Verisity Announces Record Revenue of $15.5 Million for Third Quarter Fiscal 2004

• Sequential revenue increase of 13%
• Generated over $3 Million in Cash from Operations

MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Oct. 21, 2004 -- Verisity Ltd. (Nasdaq:VRST), the leading supplier of Verification Process Automation (VPA) solutions, today announced financial results for the third fiscal quarter ended September 30, 2004. Revenue for the quarter was $15.5 million, a 29% increase from revenue of $12.0 million for the quarter ended September 30, 2003, and a 13% increase from revenue of $13.7 million for the quarter ended June 30, 2004.

The Company's net loss under generally accepted accounting principles (GAAP) for the quarter ended September 30, 2004 was $3.3 million, or ($0.14) per diluted share, compared to net income of $2.3 million, or $0.11 per diluted share, for the quarter ended September 30, 2003 and net loss of $2.5 million, or ($0.11) per diluted share, for the quarter ended June 30, 2004.

Non-GAAP net income for the quarter ended September 30, 2004 was $146,000, or $0.01 per diluted share, compared to non-GAAP net income of $2.4 million, or $0.11 per diluted share, for the quarter ended September 30, 2003 and non-GAAP net loss of $0.6 million, or ($0.02) per diluted share, for the quarter ended June 30, 2004.

Revenue for the nine months ended September 30, 2004, was $40.3 million, an 11% increase from revenue of $36.2 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2004, the Company's net loss was $7.9 million, or ($0.35) per diluted share, compared to a net income of $6.3 million, or $0.30 per diluted share, for the nine months ended September 30, 2003. Non-GAAP net loss for the nine months ended September 30, 2004 was $1.4 million, or ($0.06) per diluted share, compared to non-GAAP net income of $6.5 million, or $0.30 per diluted share, for the nine months ended September 30, 2003.

Non-GAAP results for the first, second and third quarter of 2004 exclude non-cash charges related to equity issuances, amortization of deferred compensation, and amortization of intangible assets resulting from the acquisition of Axis Systems which was completed on February 9, 2004. Non-GAAP results for the third quarter of 2003 excludes stock-based compensation. A reconciliation of GAAP to non-GAAP net income (loss) for the quarter ended September 30, 2004 and the nine months ended September 30, 2004 is included with this press release.

"This quarter's performance exceeded our expectations as we reported non-GAAP profitability and record revenues," said Moshe Gavrielov, chief executive officer of Verisity. "The breadth of our product line helped drive the strong customer demand for VPA and platform solutions that automate system-wide verification processes and scale with our customers' complex electronic designs. We are confident that our competitive position remains strong and we will continue to invest heavily in the development of leading verification tools that help shorten our customers' time-to-market," concluded Gavrielov.

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. We do not plan to update, confirm or change this guidance until our next earnings conference call except by press release in the case of material events.

• Revenue in the fourth quarter of 2004 is expected to be approximately $16.7 to $17.0 million
• Non-GAAP income per share in the fourth quarter of 2004 is expected to be approximately $0.00 to $0.01
• Revenue for fiscal 2004 is expected to be between $57.0 and $57.3 million
• Non-GAAP loss per share for fiscal 2004 is expected to be between ($0.05) and ($0.06)
  

A schedule showing a reconciliation of the business outlook from GAAP to non-GAAP is included in this release.

Verisity's earnings call will be webcast today at 4:15 p.m. Eastern Time / 1:15 p.m. Pacific Time, and may be accessed at http://www.verisity.com. Following the conclusion of the webcast, a replay will be available via Verisity's web site at http://www.verisity.com through October 28, 2004. For those without access to the Internet, a replay of the call will be available from 5:00 p.m. Pacific Time on October 21, 2004 through October 28, 2004. To listen to a replay, call (719) 457-0820, access code 965648. The Company plans to include a business outlook in the conference call.

Financial tables
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Use of Non-GAAP Financial Measures

This press release includes financial measures for net income (loss) and net income (loss) per share that exclude certain non-cash charges and that have not been calculated in accordance with GAAP. These measures differ from GAAP in that they exclude non-cash charges related to equity issuances, amortization of deferred compensation, and amortization of intangible assets resulting from the acquisition of Axis Systems which was completed on February 9, 2004. Verisity provides these measurements in addition to GAAP financial results because it believes they provide a consistent basis for comparison between quarters that is not influenced by certain non-cash expenses and therefore is helpful to understanding Verisity's underlying operational results. Further, these non-GAAP measures are some of the primary measures Verisity's management uses for planning and forecasting. These measures should not be considered an alternative to GAAP, and these non-GAAP measures may not be comparable to information provided by other companies. For more information regarding the foregoing, including Verisity's unaudited non-GAAP condensed combined consolidated balance sheet as of December 31, 2003 and unaudited pro forma condensed combined consolidated statement of operations for the year ended December 31, 2003, please refer to Verisity's Current Report on Form 8-K/A, Amendment No. 1, filed with the Securities and Exchange Commission on April 22, 2004.

About Verisity

Verisity Ltd. (NASDAQ:VRST) is the leading supplier of process automation solutions for the functional verification market. The Company addresses customers' critical business issues with its market-leading software and intellectual property (IP) that effectively and efficiently verify the design of electronic systems and complex integrated circuits for the communications, computing and consumer electronics global markets. Verisity's VPA solutions enable projects to move from executable verification plans to unit, chip/system and project level 'total coverage' and verification closure, while maximizing productivity, product quality and predictability of schedules. The Company's strong market presence is driven by its proven technology, methodology and solid strategic partnerships and programs. Verisity's customer list includes leading companies in all strategic technology sectors. Verisity is a global organization with offices throughout Asia, Europe, and North America. Verisity's principal executive offices are located in Mountain View, California, with its principal research and development offices located in Rosh Ha'ain, Israel. For more information, visit www.verisity.com.

Forward-Looking Statements

To the extent statements contained herein are not purely historical, they are forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed in the Company's filings with the Securities and Exchange Commission. Words such as "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. All forward-looking statements represent only management's present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results or performance to differ materially from those described in the forward-looking statements. In particular, these factors include the Company's ability to forecast accurately the Company's short-term and long-term operating performance, the effects of continued economic and geopolitical uncertainty and the related effects on customers' budgets, whether new or existing customers will purchase time-based or perpetual licenses, the timing of customer acceptance of the Company's products following delivery and the timing of significant orders. Another factor that could cause actual results or performance to differ materially from those described in the forward-looking statements include the impact of the acquisition of Axis on the Company's future operating or financial performance, including, but not limited to, the amount of additional investment required to develop integrated products. For a discussion of the factors and uncertainties relating to the acquisition, please refer to the Company's public disclosures made in connection with the acquisition, including, but not limited to, the Company's filings with the Securities and Exchange Commission, its news releases and its webcasts. Verisity Ltd. is not under any obligation, and expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Verisity, the Verisity logo and Specman Elite are either registered trademarks or trademarks of Verisity Design, Inc. in the United States and/or other jurisdictions. All other trademarks are the property of their respective holders.