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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549





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FORM 10-Q





xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





For the quarterly period ended June 30, 2002 or





 ̈ Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934


for the transition period from             
to





Commission File Number: 000-32417





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VERISITY LTD.


(Exact name of registrant as specified in its charter)





Israel

Not Applicable(State or other Jurisdiction of

(I.R.S. EmployerIncorporation 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 June 30, 2002, there were 19,402,934 of registrants ordinary shares, par value NIS 0.01 per share, outstanding.





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VERISITY LTD.





Quarterly Report on Form 10-Q


For the Quarter Ended June 30, 2002





Index





PagePart I

Financial InformationItem 1.

Condensed Consolidated Financial Statements:Balance Sheets

1Statements of Operations

2Statements of Cash Flows

3Notes to condensed consolidated financial statements

4-6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

6-11Item 3.

Quantitative and Qualitative Disclosures About Market Risk

11-12Part II

Other InformationItem 1.

Legal Proceedings

12Item 2.

Changes in Securities and Use of Proceeds

12Item 3.

Defaults Upon Senior Securities

13Item 4.

Submission of Matters to a Vote of Security Holders

13-14Item 5.

Other Information

15Item 6.

Exhibits and Reports on Form 8-K

15Signature







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PART IFINANCIAL INFORMATION





Item 1.    Condensed Consolidated Financial Statements





VERISITY LTD.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





June 30, 2002


December 31, 2001UnauditedASSETSCurrent assets:Cash and cash equivalents

$
64,577


$
58,488Accounts receivable


11,940



8,498Prepaid expenses and other current assets


2,972



2,511Total current assets


79,489



69,497Property and equipment, net


2,163



2,112Other assets


215



229Total assets

$
81,867


$
71,838LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
698


$
468Accrued compensation


3,720



4,574Deferred revenues


26,298



26,694Other current liabilities


3,739



2,991Total current liabilities


34,455



34,727Accrued severance pay, net


152



184Long-term portion of deferred revenues


5,387



2,397Long-term portion of capital lease obligations


8



13Total long-term liabilities


5,547



2,594Shareholders' equity:Ordinary shares and additional paid-in capital


53,986



52,501Deferred compensation


(274
)


(470
)Shareholder's loan






(202
)Accumulated deficit


(11,847
)


(17,312
)Total shareholders' equity


41,865



34,517Total liabilities and shareholders' equity

$
81,867


$
71,838


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


Six Months EndedJune 30,


June 30,2002

2001


2002

2001Unaudited


UnauditedRevenue:License

$
8,005

$
5,554


$
14,690

$
11,393Maintenance


4,168


2,883



8,382


4,947Other services


318


588



898


1,231Total revenue


12,491


9,025



23,970


17,571Cost of revenue:License


40


186



73


378Maintenance


500


447



1,001


814Other services (1)


135


305



369


698Total cost of revenue


675


938



1,443


1,890Gross profit


11,816


8,087



22,527


15,681Operating expenses:Research and development


2,145


2,051



4,433


4,176Sales and marketing


4,689


3,883



9,408


7,846General and administrative


1,462


1,319



2,681


2,355Non-cash charges related to equity issuances (1)


60


216



209


382Total operating expenses


8,356


7,469



16,731


14,759Operating income


3,460


618



5,796


922Interest income


206


487



400


721Interest expense and other income





(21
)


14


Net income before income taxes


3,666


1,084



6,210


1,643Provision for income taxes


440


56



745


85Net income

$
3,226

$
1,028


$
5,465

$
1,558Basic earnings per share:Basic net income per ordinary share

$
0.17

$
0.06


$
0.29

$
0.12Shares used in per share calculation


18,825


17,259



18,702


12,836Diluted earnings per share:Diluted net income per ordinary share

$
0.15

$
0.05


$
0.26

$
0.08Shares used in per share calculation


21,253


20,703



21,236


18,598


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




Three Months Ended

Six Months EndedJune 30,

June 30,2002


2001

2002

2001Cost of other services revenue

$
2


$
4

$
4

$
9Research and development, net

$
18


$
58

$
40

$
101Sales and marketing


(3
)


97


72


166General and administrative


45



61


97


115Total included in operating expenses

$
60


$
216

$
209

$
382





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







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VERISITY LTD.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Six Months Ended June 30,2002


2001UnauditedCash flows from operating activities:Net income

$
5,465


$
1,558Adjustments to reconcile net income to net cash provided by operating activities :Depreciation


427



416Non-cash charges related to equity issuances


260



545Changes in operating assets and liabilities:Accounts receivable


(3,442
)


1,954Prepaid expenses and other current assets


(461
)


703Accounts payable


230



(273
)Other current liabilities and accrued compensation


(106
)


(549
)Accrued severance pay, net


(32
)


13Deferred revenue


2,594



5,020Net cash provided by operating activities


4,935



9,387Cash flows used in investing activities:Purchases of property and equipment


(478
)


(834
)Purchases of short-term investments






(883
)Other assets


14



(53
)Net cash used in investing activities


(464
)


(1,770
)Cash flows from financing activities:Net proceeds from issuance of ordinary shares


1,421



22,703Proceeds from repayment of shareholder's loan


202Repayment of bank loan






(265
)Payments under capital lease obligations


(5
)


(5
)Net cash provided by financing activities


1,618



22,433Net increase in cash and cash equivalents


6,089



30,050Cash and cash equivalents at beginning of the period


58,488



18,388Cash and cash equivalents at end of the period

$
64,577


$
48,438





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 position as of June 30, 2002. The statements also show the Companys statements of operations for the three and six month
periods ended June 30, 2002 and 2001, and the statements of cash flow for the six months period ended June 30, 2002 and 2001. These interim statements include all normal recurring adjustments, which the Company believes are necessary to fairly
present the Companys financial position. All material intercompany balances have been eliminated. Because all of the disclosures required by accounting principles generally accepted in the United States are not included, these interim
statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001, included in the Companys annual report on Form 10-K filed with the Securities and Exchange Commission on March
26, 2002. The December 31, 2001 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 diluted net income per
share (in thousands, except per share data):





Three Months Ended

Six Months EndedJune 30,

June 30,2002

2001

2002

2001Unaudited

UnauditedNet income

$
3,226

$
1,028

$
5,465

$
1,558Shares used in computing basic net income per ordinary share


18,825


17,259


18,702


12,836Effect of conversion of preferred shares prior to the IPO











2,671Weighted average number of ordinary shares under the treasury method


2,428


3,304


2,527


2,929Weighted average number of ordinary shares subject to repurchase





140


7


162Shares used in computing diluted net income per ordinary share


21,253


20,703


21,236


18,598Diluted net income per ordinary share

$
0.15

$
0.05

$
0.26

$
0.08





3.    Segment, Customers and Geographic Information





The Company operates in one industry segment, the development, marketing and support of software products,
which 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, 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:





Three Months Ended

Six Months EndedJune 30,

June 30,2002

2001

2002

2001Unaudited

UnauditedRevenues from sales to unaffiliated customers:United States

$
9,087

$
7,754

$
17,209

$
14,731Israel


873


540


1,991


950Europe


2,531


731


4,770


1,890$
12,491

$
9,025

$
23,970

$
17,571June 30,

December 31,2002

2001UnauditedLong lived assets:United States

$
1,126

$
1,075Israel


966


971Europe


71


66$
2,163

$
2,112




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4.    Recently Issued Accounting Standards





In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). 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. The Company adopted SFAS No.
142 in the quarter ended March 31, 2002. The adoption of SFAS No. 142 did not have a material effect on the Companys financial position, operating results or cash flows.





In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS 144).
This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
 and provides guidance on classification and accounting for such assets when held for sale or abandonment. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 in the quarter ended March
31, 2002. The adoption of SFAS No. 144 did not have a material effect on the Companys financial position, operating results or cash flows.





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




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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, 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 26, 2002 and 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 (ICs) that are essential to a broad and growing range of applications within the electronics industry. Our products automate
the process of detecting flaws in these 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. In the second quarter of 2002, we released version 4.0 of Specman
Elite, a further enhanced version of 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.





Three and six months ended June 30, 2002 compared to three and six months ended June 30, 2001





Total Revenue





Our revenue consists of
license revenue, maintenance revenue and other services revenue. License revenue consists of fees paid by our customers to license our software products. Maintenance revenue consists of fees for technical support and product updates. Other services
revenue consists of training and consulting fees. Our total revenue was $12.5 million for the three months ended June 30, 2002, and $9.0 million for the comparable quarter of 2001, representing an increase of $3.5 million, or 38.4%, and was




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$24.0 million for the six months ended June 30, 2002 and $17.6 million for the comparable period of 2001, representing an increase of $6.4
million, or 36.4%. Approximately 57% of the increase in each period was attributable to additional sales to our existing customers with the balance coming from new customers.





License revenue.    Our license revenue was $8.0 million for the three months ended June 30, 2002, and $5.6 million for the comparable quarter of
2001, representing an increase of $2.4 million, or 44.1%, and was $14.7 million for the six months ended June 30, 2002, and $11.4 million for the comparable period of 2001, representing an increase of $3.3 million, or 28.9%. Approximately 55% of
these increases were attributable to additional sales to our existing customers, with the balance of the increase representing sales to new customers. These increases resulted from the increased sales of time-based licenses partially offset by
slightly lower sales of perpetual licenses.





Maintenance revenue.    Our maintenance
revenue was $4.2 million for the three months ended June 30, 2002, and $2.9 million for the comparable quarter of 2001, representing an increase of $1.3 million, or 44.6%, and was $8.4 million for the six months ended June 30, 2002, and $4.9 million
for the comparable period of 2001, representing an increase of $3.5 million, or 69.4%. These increases were primarily attributable to the recognition of revenue from maintenance services that we sold in connection with the sale of new licenses.





Other services revenue.    Our other services revenue was $318,000 for the three
months ended June 30, 2002, and $588,000 for the comparable quarter of 2001, representing a decrease of $270,000, or 45.9%, and was $898,000 for the six months ended June 30, 2002, and $1.2 million for the comparable period of 2001, representing a
decrease of $0.3 million or 27.1%. These decreases were 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 $675,000 for the three months ended June 30, 2002, and $938,000 for the comparable quarter of 2001,
representing a decrease of $263,000, or 28.0%, and was $1.4 million for the six months ended June 30, 2002, and $1.9 million for the comparable period of 2001, representing a decrease of $0.5 million or 23.7%. Cost of revenue as a percentage of
total revenue was 5.4% for the three months ended June 30, 2002, and 10.4% for the comparable quarter of 2001, and was 6.0% for the six months ended June 30, 2002, and 10.8% for the comparable period of 2001.





Cost of license revenue.    Cost of license revenue was $40,000 for the three months ended June 30, 2002, and
$186,000 for the comparable quarter of 2001, representing a decrease of $146,000, or 78.5%, and was $73,000 for the six months ended June 30, 2002, and $378,000 for the comparable period of 2001, representing a decrease of $305,000 or 80.7%. As a
percent of license revenue, the cost of license revenue decreased from 3.3% for the three months ended June 30, 2001, to 0.5% for the comparable quarter of 2002, and from 3.3% for the six months ended June 30, 2001, to 0.5% for the comparable period
of 2002. These decreases were primarily due to the fact that in the three and six month periods ended June 30, 2001, we accrued for royalties due to the Office of Chief Scientist in Israel (OCS), for which all obligations were fully repaid during
the fourth quarter of 2001, resulting in no royalties being owed to the OCS during the first and second quarters of 2002.





Cost of maintenance revenue.    Cost of maintenance revenue was $500,000 for the three months ended June 30, 2002, and $447,000 for the comparable quarter of 2001, representing an increase of $53,000, or
11.9%, and was $1.0 million for the six months ended June 30, 2002, and $814,000 for the comparable period of 2001, representing an increase of $0.2 million, or 23.0%. These increases were primarily attributable to additional personnel to support
our growing maintenance services. As a percent of maintenance revenue, the cost of maintenance revenue decreased from 15.5% for the three months ended June 30, 2001, to 12.0% for the comparable quarter of 2002, and from 16.5% for the six months
ended June 30, 2001, to 11.9% for the comparable period of 2002. These decreases were a result of an increased




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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 $135,000 for the three months ended June 30, 2002, and $305,000 for the comparable quarter of 2001, representing
a decrease of $170,000, or 55.7%, and was $369,000 for the six months ended June 30, 2002, and $698,000 for the comparable period of 2001, representing a decrease of $329,000 or 47.1%. These decreases were primarily attributable to the decrease in
externally contracted training services. As a percent of other services revenue, the cost of other services revenue decreased from 51.9% for the three months ended June 30, 2001, to 42.5% for the comparable quarter of 2002, and from 56.7% for the
six months ended June 30, 2001, to 41.1% for the comparable period of 2002.





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 remained relatively
unchanged and were $2.1 million for the three months ended June 30, 2002, and $2.1 million for the comparable quarter of 2001, and were $4.4 million for the six months ended June 30, 2002, and $4.2 million for the comparable period of 2001,
representing an increase of $0.2 million, or 6.1%. The increases in these expenses were primarily related to the increase in the number of software developers employed in the continuing enhancement of our software products and partially offset by a
reduction due to currency exchange as a somewhat weaker New Israeli Shekel affected the costs in our Israeli operations. Research and development expenses as a percentage of total revenues were 17.2% for the three months ended June 30, 2002, and
22.7% for the comparable quarter of 2001, and were 18.5% for the six months ended June 30, 2002, and 23.8% for the comparable period of 2001. We believe that significant investment in research and development has been and will continue to be
required to develop new products and enhance existing products to allow us to further penetrate our target markets. We anticipate that the absolute dollar amount of research and development expenses will increase in the future.





Sales and marketing.    Sales and marketing expenses consist primarily of salaries, commissions,
travel and promotional and advertising costs. Sales and marketing expenses were $4.7 million for the three months ended June 30, 2002, and $3.9 million for the comparable quarter of 2001, representing an increase of $0.8 million, or 20.8%, and were
$9.4 million for the six months ended June 30, 2002, and $7.8 million for the comparable period of 2001, representing an increase of $1.6 million, or 19.9%. These increases were primarily attributable to the hiring of additional sales and marketing
personnel, including related travel and office expenses, for an increase of approximately $0.5 million and $1.1 million in the three and six months periods, respectively. The balances of the increases were primarily due to higher commission expenses
resulting from higher revenue levels. Sales and marketing expenses as a percentage of total revenues were 37.5% for the three months ended June 30, 2002, and 43.0% for the comparable period of 2001, and were 39.2% for the six months ended June 30,
2002, and 44.7% for the comparable period of 2001. We expect sales and marketing expenses to increase as we expand our geographic reach, hire additional personnel and expand our strategic programs.





General and administrative.    General and administrative expenses consist primarily of salaries and other
personnel-related expenses for our administrative, legal, human resources, investor relations, and finance personnel, and expenses for facilities, insurance, and professional services fees. General and administrative expenses were $1.5 million for
the three months ended June 30, 2002, and $1.3 million for the comparable quarter of 2001, representing an increase of $0.2 million, or 10.8%, and were $2.7 million for the six months ended June 30, 2002, and $2.4 million for the comparable period
of 2001, representing an increase




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of $0.3 million, or 13.8%. These increases were primarily attributable to the increased personnel in our finance, legal and investor
relations functions and an increase in insurance expenses. General and administrative expenses as a percentage of total revenue were 11.7% for the three months ended June 30, 2002, and 14.6% for the comparable quarter in 2001, and were 11.2%
for the six months ended June 30, 2002, and 13.4% for the comparable period of 2001. 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 issuances.    Non-cash charges related to equity issuances reflect the amortization of the deferred share-based compensation, representing the difference between the fair
value of the ordinary shares for financial reporting purposes and the exercise price of the underlying options at the date of grant, as well as the measurement of the fair value of the non-employee share options. Our share-based compensation
expenses, reported in operating expenses, were $60,000 for the three months ended June 30, 2002, and $216,000 for the comparable quarter of 2001, and were $209,000 for the six months ended June 30, 2002, and $382,000 for the comparable period of
2001. In addition, $2,000 was reported in cost of other services for the three months ended June 30, 2002, and $4,000 for the six months ended June 30, 2002. The deferred share-based compensation is amortized over the vesting schedule of the
underlying options, generally four years.





Interest and other income, net





Interest and other income, net consists of interest income, net of interest expense and other miscellaneous expenses or income. Our
interest and other income, net decreased from $466,000 for the three months ended June 30, 2001, to $206,000 for the comparable quarter of 2002, and from $721,000 for the six months ended June 30, 2001, to $414,000 for the comparable period of 2002.
These decreases were primarily due to lower interest rates received on cash and cash equivalent balances. As a percent of total revenue, interest and other income, net decreased from 5.2% for the three months ended June 30, 2001, to 1.6% for the
comparable quarter of 2002, and from 4.1% for the six months ended June 30, 2001, to 1.7% for the comparable period of 2002.





Income taxes





We recorded provisions for income taxes of $440,000 in the three
months ended June 30, 2002, and $56,000 for the comparable quarter of 2001, and $745,000 in the six months ended June 30, 2002, and $85,000 for the comparable period of 2002. The provisions for income taxes in the three and six month periods ended
June 30, 2002 relate primarily to U.S. alternative minimum taxes related to the usage of net operating loss carryforwards.





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





Liquidity And Capital
Resources





Since our inception, we have financed our operations primarily through the private sale of
convertible preferred shares and the public offering of ordinary shares. We have also financed our operations through the sale of ordinary shares, pursuant to our equity incentive plans, equipment financing




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and cash generated from the sale of our products and services. As of June 30, 2002, we had cash and cash equivalents of $64.6 million, an
accumulated deficit of $11.8 million and working capital of $45.0 million.





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





Net cash provided by operating activities was $4.9 million for the six months ended June 30, 2002, and $9.4 million for the comparable period of 2001. Cash provided by operating activities for each
period resulted primarily from the net income and an increase in deferred revenue in those periods, and to a lesser extent, an increase in accounts receivable in the 2002 period and decrease in accounts receivable in the 2001 period.





Net cash used in investing activities was $464,000 for the six months ended June 30, 2002, and $1.8 million for the comparable
period of 2001. Investing activities in the six months ended June 30, 2002, consisted mostly of capital expenditures. Investing activities in the six months ended June 30, 2001, consisted mainly of $0.8 million capital expenditures and $0.8 million
purchases of short-term investments.





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





Net cash provided by financing activities was $22.4 million for the six months ended June 30, 2001, resulting primarily from our initial public offering, partially offset by the repayment in full of
our bank term loan.





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.    
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.





Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents. We maintain a strict
investment policy, which ensures the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our cash and cash equivalents as




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of June 30, 2002, consists primarily of short-term U.S. government securities, demand deposits and money market funds held by institutions in
the United States. Due to the nature of our cash and cash equivalents 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;
| | - |  | -------------------------------------------------------------




| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II.    OTHER INFORMATION





Item 1.    
Legal Proceeding





None.





Item 2.    
Changes In Securities and Use of Proceeds





During the three months ended June 30, 2002,
we issued an additional 196,318 ordinary shares as a result of the exercise of share option grants and the purchase of ordinary shares pursuant to our equity incentives plans. The aggregate net consideration received by the Company for the issuance
of the ordinary shares was $1.1 million. Certain of the ordinary shares were issued pursuant to compensatory plans registered by registration statements, filed with the SEC, on Form S-8. Other ordinary shares were issued pursuant to compensatory
plans of the Company that are compliant with Rule 701 promulgated under the Securities Act and in reliance on the exemption from the registration requirements of the Securities Act provided by such rule.





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, share purchases pursuant to equity incentives plans and cash generated from operation activities for general corporate purposes, capital expenditures and potential acquisitions of
complementary businesses, products and technologies. Pending these uses, theses cash balances have been and will continue to be invested in interest bearing, investment grade securities.




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Item 3.    
Default Upon Senior Securities.





None.





Item 4.    
Submission of Matters To A Vote Of Security Holders.





The 2002 Annual General Meeting
of Shareholders of Verisity Ltd. was held at our registered office located at 8-10 HaMelacha Street, Rosh HaAyin, Israel, on June 4, 2002, at 10:30 a.m. Israeli time to conduct the business described in our proxy statement. The
Proxy Statement was filed with the United States Securities and Exchange Commission on April 29, 2002. This was a regular annual meeting. The record date for determining those shareholders who were entitled to notice of, and to attend
and vote at, the meeting and at any adjournment thereof was April 29, 2002.





The proposals voted on at the
meeting, each of which were approved, are summarized below and are more fully described in the Proxy Statement. A table showing the votes for, against, and abstaining for each proposal follows this list. There were no broker non-votes on any
proposal. With respect to the election of directors, shareholders were permitted to vote for the nominee or to withhold their vote for the nominee. Shareholders could vote for, against, or abstain from voting for each of the other proposals. Votes
were cast representing 9,224,694 shares out of 18,094,744 outstanding shares. This represents 51.0% participation. The Shareholders approved the following actions:





1.    The election of Pierre Lamond as our Class I director to hold office for a term that expires in 2005 at the third Annual General
Meeting that follows the 2002 Annual General Meeting and until his successor shall be elected and qualified;





2.    The election of Michael McNamara as our Class I director to hold office for a term that expires in 2005 at the third Annual General Meeting that follows the 2002 Annual General Meeting and until his
successor shall be elected and qualified;





3.    The grant of share options
for the right to purchase ordinary shares under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the amount of 100,000 shares to Moshe Gavrielov, our Director and Chief Executive Officer, with an exercise price of $16.15, the fair market value of
our ordinary shares as of the close of business on the date of the 2002 Annual General Meeting;





4.    The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 Israeli Share Option Plan in the amount of 100,000 shares to Yoav Hollander, our Director and Chief
Technology Officer, with an exercise price of $16.15, the fair market value of our ordinary shares as of the close of business on the date of the 2002 Annual General Meeting;





5.    The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the
amount of 30,000 shares to Michael McNamara, our Director and Senior Vice President of Technology, with an exercise price of $16.15, the fair market value of our ordinary shares as of the close of business on the date of the 2002 Annual General
Meeting;





6.    The salary of Moshe Gavrielov, our Director and Chief
Executive Officer;





7.    The bonus of Moshe Gavrielov, our Director and Chief
Executive Officer;





8.    The salary of Yoav Hollander, our Director and Chief
Technology Officer;




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9. The bonus of Yoav Hollander, our Director and Chief Technology
Officer;





10. The salary of Michael McNamara, our Director and Senior Vice President of Technology;





11. The bonus of Michael McNamara, our Director and Senior Vice President of Technology;





12. Approve an increase in the number of ordinary shares available for issuance under our 2000 U.S. Share Incentive Plan by 950,000 plus
shares that become available for issuance under our prior similar plans;





13. Amendment of our Articles of
Association to (a) require approval of at least two-thirds of our outstanding shares for any change to the method of removal of any of our directors, as set forth in the Articles of Association, (b) permit the Board of Directors to appoint any
person to serve as Chairman of a shareholders meeting, instead of the Chairman of the Board personally, and (c) simplify and clarify our practices relating to proxy voting.





14. To approve the selection of Ernst & Young LLP as our independent auditors, with Messrs. Kost Forer & Gabbay, a member of Ernst & Young International, as our
Israeli statutory independent auditors for the fiscal year ending December 31, 2002.





TABLE OF VOTES CAST





Proposition

Votes for

Votes withhold

Votes against

Votes abstained1.

7,795,099

1,429,5652.

7,795,099

1,429,5653.

7,794,999



1,429,6954.

7,794,999



1,429,6955.

7,794,999



1,429,6956.

7,794,999



1,429,6957.

7,794,999



1,429,6958.

7,794,999



1,429,6959.

7,794,999



1,429,69510.

7,794,999



1,429,69511.

7,794,999



1,429,69512.

6,748,099



2,476,59513.

6,748,099



2,476,59514.

7,794,774



1,429,920




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Item 5.    Other Information.





None.





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





| | (a) |  | See Exhibit Index on Page 17.
| | --- |  | -----------------------------

| | (b) |  | None.
| | --- |  | -----



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SIGNATURES





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








VERISITY LTD.


(Registrant)





Date: August 10, 2002





/s/    Charles G. AlvarezCharles G. Alvarez Vice
President of Finance and Administration and Chief Financial Officer (Principal Accounting Officer)




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##### Table of Contents




Number

Description3.1*

Articles of Association, as amended.3.2*

Amendment to the Articles of Association3.3*

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.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 of December 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**

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.10.20*

Secured Promissory Note from Moshe Gavrielov to Verisity Design, Inc. dated March 23, 1998.10.21*

Form Software License Agreement.




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##### Table of Contents

Number

Description10.23*

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

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.10.29*

1997 Israel Share and Stock Option Incentive Plan.10.30*

1996 U.S. Stock Option Plan, as amended October 1999, form of Option Agreement for 1996 U.S. Stock Option Plan and form of Amended Option
Agreement.10.31*

Verisity Ltd. 2000 Employee Share Purchase Plan.10.32*

Amendment to Amended and Restated Investor Rights Agreement dated as of July 21, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe
Gavrielov and certain investors.10.33*

Amended and Restated Investors Rights Agreement dated as of February 26, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe
Gavrielov and certain investors.10.34*

Technology Exchange Agreement, Addendum to Software License and Volume Purchase Agreement effective as of January 1, 2000 by and between LSI Logic
Corporation and Verisity Design, Inc.10.35*

Software License and Volume Purchase Agreement effective as of December 11, 1998 by and between Verisity Design, Inc. and LSI Logic
Corporation.10.36*

Software License Agreement by and between Intel Corporation and Verisity Design, Inc., effective as of January 18, 1999.10.37*

Amendment No. 1 to Software and Related Services Agreement, effective as of May 5, 2000 and Intel Corporation Purchase Agreement, Software and Related
Services, by and between Intel Corporation and Verisity Design, Inc., effective as of June 21, 1999.10.38*

Verisity Ltd. 2000 Israeli Share Option Plan and form of Option Agreement for 2000 Israeli Share Option Plan.10.39*

Verisity Ltd. 2000 Directed Share Plan.10.40*

International Representative Agreement between Verisity Design, EURL and Integrated Systems Scandinavia EDA AB, effective as of June 15, 2000.10.41*

First Amendment to Verisity Ltd. 1999 Israeli Share Option Plan.10.42*

First Amendment to Verisity Ltd. 2000 Employee Share Purchase Plan.10.43**

Sublease Agreement dated as of February 20, 2002, between Lakewood Property Trust, I/O of Austin Inc. and Verisity Design, Inc.21.1*

List of subsidiaries.99.2

Certification pursuant to 18.U.S.C. Section 1350.99.3

Certification pursuant to 18.U.S.C. Section 1350.


---

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



18