                                            
|Current liabilities:                                                                                         |  |                |        |   |                   |  
|Accounts payable                                                                                             |  | $              | 531    |   |                   | $
|Accrued compensation                                                                                         |  |                | 4,318  |   |                   |  
|Deferred revenues                                                                                            |  |                | 23,703 |   |                   |  
|Other current liabilities                                                                                    |  |                | 5,335  |   |                   |  
|                                                                                                             |  |                |        |   |                   |  
|Total current liabilities                                                                                    |  |                | 33,887 |   |                   |  
|                                                                                                            
|Long-term portion of deferred revenues                                                                       |  |                | 4,620  |   |                   |  
|Long-term portion of capital lease obligations                                                               |  |                |       |   |                   |  
|Other long-term liabilities                                                                                  |  |                | 425    |   |                   |  
|                                                                                                            
|Shareholders equity:                                                                                        |  |                |        |   |                   |  
|Ordinary shares and additional paid-in capital                                                               |  |                | 56,336 |   |                   |  
|Deferred compensation                                                                                        |  |                | (92    | ) |                   |  
|Accumulated deficit                                                                                          |  |                | (2,085 | ) |                   |  
|                                                                                                             |  |                |        |   |                   |  
|Total shareholders equity                                                                                   |  |                | 54,159 |   |                   |  
|                                                                                                             |  |                |        |   |                   |  
|Total liabilities and shareholders equity                                                                   |  | $              | 93,091 |   |                   | $
|                                                                                                             |  |                |        |   |                   |  

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 Ended March 31,
|----------------------------------------------- |  | ----------------------------
|                                                |  | 2003                        
|                                                |  | Unaudited                   
|Revenue:                                        |  |                             
|License                                         |  | $                           
|Maintenance                                     |  |                             
|Other services                                  |  |                             
|                                                |  |                             
|Total revenue                                   |  |                             
|Cost of revenue:                                |  |                             
|License                                         |  |                             
|Maintenance                                     |  |                             
|Other services(1)                               |  |                             
|                                                |  |                             
|Total cost of revenue                           |  |                             
|                                                |  |                             
|Gross profit                                    |  |                             
|                                                |  |                             
|Operating expenses:                             |  |                             
|Research and development                        |  |                             
|Sales and marketing                             |  |                             
|General and administrative                      |  |                             
|Non-cash charges related to equity issuances(1) |  |                             
|                                                |  |                             
|Total operating expenses                        |  |                             
|                                                |  |                             
|Operating income                                |  |                             
|Interest income                                 |  |                             
|Other income (expense), net                     |  |                             
|                                                |  |                             
|Net income before income taxes                  |  |                             
|Provision for income taxes                      |  |                             
|                                                |  |                             
|Net income                                      |  | $                           
|                                                |  |                             
|Basic earnings per share:                       |  |                             
|Basic net income per ordinary share             |  | $                           
|                                                |  |                             
|Number of shares used in per share calculation  |  |                             
|                                                |  |                             
|Diluted earnings per share:                     |  |                             
|Diluted net income per ordinary share           |  | $                           
|                                                |  |                             
|Number of shares used in per share calculation  |  |                             
|                                                |  |                             

---

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



|                                     |  | Three Months Ended March 31,
|------------------------------------ |  | ----------------------------
|                                     |  | 2003                        
|Cost of other services revenue       |  | $                           
|                                     |  |                             
|Research and development             |  | $                           
|Sales and marketing                  |  |                             
|General and administrative           |  |                             
|                                     |  |                             
|Total included in operating expenses |  | $                           
|                                     |  |                             



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)



|                                                                                  |  | Three Months Ended March 31, |       
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                  |  | 2003                         |       
|                                                                                  |  | Unaudited                    |       
|Cash flows from operating activities:                                             |  |                              |       
|Net income                                                                        |  | $                            | 1,877 
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                              |       
|Depreciation and amortization                                                     |  |                              | 234   
|Non-cash charges related to equity issuances                                      |  |                              | (302  
|Changes in operating assets and liabilities:                                      |  |                              |       
|Accounts receivable                                                               |  |                              | 6,286 
|Prepaid expenses and other assets                                                 |  |                              | (849  
|Accounts payable                                                                  |  |                              | (157  
|Other liabilities and accrued compensation                                        |  |                              | (437  
|Deferred revenues                                                                 |  |                              | (4,438
|                                                                                  |  |                              |       
|Net cash provided by operating activities                                         |  |                              | 2,214 
|                                                                                 
|Cash flows from investing activities:                                             |  |                              |       
|Purchases of property and equipment                                               |  |                              | (247  
|Other assets                                                                      |  |                              | 1     
|                                                                                  |  |                              |       
|Net cash used in investing activities                                             |  |                              | (246  
|                                                                                 
|Cash flows from financing activities:                                             |  |                              |       
|Net proceeds from issuance of ordinary shares                                     |  |                              | 135   
|Proceeds from repayment of shareholders loan                                     |  |                              |      
|Payments under capital lease obligations                                          |  |                              | (4    
|                                                                                  |  |                              |       
|Net cash provided by financing activities                                         |  |                              | 131   
|                                                                                 
|Net increase in cash and cash equivalents                                         |  |                              | 2,099 
|Cash and cash equivalents at beginning of the period                              |  |                              | 79,509
|                                                                                  |  |                              |       
|Cash and cash equivalents at end of the period                                    |  | $                            | 81,608
|                                                                                  |  |                              |       



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 March 31, 2003.
The statements also show the Companys statements of operations and cash flows for the three month periods ended March 31, 2003 and 2002. These interim statements include all normal recurring adjustments which the Company believes are necessary
to fairly present our 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
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
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 Company bases 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 dilutive potential 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
table presents the calculation of unaudited basic and diluted net income per share (in thousands, except per share data):



|                                                                     |  | Three Months Ended March 31,
|-------------------------------------------------------------------- |  | ----------------------------
|                                                                     |  | 2003                        
|                                                                     |  | Unaudited                   
|Net income                                                           |  | $                           
|                                                                     |  |                             
|Shares used in computing basic net income per ordinary share         |  |                             
|Weighted-average number of ordinary shares under the treasury method |  |                             
|Weighted-average number of ordinary shares subject to repurchase     |  |                             
|                                                                     |  |                             
|Shares used in computing diluted net income per ordinary share       |  |                             
|                                                                     |  |                             
|Diluted net income per ordinary share                                |  | $                           
|                                                                     |  |                             



|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 March 31,
|---------------------------------------------- |  | ----------------------------
|                                               |  | 2003                        
|                                               |  | Unaudited                   
|Revenues from sales to unaffiliated customers: |  |                             
|United States                                  |  | $                           
|Israel                                         |  |                             
|Europe                                         |  |                             
|                                               |  |                             
|                                               |  | $                           
|                                               |  |                             



|                    |  | March 31, 2003 |       | December 31, 2002
|------------------- |  | -------------- | ----- | -----------------
|                    |  | Unaudited     
|Long lived assets : |  |                |       |                  
|United States       |  | $              | 1,057 |                  
|Israel              |  |                | 1,162 |                  
|Europe              |  |                | 71    |                  
|                    |  |                |       |                  
|                    |  | $              | 2,290 |                  
|                    |  |                |       |                  





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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.



In December
2002, the FASB issued Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FASB 148). FASB 148 amends FASB 123 Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FASB 148 amends the disclosure requirements of FASB 123 to require more prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of FASB 148 are effective for fiscal periods ending after
December 15, 2002. The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), Accounting for Stock Issued to Employees, to account for
employee stock options.



|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 123, Accounting for Stock-Based Compensation.



The Companys FASB 123 pro forma information is as follows:



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|                                                                                                    |  | Three Months EndedMarch 31,           |       
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------
|                                                                                                    |  | 2003                                  |       
|                                                                                                    |  | (in thousands, except per share data) |       
|Net income as reported                                                                              |  | $                                     | 1,877 
|Stock-based compensation expense included in reported net income, net of tax
effect                 |  |                                       | 43    
|Total stock based compensation expense determined under fair value based methods, net of
tax effect |  |                                       | (2,163
|                                                                                                    |  |                                       |       
|Pro forma net Income (loss)                                                                         |  | $                                     | (243  
|                                                                                                    |  |                                       |       
|Basic net income (loss) per share:                                                                  |  |                                       |       
|As reported                                                                                         |  | $                                     | 0.10  
|                                                                                                    |  |                                       |       
|Pro forma                                                                                           |  | $                                     | (0.01 
|                                                                                                    |  |                                       |       
|Diluted net income (loss) per share:                                                                |  |                                       |       
|As reported                                                                                         |  | $                                     | 0.09  
|                                                                                                    |  |                                       |       
|Pro forma                                                                                           |  | $                                     | (0.01 
|                                                                                                    |  |                                       |       



The fair value of all
options granted during the three months ended March 31, 2002 and 2003 were estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                                               |  | Three Months Ended March 31, |      
|---------------------------------------------- |  | ---------------------------- | -----
|                                               |  | 2003                         |      
|Volatility                                     |  |                              | 80   
|Weighted-average expected lives                |  |                              | 4.0  
|Expected dividend yields                       |  |                              |     
|Weighted-average risk-free interest rates      |  |                              | 2.50 
|Weighted-average fair value of options granted |  | $                            | 12.53



The measurement to fair
value of non-employee share options resulted in a negative expense of $80,000 in the three months ended March 31, 2003, due to the lower market price of the Companys shares at the end of the period and was recorded in the Sales and marketing
expenses. As a result the Company had a net negative share-based compensation of $34,000 in the three months ended March 31, 2003.



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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 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 filed with the Securities and Exchange Commission on March 21, 2003 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 continued through the first quarter of 2003 without perceptible relief. The result of this
prolonged uncertainty 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 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



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of 2002 and we cannot predict with any certainty if and when future revenue may increase. Please see the risk factor 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 30.9% of
our total revenue in the first quarter of 2003 and 35.8% of our total revenue in the first quarter of 2002. We believe that international markets 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 Months Ended March 31, 2003 Compared to Three Months Ended March 31, 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 annual support and product updates. Other services revenue consists of training and consulting fees. Our total revenue was $11.7 million for the three months ended
March 31, 2003 and $11.5 million for the comparable quarter of 2002, representing an increase of $0.2 million, or 2.0%.



Licenses revenue. Our license revenue was $7.0 million for the three months ended March 31, 2003, and $6.7 million for comparable
quarter of 2002, representing an increase of $0.3 million, or 4.2%. This increase was attributable to an increase in the sale of time-based licenses of $0.5 million to new and existing customers partially offset by a decrease of $0.2 million in the
sale of perpetual licenses. This reflects a continued movement by our customers toward election of time-based licenses over perpetual licenses. We believe the primary reason for this trend is that it provides customers the most affordable means for
licensing our products.



Maintenance
revenue. Our maintenance revenue was $4.5 million for the three months ended March 31, 2003, and $4.2 million for the comparable quarter of 2002, representing an increase of $0.3



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million, or 6.9%. This increase was primarily attributable to recognition of maintenance revenue in connection with the sale of new licenses.



Other services revenue. Our other
services revenue was $227,000 for the three months ended March 31, 2003, and $580,000 for the comparable quarter of 2002, representing a decrease of $353,000, or 60.9%. This decrease was primarily attributable to fewer training services being
requested by our customers, which we believe resulted from reduced travel for security and budgetary purposes.



Cost of Revenue



Cost of revenue consists of costs associated with generating license, maintenance and other services revenue. Cost of revenue was $698,000 for the three months ended March 31, 2003 and $768,000 for the
comparable quarter of 2002, representing a decrease of $70,000, or 9.1%. Cost of revenue as a percentage of total revenue was 6.0% for the three months ended March 31, 2003 and 6.7% for the comparable quarter of 2002.



Cost of license revenue. Cost of license revenue was
$35,000 for the three months ended March 31, 2003 and $33,000 for the comparable quarter of 2002, representing an increase of $2,000, or 6.1%.



Cost of maintenance revenue. Cost of maintenance revenue was $545,000 for the three months ended March 31, 2003 and $501,000 for
the comparable quarter of 2002, representing an increase of $44,000 or 8.8%. 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 11.9% for the three months ended March 31, 2002, to 12.1% for the comparable quarter 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 $118,000 for the three months ended March
31, 2003 and $234,000 for the comparable quarter of 2002, representing a decrease of $116,000, or 49.6%. This decrease is primarily attributable to the decrease in externally contracted training services. As a percent of other services revenue, the
cost of other services revenue increased from 40.3% for the three months ended March 31, 2002, to 52.0% for the comparable quarter of 2003.



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 $2.6 million for the three months
ended March 31, 2003 and $2.3 million for the comparable quarter of 2002, representing an increase of $0.3 million, or 13.6%. 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 22.2% in the three months ended March 31, 2003 and 19.9% in the comparable quarter 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 for sales and marketing personnel and promotional and advertising costs. Sales and marketing



10



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##### Table of Contents

expenses were $5.2 million for the three months ended March 31, 2003 and $4.7 million for the comparable quarter of 2002, representing an
increase of $0.5 million, or 9.6%. This increase is primarily attributable to the cost associated with 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 44.2% for the three months ended March 31, 2003, and 41.1% for the comparable period of 2002. We expect sales and marketing expenses to increase as we expand our geographic reach and hire additional personnel.



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 were $1.4 million for the three months ended March 31, 2003 and $1.2 million for the comparable quarter of 2002, representing an increase of $0.2 million, or 14.0%. This increase is attributable approximately equally to increased personnel
related expenses, outside professional service fees and insurance premiums. General and administrative expenses as a percentage of total revenue were 11.9% for the three months ended March 31, 2003, and 10.6% for the comparable quarter in 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 and insurance.



Non-cash
charges related to equity issuance. 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. The measurement to fair value of non-employee share options resulted in a negative expense of
$80,000 in the three months ended March 31, 2003, due to the lower market price of our shares at the end of the period and was recorded in the Sales and marketing expenses. As a result we had a negative net share-based compensation of $34,000 in the
three months ended March 31, 2003, and $149,000 as a share-based compensation expense for the comparable quarter of 2002. In addition, $1,000 was reported in cost of other services for the three months ended March 31, 2003, and $2,000 for the
comparable quarter of 2002. The deferred share-based compensation is amortized over the vesting schedule, generally four years.



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 $208,000 for the three months ended March 31, 2002, to $167,000
for the comparable quarter of 2003. This decrease was primarily due to lower interest rates received on cash and cash equivalent balances. As a percent of total revenue, interest income, interest expenses and other income, net decreased from 1.8%
for the three months ended March 31, 2002 to 1.4% for the comparable quarter of 2003.



Income taxes



We recorded provision for income taxes of $162,000 in the three months ended March 31, 2003, and $305,000 for the comparable quarter of 2002. The provisions for income taxes in these related periods are primarily due to income taxes
in jurisdictions other than Israel and various withholding taxes. Our 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.



11



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##### Table of Contents



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 March 31, 2003, we had cash and cash equivalents of $81.6 million, an accumulated deficit of $2.1 million and working capital of $56.5 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 $2.2 million for the three months ended March 31, 2003, and $2.5 million for the comparable
quarter of 2002. Cash provided by operating activities for each period resulted primarily from the net income and to a much lesser extent, $0.3 million in each period, to net favorable changes in other balance sheet accounts.



Net cash used in investing activities was $246,000 in the
three months ended March 31, 2003, and $254,000 for the comparable quarter of 2002. Investing activities in those periods consisted mainly of capital equipment expenditures.



Net cash provided by financing activities was $131,000 for the three months ended March 31, 2003, resulting
primarily from exercise of share options by employees. Net cash provided by financing activities was $543,000 for the three months ended March 31, 2002, resulting primarily from exercise of share options by employees and repayment of a
shareholders loan.



We believe that 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.



12



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##### Table of Contents



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 March 31, 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 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 the Exchange 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 March 31, 2003, we issued an additional 44,021 ordinary shares as a result of the exercise of share option grants. The aggregate net consideration received by the Company for the issuance of the
ordinary share was $135,000. Certain of the ordinary shares were issued pursuant to compensatory plans registered by registration statements 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.



13



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##### Table of Contents



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.



In April 2001, the underwriters of the 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 the ordinary shares. The net proceeds received after deducting underwriting discounts were approximately
$3.3 million.



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 have been and will
continue to be invested in interest bearing, investment grade securities.



Item 3.
Default Upon Senior Securities.



None.



Item 4.
Matters Submitted to a Vote of Securities Holders.



None.



Item 5.
Other Information.



None.



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



| | (a) |  | See Exhibit Index on Page 18.
| | --- |  | -----------------------------



| | (b) |  | On April 21, 2003, we filed a current report on Form 8-K to disclose the results of operations and financial condition for the quarter ended March 31, 2003.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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: May 13, 2003 |  | By:          
|                   |  |              



15



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##### Table of Contents

Certification under Section 302(a) of the Sarbanes-Oxley Act of 2002



I, Moshe Gavrielov, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Verisity Ltd.;
| | -- |  | --------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant, and we have:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 13, 2003



/s/    Moshe
GavrielovChief Executive Officer




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I, Charles Alvarez, certify
that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Verisity Ltd.,;
| | -- |  | ---------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant, and we have:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 13, 2003



/s/    Charles
AlvarezVice President of Finance and Administration and Chief Financial 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.                                                                                                                                                              
|       
|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.                                                                       



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|     
|-----
|10.29
|     
|10.30
|     
|10.31
|     
|10.32
|     
|10.33
|     
|10.34
|     
|10.35
|     
|10.36
|     
|10.37
|     
|10.38
|     
|10.39
|     
|10.40
|     
|10.41
|     
|10.42
|     
|10.43
|     
|10.44
|     
|10.45
|     
|10.46
|     
|99.2 
|     
|99.3 

---

|* |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



19