AGREEMENT AND PLAN OF MERGER DATED AS OF JANUARY 12, 2005 AMONG CADENCE DESIGN SYSTEMS, INC., VERISITY LTD. AND SCIOTO RIVER LTD

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EXHIBIT 2.1

EXECUTION VERSION

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AGREEMENT AND PLAN OF MERGER

DATED AS OF JANUARY 12, 2005

AMONG

CADENCE DESIGN SYSTEMS, INC.,

VERISITY LTD.

AND

SCIOTO RIVER LTD.

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TABLE OF CONTENTS

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ARTICLE 1 THE MERGER..................................................................................................... 1

Section 1.1. The Merger............................................................................. 1

Section 1.2. Effective Time......................................................................... 1

Section 1.3. Closing of the Merger.................................................................. 2

Section 1.4. Effects of the Merger.................................................................. 2

Section 1.5. Certificate of Incorporation and Bylaws................................................ 2

Section 1.6. Directors.............................................................................. 2

Section 1.7. Officers............................................................................... 2

Section 1.8. Conversion of Shares................................................................... 2

Section 1.9. Exchange of Certificates............................................................... 3

Section 1.10. Stock Options and Restricted Stock Units............................................... 4

ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................................. 6

Section 2.1. Organization and Qualification; Subsidiaries; Investments.............................. 7

Section 2.2. Capitalization of the Company and its Subsidiaries..................................... 8

Section 2.3. Authority Relative to this Agreement; Recommendation................................... 9

Section 2.4. SEC Reports; Financial Statements...................................................... 10

Section 2.5. Information Supplied................................................................... 11

Section 2.6. Consents and Approvals; No Violations.................................................. 11

Section 2.7. No Default............................................................................. 12

Section 2.8. No Undisclosed Liabilities; Absence of Changes......................................... 12

Section 2.9. Litigation............................................................................. 14

Section 2.10. Compliance with Applicable Law......................................................... 14

Section 2.11. Employee Benefit Plans; Labor Matters.................................................. 15

Section 2.12. Environmental Laws and Regulations..................................................... 19

Section 2.13. Taxes.................................................................................. 20

Section 2.14. Intellectual Property.................................................................. 22

Section 2.15. Material Contracts..................................................................... 27

Section 2.16. Title to Properties; Absence of Liens and Encumbrances................................. 28

Section 2.17. Insurance.............................................................................. 28

Section 2.18. Warranties............................................................................. 29

Section 2.19. Opinion of Financial Advisor........................................................... 29

Section 2.20. Brokers................................................................................ 29

Section 2.21 Interested Party Transactions.......................................................... 29

Section 2.22 Corporate Governance Matters........................................................... 30

Section 2.23 Grants, Incentives and Subsidies....................................................... 31

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ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION....................................................... 32

Section 3.1. Organization........................................................................... 32

Section 3.2. Authority Relative to this Agreement................................................... 32

Section 3.3. Information Supplied................................................................... 33

Section 3.4. Consents and Approvals; No Violations.................................................. 33

Section 3.5. Brokers................................................................................ 33

Section 3.6. Parent Common Stock.................................................................... 33

Section 3.7. No Prior Activities of Acquisition..................................................... 34

Section 3.8. Sufficient Funds....................................................................... 34

ARTICLE 4 COVENANTS...................................................................................................... 34

Section 4.1. Conduct of Business of the Company..................................................... 34

Section 4.2. Conduct of Business of Parent.......................................................... 37

Section 4.3. Preparation of the Proxy Statement..................................................... 38

Section 4.4. Other Potential Acquirers.............................................................. 39

Section 4.5. Comfort Letter......................................................................... 42

Section 4.6. Stock Exchange Listing................................................................. 42

Section 4.7. Access to Information.................................................................. 42

Section 4.8. Certain Filings; Reasonable Efforts.................................................... 43

Section 4.9 Public Announcements................................................................... 44

Section 4.10. Indemnification and Directors' and Officers' Insurance................................. 44

Section 4.11 Notification of Certain Matters........................................................ 45

Section 4.12. Additions to and Modification of Disclosure Letter..................................... 46

Section 4.13. Termination of 401(k) Plan............................................................. 46

Section 4.14. Lump Sum Distributions................................................................. 46

Section 4.15. Company ESPP........................................................................... 46

Section 4.16. Employee Benefits...................................................................... 46

Section 4.17. Israeli Approvals...................................................................... 47

Section 4.18 Israeli Income Tax Ruling.............................................................. 48

Section 4.19. Israeli Securities Law Exemption....................................................... 49

Section 4.20. Israeli Retirement or Pension Plans.................................................... 49

Section 4.21. Ruling Regarding Withholding........................................................... 49

Section 4.22. Sub-Plan Options....................................................................... 49

ARTICLE 5 CONDITIONS TO CONSUMMATION OF THE MERGER....................................................................... 50

Section 5.1. Conditions to Each Party's Obligations to Effect the Merger............................ 50

Section 5.2. Conditions to the Obligations of the Company........................................... 50

Section 5.3. Conditions to the Obligations of Parent and Acquisition................................ 51

ARTICLE 6 TERMINATION; AMENDMENT......................................................................................... 52

Section 6.1. Termination............................................................................ 52

Section 6.2. Effect of Termination.................................................................. 54

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Section 6.3. Fees and Expenses...................................................................... 54

Section 6.4. Amendment.............................................................................. 55

ARTICLE 7 MISCELLANEOUS.................................................................................................. 56

Section 7.1. Nonsurvival of Representations and Warranties.......................................... 56

Section 7.2. Entire Agreement; Assignment........................................................... 56

Section 7.3. Validity............................................................................... 56

Section 7.4. Notices................................................................................ 56

Section 7.5. Governing Law.......................................................................... 57

Section 7.6. Descriptive Headings, Section References............................................... 59

Section 7.7. Parties in Interest.................................................................... 59

Section 7.8. Certain Definitions.................................................................... 59

Section 7.9. Personal Liability..................................................................... 61

Section 7.10. Counterparts........................................................................... 61

Section 7.11. Rules of Construction.................................................................. 61

Section 7.12. Validity............................................................................... 61

Section 7.13. Tax Withholding........................................................................ 61

Section 7.14. Currency References.................................................................... 61

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TABLE OF EXHIBITS

Exhibit A...................... Israeli Withholding Ruling Application

Exhibit B...................... Form of Herzog, Fox & Neeman Opinion

TABLE OF CONTENTS

TO

DISCLOSURE LETTER

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Section 2.1(a)..................................... Organization and Qualification; Subsidiaries; Investments

Section 2.1(c)..................................... Equity Investments of Company and Subsidiaries

Section 2.2(a)..................................... Capitalization of the Company and Subsidiaries

Section 2.2(b)..................................... Shares Representing Equity Securities of the Company or Subsidiaries

Section 2.3........................................ Authority Relative to this Agreement; Recommendation

Section 2.4........................................ SEC Reports; Financial Statements

Section 2.5........................................ Information Supplied

Section 2.6........................................ Consents and Approvals; No Violations

Section 2.7........................................ No Default

Section 2.8........................................ No Undisclosed Liabilities; Absence of Changes

Section 2.9........................................ Litigation

Section 2.10....................................... Compliance with Applicable Law

Section 2.11(a).................................... Employee Benefit Plans; Labor Matters

Section 2.11(b)(i)................................. Employment Agreements with Officers of the Company

Section 2.11(b)(ii)................................ Agreements with Consultants for More than $100,000 Annually

Section 2.11(b)(iii)............................... Severance Agreements, Programs and Policies

Section 2.11(b)(iv)................................ Change in Control Provisions

Section 2.11(e).................................... Extension Orders (tzavei harchava)

Section 2.11(h).................................... Overtime Payments

Section 2.12....................................... Environmental Laws and Regulations

Section 2.13....................................... Tax Matters

Section 2.13(b)(v)................................. Excess Parachute Payments

Section 2.13(b)(1)................................. Tax Assessments, Audits, Examinations or Disputes

Section 2.13(c).................................... Israeli Tax Incentives

Section 2.14(b)(1)................................. Company Registered Marks

Section 2.14(b)(2) ................................ Company Patents

Section 2.14(b)(3)................................. Company Registered Copyrights

Section 2.14(b)(4)................................. Registration and Enforceability of Company Intellectual Property

Section 2.14(c).................................... Company Software and Intellectual Property Contributed to Standards

Setting Bodies

Section 2.14(d).................................... Ownership

Section 2.14(e)(1)................................. Inbound License Agreements

Section 2.14(e)(2)................................. Exceptions to Ownership of Improvements in

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Company Intellectual Property

Section 2.14(e)(3)................................. Non-Standard Licenses of Company Software and Intellectual Property

Section 2.14(e)(4)................................. Company Software Licenses Not Pursuant to Written License Agreement

Section 2.14(f).................................... Sufficiency of IP Assets

Section 2.14(g).................................... Transfers; Loss of Rights

Section 2.14(h).................................... No Infringement by the Company or Third Parties

Section 2.14(i).................................... No Violations

Section 2.14(j).................................... Software

Section 2.14(k).................................... Open Source Software

Section 2.14(l).................................... Performance of Existing Software Products

Section 2.14(m).................................... Restrictions on Employees

Section 2.14(n).................................... Export

Section 2.15(a)(i) and (a)(ii)..................... Material Contracts

Section 2.15(a)(iii)............................... Non-Competition Restrictions or Consent for Transaction

Section 2.15(a)(iv)................................ Channel Sales with Distributors

Section 2.15(a)(vii)............................... Most Favored Customer Pricing Clauses

Section 2.15(a)(x)................................. Third Party Indemnification or Guaranty

Section 2.15(a)(xi)................................ Disposition or Acquisition of Assets, Property or Other Interest

Section 2.15(a)(xii)............................... Distribution, Joint Marketing or Development

Section 2.15(a)(viii).............................. Otherwise Material

Section 2.16(a).................................... Leases

Section 2.16(b).................................... Liens

Section 2.17....................................... Insurance

Section 2.18....................................... Warranties

Section 2.21....................................... Interested Party Transactions

Section 2.23....................................... Grants, Incentives and Subsidies

Section 4.1(b)(i)(A)............................... Acquisitions

Section 4.1(b)(iv)(C).............................. New Capital Expenditures

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TABLE OF DEFINED TERMS

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Cross Reference

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Acquisition...................................................................... Preamble,........................... 1

Acquisition Shareholder Approval Notice.......................................... Section 4.3(b),..................... 39

affiliate........................................................................ Section 7.8(a),..................... 60

Agreement........................................................................ Preamble,........................... 1

applicable law(s)................................................................ Section 7.8(b),..................... 60

Assumed Options.................................................................. Section 4.18,....................... 48

business day..................................................................... Section 7.8(c),..................... 60

capital stock.................................................................... Section 7.8(d),..................... 60

Certificates..................................................................... Section 1.9(b),..................... 3

Closing Date..................................................................... Section 1.3,........................ 2

Closing.......................................................................... Section 1.3,........................ 2

Code............................................................................. Section 2.13(b),.................... 21

Companies Law.................................................................... Preamble,........................... 1

Company Acquisition.............................................................. Section 6.3(a)(ii),................. 54

Company Board.................................................................... Section 2.3(a),..................... 9

Company ESPP..................................................................... Section 4.15,....................... 46

Company Financial Advisor........................................................ Section 2.21,....................... 29

Company Patents.................................................................. Section 2.14(b),.................... 23

Company Permits.................................................................. Section 2.10,....................... 14

Company Plans.................................................................... Section 1.10(a),.................... 5

Company.......................................................................... Preamble,........................... 1

Company Registered Copyrights.................................................... Section 2.14(b),.................... 23

Company Registered IP............................................................ Section 2.14(b),.................... 23

Company Registered Marks......................................................... Section 2.14(b),.................... 23

Company Restricted Stock Unit.................................................... Section 1.10(b),.................... 5

Company Restricted Stock Units................................................... Section 1.10(b),.................... 5

Company SEC Reports.............................................................. Section 2.4(a),..................... 10

Company Securities............................................................... Section 2.2(a),..................... 8

Company Shareholder Approval Notice.............................................. Section 4.3(b),..................... 39

Company Standard Form License Agreement.......................................... Section 2.21,....................... 29

Company Stock Option or Options.................................................. Section 1.10(a),.................... 5

Company Stockholders Meeting..................................................... Section 2.5,........................ 11

Confidentiality Agreement........................................................ Section 4.7(a),..................... 43

Contract......................................................................... Section 2.15(a),.................... 27

Copyrights....................................................................... Section 2.14(a),.................... 22

Disclosure Letter................................................................ Article 2,.......................... 6

Dusty Marks...................................................................... Section 2.14(b),.................... 22

Effective Time................................................................... Section 1.2,........................ 2

Employee Plans................................................................... Section 2.11(a),.................... 15

Employment Agreements............................................................ Preamble,........................... 1

Environmental Laws............................................................... Section 2.12,....................... 19

ERISA Affiliate.................................................................. Section 2.11(a),.................... 15

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ERISA............................................................................ Section 2.11(a),.................... 15

Exchange Act..................................................................... Section 2.2(b),..................... 9

Exchange Agent................................................................... Section 1.9(a),..................... 3

Exchange Fund.................................................................... Section 1.9(a),..................... 3

Exchange Ratio................................................................... Section 1.10(a),.................... 5

Final Date....................................................................... Section 6.1(b),..................... 53

Final Exercise Date.............................................................. Section 4.15,....................... 46

Financial Statements............................................................. Section 2.4(a),..................... 10

Foreign Plan..................................................................... Section 2.11(j),.................... 18

Governmental Entity.............................................................. Section 2.6,........................ 12

Grant............................................................................ Section 2.23,....................... 31

Grants........................................................................... Section 2.23,....................... 31

GUST............................................................................. Section 2.11(i),.................... 18

Hazardous Substance.............................................................. Section 2.12,....................... 20

HSR Act.......................................................................... Section 2.6,........................ 11

Inbound License Agreements....................................................... Section 2.14(e),.................... 24

incentive stock options.......................................................... Section 1.10(a),.................... 5

include or including............................................................. Section 7.8(e),..................... 60

Indemnified Liabilities.......................................................... Section 4.10(a),.................... 44

Indemnified Persons.............................................................. Section 4.10(a),.................... 44

Insurance Policies............................................................... Section 2.17,....................... 28

Insured Parties.................................................................. Section 4.10(b),.................... 45

Intellectual Property............................................................ Section 2.14(a),.................... 22

Internal Controls................................................................ Section 2.22,....................... 30

Investment Center Approval....................................................... Section 4.17,....................... 47

Investment Center................................................................ Section 2.6,........................ 11

IRS.............................................................................. Section 2.11(a),.................... 15

ISOs ............................................................................ Section 1.10(a),.................... 5

Israeli Income Tax Ruling........................................................ Section 4.18, ...................... 48

Israeli Matters.................................................................. Section 7.5,........................ 58

Israeli Securities Exemption..................................................... Section 4.19,....................... 49

Israeli Withholding Ruling Application........................................... Section 4.21,....................... 49

Know How......................................................................... Section 2.23,....................... 31

knowledge or known............................................................... Section 7.8(f),..................... 60

Lease Documents.................................................................. Section 2.16(a),.................... 28

Lien............................................................................. Section 7.8(g),..................... 60

M&P Plan......................................................................... Section 2.11(i),.................... 18

Marks............................................................................ Section 2.14(a),.................... 22

Mask Works....................................................................... Section 2.14(a),.................... 22

Material Adverse Effect on Parent................................................ Section 3.1(b),..................... 32

Material Adverse Effect on the Company........................................... Section 2.1(b),..................... 7

Material Contract................................................................ Section 2.15(a),.................... 27

Material Contracts............................................................... Section 2.15(a),.................... 27

Merger Consideration............................................................. Section 1.8(a),..................... 3

Merger Proposal.................................................................. Section 4.3(a),..................... 38

Merger........................................................................... Section 1.1,........................ 1

Multiemployer Plan............................................................... Section 2.11(f),.................... 17

Multiple Employer Plan........................................................... Section 2.11(f),.................... 17

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Non Competition Agreements....................................................... Preamble,........................... 1

Notice of Superior Proposal,..................................................... Section 4.5(c),..................... 41

NYSE............................................................................. Section 4.2(a),..................... 38

OCS Approval..................................................................... Section 4.17,....................... 47

OCS.............................................................................. Section 2.6,........................ 11

Other Interests.................................................................. Section 2.1(c),..................... 8

Parent Common Stock.............................................................. Section 1.10(a),.................... 5

Parent........................................................................... Preamble,........................... 1

Patents.......................................................................... Section 2.14(a),.................... 22

person........................................................................... Section 7.8(h),..................... 61

Proxy Statement.................................................................. Section 2.5,........................ 11

Restricted Cash.................................................................. Section 1.8(d),..................... 3

Restricted Company Share......................................................... Section 1.8(d),..................... 3

Sarbanes-Oxley Act............................................................... Section 2.22,....................... 30

SEC ............................................................................. Section 2.4(a),..................... 10

Section 102 Options.............................................................. Section 4.18,....................... 48

Securities Act................................................................... Section 2.2(a),..................... 8

Share............................................................................ Section 1.8(a),..................... 2

Shareholder Approval Notices..................................................... Section 4.3(b),..................... 39

Shares........................................................................... Section 1.8(a),..................... 2

Software......................................................................... Section 2.14(a),.................... 22

Sub-Plan Options................................................................. Section 1.10(a),.................... 5

Sub-Plan......................................................................... Section 1.10(a),.................... 5

Subsidiary....................................................................... Section 2.1(a),..................... 7

Superior Proposal,............................................................... Section 4.5(d),..................... 41

Supplemental Rulings............................................................. Section 4.18,....................... 48

Surviving Company................................................................ Section 1.1,........................ 1

Tax Authority.................................................................... Section 7.8(i),..................... 61

Tax or Taxes..................................................................... Section 2.13(a)(i),................. 20

Tax Return....................................................................... Section 2.13(a)(ii),................ 20

Termination Payment.............................................................. Section 6.3(a),..................... 54

Third Party Acquisition,......................................................... Section 4.5(d),..................... 41

Third Party,..................................................................... Section 4.5(d),..................... 41

Trade Secrets.................................................................... Section 2.14(a),.................... 22

US GAAP.......................................................................... Section 2.4(a),..................... 11

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of January

12, 2005, is by and among Verisity Ltd., an Israeli corporation (the "COMPANY"),

Cadence Design Systems, Inc., a Delaware corporation ("PARENT"), and Scioto

River Ltd., an Israeli corporation and a wholly owned subsidiary of Parent

("ACQUISITION").

WHEREAS, the Boards of Directors of the Company, Parent and Acquisition

have each (i) determined that the Merger is advisable and fair and in the best

interests of their respective corporations and stockholders and (ii) approved

the Merger upon the terms and subject to the conditions set forth in this

Agreement;

WHEREAS, Parent, as the sole shareholder of Acquisition, has approved the

Merger and this Agreement;

WHEREAS, Parent, the Company and Acquisition intend to effect the Merger

of Acquisition into the Company in accordance with this Agreement and the

Israeli Companies Law-5759-1999 (the "COMPANIES LAW");

WHEREAS, certain officers and employees of the Company have entered into

employment agreements, effective upon consummation of the Merger (the

"EMPLOYMENT AGREEMENTS"), as an inducement to Parent to enter into this

Agreement; and

WHEREAS, certain shareholders of the Company have entered into

non-competition agreements, effective upon consummation of the Merger (the "NON

COMPETITION AGREEMENTS"), as an inducement to Parent to enter into this

Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the

representations, warranties, covenants and agreements herein contained, and

intending to be legally bound hereby, the Company, Parent and Acquisition hereby

agree as follows:

ARTICLE 1

THE MERGER

Section 1.1. The Merger. At the Effective Time and upon the terms and

subject to the conditions of this Agreement and in accordance with the Companies

Law, Acquisition (as the target company (Chevrat Ha'Ya'ad)) shall be merged with

and into the Company (as the absorbing company (HaChevra Ha'Koletet)) (the

"MERGER"). Following the Merger, the Company shall continue as the surviving

corporation (the "SURVIVING COMPANY") and the separate corporate existence of

Acquisition shall cease.

Section 1.2. Effective Time. Subject to the terms and conditions set forth

in this Agreement, the Merger shall become effective after the delivery of the

Shareholder Approval Notices to the Companies Registrar, after the expiration of

the 70 day waiting period set forth in such Section 323 of the Companies Law,

after the Closing has

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occurred, and upon the issuance of a certificate of merger by the Companies

Registrar in accordance with Section 323(5) of the Companies Law (the "EFFECTIVE

TIME"). For the removal of doubt, the Merger shall not be effective for any and

all purposes, and the parties shall cooperate to cause the issuance of the

certificate of merger not to be made, until after the satisfaction or waiver of

the conditions set forth in Article 5, notwithstanding the expiration of the 70

day waiting period set forth in such Section 323 of the Companies Law and/or any

filings made and approvals obtained in connection with the Merger.

Section 1.3. Closing of the Merger. The closing of the Merger (the

"CLOSING") will take place at a time and on a date (the "CLOSING DATE") to be

specified by the parties, which shall be no later than the third business day

after satisfaction of the latest to occur of the conditions set forth in Article

5, at the offices of Gibson, Dunn & Crutcher LLP, 1881 Page Mill Road, Palo

Alto, California 94304, but in no event before the delivery of the Shareholder

Approval Notices and the expiration of the 70 day period referred to in Section

1.2, unless another time, date or place is agreed to in writing by the parties

hereto.

Section 1.4. Effects of the Merger. The Merger shall have the effects set

forth in the Companies Law. Without limiting the generality of the foregoing and

subject thereto, at the Effective Time, all the properties, rights, privileges,

powers and franchises of the Company and Acquisition shall vest in the Surviving

Company, and all debts, liabilities and duties of the Company and Acquisition

shall become the debts, liabilities and duties of the Surviving Company.

Section 1.5. Articles of Association and Memorandum of Association. The

Articles of Association of the Surviving Company shall be amended as necessary

to read the same as the Articles of Association of Acquisition in effect at the

Effective Time until amended in accordance with applicable law. The Memorandum

of Association of the Company shall be the Memorandum of Association of the

Surviving Company until amended in accordance with applicable law.

Section 1.6. Directors. The directors of Acquisition at the Effective Time

shall be appointed as the initial directors of the Surviving Company, each to

hold office in accordance with the Articles of Association of the Surviving

Company until such director's successor is duly elected or appointed and

qualified.

Section 1.7. Officers. The officers of Acquisition at the Effective Time

shall be appointed as the initial officers of the Surviving Company, each to

hold office in accordance with the Articles of Association of the Surviving

Company until such officer's successor is duly elected or appointed and

qualified.

Section 1.8. Conversion of Shares.

(a) At the Effective Time, each ordinary share, NIS 0.01 par value

per share, of the Company (each a "SHARE" and, collectively, the "SHARES")

issued and outstanding immediately prior to the Effective Time (other than (i)

Shares held in the Company's treasury or by any of the Company's Subsidiaries

and (ii) Shares held by

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Parent, Acquisition or any other subsidiary of Parent) shall, by virtue of the

Merger and without any action on the part of Acquisition, the Company or the

holder thereof, be converted into the right to receive $12.00 in cash without

interest (the "MERGER CONSIDERATION").

(b) At the Effective Time, each outstanding ordinary share, NIS 0.01

par value per share, of Acquisition shall be converted into one ordinary share,

NIS 0.01 par value per share, of the Surviving Company.

(c) At the Effective Time, each Share held in the treasury of the

Company and each Share held by Parent or any subsidiary of Parent, Acquisition

or the Company immediately prior to the Effective Time shall remain outstanding

and no Merger Consideration shall be delivered with respect thereto.

(d) Each Share subject to repurchase by the Company, or that is

otherwise subject to a risk of forfeiture or other condition under any

applicable restricted stock purchase agreement or other agreement with the

Company, issued and outstanding immediately prior to the Effective Time (each a

"RESTRICTED COMPANY SHARE") shall be exchanged pursuant to Section 1.8(a) into

the right to receive the Merger Consideration, subject to permanent retention

(i.e., forfeiture by the holder thereof) by Parent on the same terms as governed

such Restricted Company Share prior to the Merger (such Merger Consideration,

until the restrictions thereon lapse, is referred to as "RESTRICTED CASH");

provided, however, that upon permanent retention of any Restricted Cash, Parent

will pay to the former holder of the applicable Restricted Company Share an

amount equal to the repurchase price of the Restricted Company Shares in effect

immediately prior to the Effective Time, if any. Parent will distribute to

former holders of Restricted Company Shares any amount of Restricted Cash with

respect to which the restrictions lapse after the Effective Time in accordance

with the terms that governed the Restricted Company Share.

Section 1.9. Exchange of Certificates.

(a) Prior to the Effective Time Parent shall deliver to its transfer

agent, or a depository or trust institution of recognized standing selected by

Parent and Acquisition and reasonably satisfactory to the Company (the "EXCHANGE

AGENT") for the benefit of the holders of Shares for exchange in accordance with

this Article 1 an amount of cash equal to the Merger Consideration multiplied by

the number of Shares outstanding as of the Effective Time, other than the Shares

referred to in Section 1.8(c) (such cash is hereinafter referred to as the

"EXCHANGE FUND"), to be exchanged for outstanding Shares.

(b) Promptly after the Effective Time, the Exchange Agent shall mail

to each holder of record of a certificate or certificates that immediately prior

to the Effective Time represented outstanding Shares (the "CERTIFICATES") and

whose shares were converted into the right to receive Merger Consideration

pursuant to Section 1.8: (i) a letter of transmittal (which shall specify that

delivery shall be effected and risk of loss and title to the Certificates shall

pass only upon delivery of the Certificates to the Exchange Agent and shall be

in such form and have such other provisions as Parent and

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the Company may reasonably specify prior to Closing) and (ii) customary

instructions for use in effecting the surrender of the Certificates in exchange

for Merger Consideration. Upon surrender of a Certificate for cancellation to

the Exchange Agent together with such letter of transmittal duly executed, the

holder of such Certificate shall be entitled to receive in exchange therefor the

Merger Consideration to which such holder is entitled. In the event of a

transfer of ownership of Shares that is not registered in the transfer records

of the Company, Merger Consideration may be issued to a transferee if the

Certificate representing such Shares is presented to the Exchange Agent

accompanied by all documents required to evidence and effect such transfer and

by evidence sufficient to show that any applicable stock transfer taxes have

been paid. Until surrendered as contemplated by this Section 1.9, each

Certificate shall be deemed at any time after the Effective Time to represent

only the right to receive upon such surrender the Merger Consideration as

contemplated by this Section 1.9.

(c) If any Certificate shall have been lost, stolen or destroyed,

the Exchange Agent shall issue in exchange therefor, upon the making of an

affidavit of that fact by the holder thereof, such Merger Consideration as may

be required pursuant to this Agreement; provided, however, that Parent or the

Exchange Agent may, in its discretion, require the delivery of a suitable bond

or indemnity against any claim that may be made against it with respect to such

certificate.

(d) Merger Consideration paid upon the surrender for exchange of

Shares in accordance with the terms hereof shall be deemed to have been paid in

full satisfaction of all rights pertaining to such Shares. From the Effective

Time, there shall be no further registration of transfers on the stock transfer

books of the Surviving Company of the Shares that were outstanding immediately

prior to the Effective Time. If, after the Effective Time, Certificates are

presented to the Surviving Company for any reason, they shall be canceled and

exchanged as provided in this Article 1.

(e) Any portion of the Exchange Fund that remains undistributed to

the former shareholders of the Company upon the one year anniversary the

Effective Time shall be delivered to Parent upon demand, and any former

shareholders of the Company who have not theretofore complied with this Article

1 shall thereafter look only to Parent for payment of their claim for Merger

Consideration.

(f) The Exchange Agent shall invest the cash included in the

Exchange Fund, as so directed by Parent. Any interest and other income resulting

from such investments shall be paid to Parent upon the termination of the

Exchange Fund pursuant to Section 1.9(e).

(g) Neither Parent nor the Company shall be liable to any holder of

Shares for Merger Consideration from the Exchange Fund delivered to a public

official pursuant to any applicable abandoned property, escheat or similar law.

Section 1.10. Stock Options and Restricted Stock Units.

(a) At the Effective Time, except as set forth below with respect to

Sub-Plan Options, each outstanding option to purchase Shares (each "COMPANY

STOCK

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OPTION" and, collectively, "COMPANY STOCK OPTIONS") issued pursuant to the

Company's Amended and Restated Verisity Ltd. 2000 U.S. Share Incentive Plan,

Verisity Ltd. 1999 Israeli Share Option Plan, Verisity Ltd. 1999 Share Incentive

Plan, the Verisity Ltd. 1997 Israel Share and Stock Option Incentive Plan (but

not including the Sub-Plan for the Issuance of Options to the Company's

Employees), 1996 U.S. Stock Option Plan (as amended on October 28, 1999),

Verisity Ltd. 2000 Israeli Share Option Plan and Amended and Restated Axis

Systems Inc. 1997 Stock Plan or other agreement or arrangement, whether vested

or unvested, shall be converted as of the Effective Time into options to

purchase shares of Parent Common Stock in accordance with this Section 1.10. All

plans or agreements described above pursuant to which any Company Stock Option

has been issued or may be issued are referred to collectively as the "COMPANY

PLANS". Notwithstanding the foregoing, subject to any changes made in accordance

with Section 4.22, each outstanding Company Stock Option outstanding under the

Sub-Plan for the Issuance of Options to the Company's Employees under the

Verisity Ltd. 1997 Israel Share and Stock Option Incentive Plan (the "SUB-PLAN"

and such Company Stock Options, the "SUB-PLAN OPTIONS") shall not be converted

into options to purchase shares of Parent Common Stock, but shall be exercisable

for the consideration specified in Sub-Plan and the Tamir Fishman Trust. At the

Effective Time, each Company Stock Option assumed by Parent pursuant to this

Agreement shall continue to have, and be subject to, the same terms and

conditions set forth in the Company Plan under which such option was granted and

the agreement evidencing the grant thereof immediately prior to the Effective

Time, including provisions with respect to vesting, except that: (i) such option

will be exercisable for that number of whole shares of common stock of Parent,

par value $.01 per share (the "PARENT COMMON STOCK"), equal to the product of

(A) the number of Shares that were issuable upon exercise of such option

immediately prior to the Effective Time multiplied by (B) the Exchange Ratio,

and rounded down to the nearest whole number of shares of Parent Common Stock;

and (ii) the per share exercise price of each such Company Stock Option shall be

adjusted by dividing (A) the per share exercise price of each such Company Stock

Option by (B) the Exchange Ratio, and rounding up to the nearest cent. The terms

of each Company Stock Option shall, in accordance with its terms, be subject to

further adjustment as appropriate to reflect any stock split, stock dividend,

recapitalization or other similar transaction with respect to Parent Common

Stock on or subsequent to the Effective Time. The "EXCHANGE RATIO" shall be

equal to the quotient of (1) $12.00, divided by (2) the average of the closing

prices on the NYSE of a share of Parent Common Stock during the five (5) trading

days ending on the date that is two trading days prior to the Closing Date. The

parties acknowledge that, with respect to any option to which Section 421 of the

Code applies by reason of its qualification under Section 422 of the Code

("INCENTIVE STOCK OPTIONS" or "ISOS"), the foregoing provisions comply with the

requirements of Section 424(a) of the Code.

(b) At the Effective Time, each outstanding restricted stock unit

for Shares (each "COMPANY RESTRICTED STOCK UNIT" and, collectively "COMPANY

RESTRICTED STOCK UNITS") issued pursuant to any Company Plan, whether vested or

unvested, shall be converted as of the Effective Time into restricted stock

units for shares of Parent Common Stock in accordance with this Section 1.10. At

the Effective Time, each Company Restricted Stock Unit assumed by Parent

pursuant to this Agreement shall continue to have, and be subject to, the same

terms and conditions set forth in the Company Plan under which such Company

Restricted Stock Unit was issued and the

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agreement evidencing the grant thereof immediately prior to the Effective Time,

including provisions with respect to vesting, except that upon vesting the

Company Restricted Stock Unit shall result in that number of shares of Parent

Company Stock equal to the product of the number of Shares that remained

issuable upon vesting of the Company Restricted Stock Unit immediately prior to

the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest

whole share of Parent Common Stock. The terms of each Company Restricted Stock

Unit shall, in accordance with its terms, be subject to further adjustment as

appropriate to reflect any stock split, stock dividend, recapitalization or

other similar transaction with respect to Parent Common Stock on or after the

Effective Time.

(c) As soon as practicable after the Effective Time, Parent shall

deliver to the holders of Company Stock Options and Company Restricted Stock

Units appropriate notices setting forth such holders' rights pursuant to the

Company Plans and that the agreements evidencing the grants of such options

shall continue in effect on the same terms and conditions (subject to the

adjustments required by this Section 1.10 after giving effect to the Merger).

(d) Parent shall take all corporate action necessary to reserve for

issuance a sufficient number of shares of Parent Common Stock for delivery upon

exercise of Company Stock Options and Company Restricted Stock Units assumed in

accordance with this Section 1.10. No later than five business days after the

Effective Time, Parent shall file a registration statement on Form S-8 (or any

successor or other appropriate forms) with respect to the shares of Parent

Common Stock subject to any Company Stock Options or Company Restricted Stock

Units held by persons who are directors, officers or employees of, or

consultants to, the Company or any Subsidiary and shall use all commercially

reasonable efforts to maintain the effectiveness of such registration statement

or registration statements (and maintain the current status of the prospectus or

prospectuses contained therein) for so long as such options or restricted stock

units remain outstanding.

(e) At or before the Effective Time, the Company shall cause to be

effected any necessary amendments to the Company Plans to give effect to the

foregoing provisions of this Section 1.10.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to each of Parent and

Acquisition, subject to the exceptions set forth in the Disclosure Letter

delivered by the Company to Parent in accordance with Section 4.12 (the

"DISCLOSURE LETTER") and certified by the Chief Executive Officer and the Chief

Financial Officer of the Company (which exceptions shall specifically identify

the Section, subsection or paragraph, as applicable, to which such exception

relates, and shall be deemed to relate to each other Section, subsection or

paragraph to which such exceptions clearly relate on their face), that:

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Section 2.1. Organization and Qualification; Subsidiaries; Investments.

(a) Section 2.1(a) of the Disclosure Letter sets forth, as of the

date of this Agreement, a true and complete list of the persons of which the

Company owns fifty percent (50%) or more of the voting interests or otherwise

has the right to direct the management (each, a "SUBSIDIARY") together with the

jurisdiction of incorporation or organization of each Subsidiary and the

percentage of each Subsidiary's outstanding capital stock or other equity

interests owned directly or indirectly by the Company. All the outstanding

capital stock or other ownership interests of each Subsidiary is owned by the

Company, directly or indirectly, free and clear of any Lien or any other

limitation or restriction. Each of the Company and Subsidiaries is duly

organized, validly existing and (to the extent such concept exists under the

laws of its jurisdiction of incorporation or organization) in good standing

under the laws of the jurisdiction of its incorporation or organization and has

all requisite power and authority to own, lease and operate its properties and

to carry on its business as now being conducted. The Company has delivered to

Parent's counsel accurate and complete copies of the Articles of Association or

Certificate of Incorporation and Bylaws or comparable governing documents, each

as in full force and effect on the date hereof, of the Company and each

Subsidiary. The Company's Amended and Restated Articles of Association, as

amended and restated on June 4, 2002, and filed with the SEC as Exhibit 3.3 to

the Company's Form 10-K on March 12, 2004, were adopted and approved by more

than 50% of the voting rights present at the meeting and voting on the

resolution, as required by the then current Articles of Association of the

Company. Other than as specified in Section 2.1(a) of the Disclosure Letter, the

Company has no operating Subsidiaries other than those incorporated in a state

of the United States.

(b) Each of the Company and the Subsidiaries is duly qualified or

licensed and, to the extent such concept exists under applicable law, in good

standing to do business in each jurisdiction in which the property owned, leased

or operated by it or the nature of the business conducted by it makes such

qualification or licensing necessary, except in such jurisdictions where the

failure to be so duly qualified or licensed and in good standing does not,

individually or in the aggregate, have a Material Adverse Effect on the Company.

For purposes hereof, the term "MATERIAL ADVERSE EFFECT ON THE COMPANY" means (i)

any circumstance involving, change in or effect on the Company or any Subsidiary

that is, or is reasonably likely in the future to be, materially adverse to the

assets, liabilities (including contingent liabilities), business, financial

condition or results of operations of the Company and Subsidiaries, taken as a

whole, excluding from the foregoing the effect, if any, of (A) changes in

general economic conditions, (B) any action or inaction required of the Company

under Section 4.1, (C) changes in the securities markets in general, (D) changes

generally affecting the industry in which the Company and Subsidiaries operate

(provided that such changes do not affect the Company and Subsidiaries, taken as

a whole, in a disproportionate manner), (E) the effect of the public

announcement or pendency of the transactions contemplated hereby on the

bookings, orders or purchases by, provision of materials by, or other actions

of, existing or prospective customers or suppliers of the Company or any

Subsidiary, (F) any shareholder class action litigation arising directly out of

allegations of a breach of fiduciary duty relating to this Agreement, or (G) any

change in the price or trading volume of the Shares from the date hereof, in and

of itself;

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or (ii) any circumstance involving, change in or effect on the Company or any

Subsidiary that is reasonably likely to prevent the Company from consummating

the transactions contemplated by this Agreement; provided, however, that any

reference to dollar amounts in this Agreement shall not be deemed, in and of

itself, to constitute the point at which a change or event is sufficiently

material to be "material" or "materially adverse".

(c) Other Interests. Section 2.1(c) of the Disclosure Letter sets

forth a true and complete list of each equity investment made by the Company or

any Subsidiary in any person (including the percentage ownership, purchase price

and any management or directorship rights granted to the Company or any such

Subsidiary) other than the Subsidiaries ("OTHER INTERESTS"). The Other Interests

are owned directly or indirectly by the Company free and clear of all Liens.

Section 2.2. Capitalization of the Company and Subsidiaries.

(a) The authorized capital stock of the Company consists of

1,000,000 NIS, divided into (i) 91,222,534 Shares, of which, as of December 31,

2004, 24,027,344 were issued and outstanding; (ii) 3,777,466 Class B Ordinary

Shares of NIS 0.01 par value each, none of which are outstanding; and (iii)

5,000,000 Special Preferred Shares of NIS 0.01 par value each, none of which are

outstanding. The Company does not have outstanding any preferred stock purchase

rights issuable pursuant to a rights agreement. All of the outstanding Shares

are, and the Shares issuable upon exercise of the Company Stock Options, when

issued in accordance with the Company Plans, will be, validly issued and fully

paid, nonassessable and free of preemptive rights. As of December 31, 2004, an

aggregate of 1,287,655 Shares were available for grant and 3,844,812 Shares were

issuable upon or otherwise deliverable in connection with the exercise of

outstanding Company Stock Options granted pursuant to the Company Plans. As of

December 31, 2004, an aggregate of 404,033 Shares were available for issuance

pursuant to the Company ESPP. Between December 14, 2004 and the date hereof, no

shares of the Company's capital stock have been issued other than pursuant to

Company Stock Options already in existence on such date. Except as set forth

above, as of December 31, 2004, there are outstanding (i) no shares of capital

stock or other voting securities of the Company, (ii) no securities of the

Company or any Subsidiary convertible into, or exchangeable or exercisable for,

shares of capital stock or voting securities of the Company or any Subsidiary,

(iii) no options, warrants or other rights to acquire from the Company or any

Subsidiary, and no obligations of the Company or any Subsidiary to issue, any

capital stock, voting securities or securities convertible into or exchangeable

or exercisable for capital stock or voting securities of the Company or any

Subsidiary, and (iv) no equity equivalent interests in the ownership or earnings

of the Company or any Subsidiary or other similar rights. All of the outstanding

Shares, Company Stock Options and Company Restricted Stock Units (collectively,

the "COMPANY SECURITIES") were issued in compliance with the U.S. Securities Act

of 1933, as amended (the "SECURITIES ACT"), applicable U.S. state securities

laws, the Israeli Companies Ordinance [New Version] 1983, the Companies Law and

the Israeli Securities Law, 5728-1968. As of December 31, 2004, except with

respect to the Restricted Company Shares, there are no outstanding rights or

obligations of the Company or any Subsidiary to repurchase, redeem or otherwise

acquire any of its outstanding capital stock or other ownership interests. There

are no shareholder agreements, voting trusts or other arrangements or

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understandings to which the Company or any Subsidiary is a party or by which it

or the Company Board is bound, and to its knowledge, as of the date hereof,

there are no other agreements, voting trusts or other arrangements or

understandings, relating to the voting or registration of any shares of capital

stock or other voting securities of the Company or any Subsidiary. No Company

Securities are owned by the Company or any Subsidiary. Section 2.2 of the

Disclosure Letter sets forth a true and complete list, as of December 31, 2004,

of all holders of outstanding Restricted Company Shares, Company Stock Options

and Company Restricted Stock Units, the exercise or vesting schedule, the

exercise price per share, and the term of each such Share, Company Stock Option

or Company Restricted Stock Unit, as applicable and in the case of Company Stock

Options, whether such option is a nonqualified stock option or incentive stock

option, and any restrictions on exercise or sale of the option or underlying

Shares, and whether or not, to the Company's knowledge, an election under

Section 83(b) of the Code is in effect with respect to any Shares that are

Restricted Company Shares, in each case as of the date hereof. Each Company

Stock Option intended to qualify as an "incentive stock option" under Section

422 of the Code so qualifies (provided that a holder may have altered the Tax

treatment of the Shares issued on exercise of an ISO by making a disqualifying

disposition). Except as set forth in Section 2.2 of the Disclosure Letter, none

of the terms of the Company Stock Options, Company Restricted Stock Units or

Restricted Company Shares provides for accelerated vesting as a result of the

execution and delivery of this Agreement or the consummation of the transactions

contemplated hereby (either alone or in combination with any other events).

Other than as disclosed in the Company SEC Reports, the Company has not granted

Company Stock Options to employees or consultants under any Company Plan at an

exercise price of less than the fair market value per Share at the time of grant

as determined in good faith by the Company Board.

(b) The Shares constitute the only class of equity securities of the

Company or any Subsidiary registered or required to be registered under the

Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT").

Section 2.3. Authority Relative to this Agreement; Recommendation.

(a) The Company has all necessary corporate power and authority to

execute and deliver this Agreement, to perform its obligations under this

Agreement and to consummate the transactions contemplated hereby. The execution

and delivery of this Agreement and the consummation of the transactions

contemplated hereby have been duly and validly authorized by the Board of

Directors of the Company (the "COMPANY BOARD"), and no other corporate

proceedings on the part of the Company are necessary to authorize this

Agreement, or to consummate the transactions contemplated hereby, except the

approval of the Merger and the approval and adoption of this Agreement by the

shareholders of the Company as specified in Section 2.3(b) below. Without

limiting the generality of the foregoing, the Company Board, at a meeting duly

called and held, has adopted resolutions by the unanimous vote of the

non-employee directors (i) approving and declaring advisable this Agreement, the

Merger and the other transactions to be entered into by the Company, as

contemplated by this Agreement, (ii) exempting the Merger and the transactions

contemplated by this Agreement from the "interested shareholder" provisions of

the Company's Articles of Association, (iii) concluding, after

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taking into account the financial condition of the merging companies, that in

its opinion there is no reasonable suspicion that the Surviving Company will not

be able to pay its debts to its creditors, (iv) declaring that it is in the best

interests of the Company (including its shareholders) that the Company enter

into this Agreement and consummate the Merger and the other transactions

contemplated hereby, (v) directing that the adoption of this Agreement be

submitted as promptly as practicable to a vote at the Company Shareholders

Meeting, and (vi) recommending that the shareholders of the Company adopt this

Agreement and approve the Merger, which resolutions have not been subsequently

rescinded, modified or withdrawn in any way. This Agreement has been duly and

validly executed and delivered by the Company and constitutes, assuming the due

authorization, execution and delivery hereof by Parent and Acquisition, a valid,

legal and binding agreement of the Company, enforceable against the Company in

accordance with its terms, subject to any applicable bankruptcy, insolvency,

reorganization, moratorium or similar laws now or hereafter in effect relating

to creditors' rights generally or to general principles of equity.

(b) Assuming neither Parent nor Acquisition, nor any of their

affiliates (as specified in Section 320(c) of the Companies Law), (i) owns or

holds any Shares, or (ii) votes any Shares it owns, the affirmative vote of a

majority of the voting power of the Shares present and voting at the Company

Shareholder Meeting is the only vote of the holders of any securities of the

Company necessary to approve the Merger. The quorum required for the Company

Shareholder Meeting is at least two shareholders who hold or represent at least

a majority of the voting rights of the issued share capital of the Company. No

vote or approval of (i) any creditor of the Company or any Subsidiary (subject

to the rights of creditors under Section 319 of the Companies Law), (ii) any

holder of any option or warrant granted by the Company or any Subsidiary, or

(iii) any shareholder of the Company's Subsidiaries is necessary in order to

approve or permit the consummation of the Merger.

Section 2.4. SEC Reports; Financial Statements.

(a) The Company has filed all required forms, reports and documents

("COMPANY SEC REPORTS") with the Securities and Exchange Commission (the "SEC")

in connection with and since its initial public offering in March 2001, and each

of such Company SEC Reports complied at the time of filing in all material

respects with all applicable requirements of the Securities Act and the Exchange

Act, each as in effect on the dates such forms, reports and documents were

filed. None of such Company SEC Reports, including any financial statements or

schedules included or incorporated by reference therein, contained when filed

any untrue statement of a material fact or omitted to state a material fact

required to be stated or incorporated by reference therein or necessary in order

to make the statements therein in light of the circumstances under which they

were made not misleading, except to the extent superseded by a Company SEC

Report filed subsequently and prior to the date hereof. The statements of

operations included in the financial statements of the Company contained in the

Company SEC Reports (the "FINANCIAL STATEMENTS") do not reflect items of special

or nonrecurring revenue in excess of $200,000 in the aggregate or other income

not earned in the ordinary course of business in excess of $200,000 in the

aggregate, except as expressly specified therein, and such Financial Statements

include all adjustments, which consist only of

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normal recurring accruals, necessary for a fair presentation. The Financial

Statements have been prepared in all material respects in accordance with United

States generally accepted accounting principles ("US GAAP") consistently applied

and maintained throughout the periods indicated and fairly present the

consolidated financial condition of the Company and Subsidiaries at their

respective dates and the results of their operations and changes in financial

position for the periods covered thereby (subject to normal year-end adjustments

and except that unaudited financial statements do not contain all required

footnotes). Neither the Company nor any Subsidiary has any off-balance sheet

financing arrangements.

(b) The Company has heretofore made available to Acquisition or

Parent a complete and correct copy of any amendments or modifications that, as

of the date hereof, are required to be filed with the SEC but have not yet been

filed with the SEC to agreements, documents or other instruments that previously

had been filed by the Company with the SEC under Item 601(b) of Regulation S-K,

and all such amendments or modifications will be timely filed with the SEC.

(c) None of the Subsidiaries is, or has at any time been, subject to

the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act.

Section 2.5. Information Supplied. None of the information supplied or to

be supplied by the Company for inclusion or incorporation by reference in the

proxy statement relating to the meeting of the Company's shareholders to be held

in connection with the Merger (the "PROXY STATEMENT") will, at the date mailed

to shareholders of the Company and at the time of the meeting of shareholders of

the Company to be held in connection with the Merger (the "COMPANY SHAREHOLDERS

MEETING"), contain any untrue statement of a material fact or omit to state any

material fact required to be stated therein or necessary in order to make the

statements therein in light of the circumstances under which they are made not

misleading. The Proxy Statement will comply as to form in all material respects

with the provisions of the Exchange Act and the rules and regulations

thereunder. Notwithstanding the foregoing, the Company makes no representation,

warranty or covenant with respect to any information supplied or required to be

supplied by Parent or Acquisition which is contained in or omitted from any of

the foregoing documents.

Section 2.6. Consents and Approvals; No Violations. Except for such

filings, permits, authorizations, consents and approvals as may be required

under applicable requirements of the Securities Act, the Exchange Act, state

securities or blue sky laws, and the Hart-Scott-Rodino Antitrust Improvements

Act of 1976, as amended (the "HSR ACT"), any filings under similar merger

notification laws or regulations of non-Israeli or U.S. Governmental Entities,

to the extent required by applicable law, the consent of the Israeli

Commissioner of Restrictive Trade Practices, to the extent required pursuant to

the Restrictive Trade Practices Law (1988) as amended, the filing and

recordation of the Merger Proposal and the Shareholder Approval Notice and other

filings as required by the Companies Law, the approval of the Office of the

Chief Scientist in the Israeli Ministry of Industry and Commerce (the "OCS") and

the approval of the Israeli Investment Center in the Israeli Ministry of

Industry and Commerce (the "INVESTMENT CENTER"), no other filing with or notice

to and no other permit, authorization, consent or

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approval of any Israeli, United States (federal, state or local) or foreign

court or tribunal, or administrative, governmental or regulatory body, agency or

authority (each a "GOVERNMENTAL ENTITY") is necessary for the execution and

delivery by the Company of this Agreement or the consummation by the Company of

the transactions contemplated hereby, except for filings, notices, permits,

authorizations, consents or approvals the failure of which to make or obtain may

be cured solely by payment of not more than $200,000 in the aggregate. Neither

the execution, delivery and performance of this Agreement by the Company nor the

consummation by the Company of the transactions contemplated hereby will (i)

conflict with or result in a breach of any provision of the respective Articles

of Association or Memorandum of Association or other charter or governing

documents of the Company or any Subsidiary; (ii) except as set forth in Section

2.6 of the Disclosure Letter, result in a violation or breach of or constitute

(with or without due notice or lapse of time or both) a default (or give rise to

any right of termination, amendment, cancellation or acceleration or Lien) under

any of the terms, conditions or provisions of any Material Contract to which the

Company or any Subsidiary is a party or by which any of them or their respective

properties or assets may be bound; (iii) contravene, conflict with or result in

a violation of any of the terms or requirements of, or give any Governmental

Entity the right to revoke, withdraw, suspend, cancel, terminate, modify or

exercise any right or remedy or require any refund or recapture with respect to,

any Grant (as hereinafter defined) given by any Governmental Entity (or any

benefit provided or available thereunder) or other permit, license, consent,

authorization, grant, benefit, right that is held by the Company or that

otherwise relates to the business or assets of the Company, or (iv) except as

set forth in Section 2.6 of the Disclosure Letter, violate any applicable law

pertinent to the Company or any Subsidiary or any of their respective properties

or assets, except, in the case of foregoing clause (ii), (iii) or (iv), for

violations, breaches or defaults that would not, individually or in the

aggregate, result in any loss, expense, charge, assessment, levy, fine or other

liability being imposed upon or incurred by the Company or any Subsidiary

exceeding $200,000.

Section 2.7. No Default. Except as set forth in Section 2.7 of the

Disclosure Letter, neither the Company nor any Subsidiary is in breach, default

or violation (and no event has occurred that, with notice or the lapse of time,

or both, would constitute a breach, default or violation) of any term, condition

or provision of (i) its Memorandum of Association or Articles of Association or

other charter or governing documents; (ii) any Material Contract or other

obligation to which the Company or any Subsidiary is now a party or by which it

or any of its properties or assets may be bound; or (iii) any applicable law

pertinent to the Company or any Subsidiary or any of its properties or assets,

except, in the case of the foregoing clause (ii) or (iii), for violations,

breaches or defaults that would not, individually or in the aggregate, result in

any loss, expense, charge, assessment, levy, fine or other liability being

imposed upon or incurred by the Company or any Subsidiary exceeding $500,000.

Section 2.8. No Undisclosed Liabilities; Absence of Changes. Except as set

forth in Section 2.8 of the Disclosure Letter, neither the Company nor any

Subsidiary has any liabilities or obligations of any nature, whether or not

accrued, contingent or otherwise, that would be required by United States

generally accepted accounting principles to be reflected on a consolidated

balance sheet of the Company (including the notes thereto), other than

liabilities and obligations which are reflected on the Company's unaudited

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balance sheet as of September 30, 2004 or incurred after such date in the

ordinary course of business consistent with past practices. Except for

transactions, arrangements and other relationships otherwise specifically

identified in the Financial Statements, Section 2.8 of the Disclosure Letter

sets forth a true, complete and correct list of all transactions, arrangements

and other relationships between and/or among the Company and any of its

affiliates. Except as set forth in Section 2.8 of the Disclosure Letter, since

September 30, 2004, the Company and each Subsidiary has conducted its business

in all material respects only in, and has not engaged in any material

transaction other than according to, the ordinary and usual course of such

business consistent with past practices, and there has not been any:

(a) Material Adverse Effect on the Company;

(b) damage, destruction or other casualty loss with respect to any

asset or property owned, leased or otherwise used by the Company or any

Subsidiary and having a value at the time of exceeding $300,000, whether or not

covered by insurance;

(c) declaration, setting aside or payment of any dividend or other

distribution in respect of the capital stock of the Company or any Subsidiary,

repurchase, redemption or other acquisition by the Company or any Subsidiary of

any outstanding shares of capital stock or other securities of, or other

ownership interests in, the Company or any Subsidiary;

(d) amendment of any material term of any outstanding security of

the Company or any Subsidiary, except for waivers of vesting acceleration set

forth in the Employment Agreements or stock option agreements;

(e) incurrence, assumption or guarantee by the Company or any

Subsidiary of any indebtedness for borrowed money other than in the ordinary

course of business and in amounts and on terms consistent with past practices;

(f) creation or assumption by the Company or any Subsidiary of any

Lien on any asset or property with a value in exceeding $200,000;

(g) loan, advance or capital contribution made by the Company or any

Subsidiary to, or investment in, any person other than (i) loans or advances to

employees in connection with business-related matters, in each case made in the

ordinary course of business consistent with past practices, (ii) loans, advances

or capital contributions or investments by the Company to or in any wholly-owned

Subsidiary, by any wholly-owned Subsidiary in the Company or by any wholly-owned

Subsidiary in any other wholly-owned Subsidiary, and (iii) the Other Interests;

(h) transaction or commitment made, or any Contract entered into, by

the Company or any Subsidiary relating to its assets or business (including the

acquisition or disposition of any assets or property) or any relinquishment by

the Company or any Subsidiary of any Contract or other right, in either case

having a stated contract amount or otherwise potentially involving Company or

Subsidiary obligations or entitlements exceeding $200,000 (other than Contracts

with customers and suppliers entered into in the ordinary course of business,

consistent with past practice);

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(i) change by the Company in any of its accounting principles,

practices or methods;

(j) increase in the compensation payable or that could become

payable by the Company or any Subsidiary to (i) officers of the Company or any

Subsidiary or (ii) any employee of the Company or any Subsidiary whose annual

cash compensation is $100,000 or more, except for annual bonuses, the aggregate

total of which shall not exceed the amount set forth in Section 2.8(j) of the

Disclosure Letter;

(k) labor dispute, other than routine individual grievances, or any

activity or proceeding by a labor union or representative thereof to organize

any employees of the Company or any Subsidiary, or any lockouts, strikes,

slowdowns, work stoppages or threats thereof by or with respect to any such

employees; or

(l) between December 31, 2004 and the date hereof, issuance of any

Company Securities or other shares of capital stock or voting securities of the

Company, securities of the Company or any Subsidiary convertible into, or

exchangeable or exercisable for, shares of capital stock or voting securities of

the Company or any Subsidiary, options, warrants or other rights to acquire from

the Company or any Subsidiary, obligations of the Company or any Subsidiary to

issue, any capital stock, voting securities or securities convertible into or

exchangeable or exercisable for capital stock or voting securities of the

Company or any Subsidiary, or equity equivalent interests in the ownership or

earnings of the Company or any Subsidiary or other similar rights, other than

the issuance and sale of shares upon exercise of Company Stock Options granted

prior to December 31, 2004 which are listed in Section 2.2 of the Disclosure

Letter.

Section 2.9. Litigation. Except as set forth in Section 2.9 of the

Disclosure Letter, there are no suits, claims, actions, proceedings or

investigations pending or, to the knowledge of the Company, threatened against

the Company, any Subsidiary or any of their respective properties or assets

before any Governmental Entity that would, individually or in the aggregate,

result in any charge, assessment, levy, fine or other liability being imposed

upon or incurred by the Company or any Subsidiary exceeding $200,000. Neither

the Company nor any Subsidiary is subject to any outstanding order, writ,

injunction or decree of any Governmental Entity that would, individually or in

the aggregate, result in any charge, assessment, levy, fine or other liability

being imposed upon or incurred by the Company or any Subsidiary exceeding

$200,000.

Section 2.10. Compliance with Applicable Law. Except as set forth in

Section 2.10 of the Disclosure Letter, each of the Company and Subsidiaries

holds all permits, licenses, variances, exemptions, orders and approvals of all

Governmental Entities necessary for the lawful conduct of its business

(collectively, the "COMPANY PERMITS"), except for failures to hold such permits,

licenses, variances, exemptions, orders and approvals that would not,

individually or in the aggregate, result in any charge, assessment, levy, fine

or other liability being imposed upon or incurred by the Company or any

Subsidiary exceeding $200,000 and that have not resulted in, and could not

reasonably be expected to result in, any injunction or other equitable remedy

being imposed on the Company or any Subsidiary. Each of the Company and

Subsidiaries is in

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compliance with the terms of the Company Permits held by it, except where the

failure so to comply would not, individually or in the aggregate, result in any

charge, assessment, levy, fine or other liability being imposed upon or incurred

by the Company or any Subsidiary exceeding $200,000 and that have not resulted

in, and could not reasonably be expected to result in, any injunction or other

equitable remedy being imposed on the Company or any Subsidiary. The businesses

of the Company and Subsidiaries are being conducted in compliance with all

applicable laws of the United States, Israel or any other country or any

political subdivision thereof or of any Governmental Entity, except for

violations or possible violations of any United States, Israeli or foreign laws,

ordinances or regulations that do not and will not result, individually or in

the aggregate, in any charge, assessment, levy, fine or other liability being

imposed upon or incurred by the Company or any Subsidiary exceeding $200,000 and

that have not resulted in, and could not reasonably be expected to result in,

any injunction or other equitable remedy being imposed on the Company or any

Subsidiary. No investigation or review by any Governmental Entity with respect

to the Company or any Subsidiary is pending nor, to the knowledge of the

Company, has any Governmental Entity indicated an intention to conduct the same.

Section 2.11. Employee Benefit Plans; Labor Matters.

(a) Section 2.11(a) of the Disclosure Letter lists as of the date

hereof all employee benefit plans (as defined in Section 3(3) of the Employee

Retirement Income Security Act of 1974, as amended ("ERISA")), and all bonus,

stock option, stock purchase, incentive, deferred compensation, supplemental

retirement, health, life, or disability insurance, dependent care, severance and

other similar fringe or employee benefit plans, programs or arrangements and any

current or former employment or executive compensation or severance agreements,

written or otherwise, maintained, contributed to or required to be maintained or

contributed to for the benefit of or relating to any employee or former employee

of the Company, any trade or business (whether or not incorporated) that is a

member of a controlled group including the Company or that is under common

control with the Company within the meaning of Section 414 of the Code (an

"ERISA AFFILIATE"), as well as each plan with respect to which the Company or an

ERISA Affiliate could incur liability under Section 4069 (if such plan has been

or were terminated) or Section 4212(c) of ERISA (together, the "EMPLOYEE

PLANS"). The Company has made available to Parent a copy of (i) the two (2) most

recent annual reports on Form 5500 filed with the Internal Revenue Service (the

"IRS") for each disclosed Employee Plan where such report is required; (ii) the

documents and instruments governing each such Employee Plan (other than those

referred to in Section 4(b)(4) of ERISA); (iii) all trust documents and

custodial agreements relating to each Employee Plan, (iv) the current summary

plan description and each summary of material modifications relating to each

Employee Plan; (v) the most recent IRS determination letter received with

respect to each Employee Plan intended to qualify for favorable tax treatment

under Section 401(a) of the Code; (vi) all insurance contracts, investment

management or advisory agreements, audit reports, relating to each Employee

Plan; and (vii) all material correspondence with any Governmental Entity

relating to each Employee Plan. No Employee Plan is subject to Title IV of ERISA

or Section 412 of the Code, and neither the Company nor any ERISA Affiliate has

incurred any liability (contingent or otherwise) with respect to any such

Employee Plan. Each Employee Plan

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has been maintained in all material respects, by its terms and in operation, in

accordance with ERISA, the Code and other applicable law, and there has been no

material violation of any reporting or disclosure requirement imposed by ERISA

or the Code. Each Employee Plan intended to be qualified under Section 401(a) of

the Code, and each trust intended to be exempt under Section 501(a) of the Code,

has been determined to be so qualified or exempt by the IRS, and since the date

of each most recent determination, there has been no event, condition or

circumstance that has adversely affected or could reasonably be expected to

adversely affect such qualified status. No Employee Plan has participated in,

engaged in or been a party to any transaction that is prohibited under Section

4975 of the Code or Section 406 of ERISA and not exempt under Section 4975 of

the Code or Section 408 of ERISA, respectively. With respect to any Employee

Plan, (i) neither the Company, nor any of its ERISA Affiliates has had asserted

against it any claim for taxes under Chapter 43 of Subtitle D of the Code and

Section 5000 of the Code, or for penalties under ERISA Section 502(c), (i) or

(l), nor, to the knowledge of the Company, is there a basis for any such claim,

and (ii) no officer, director or employee of the Company has committed a

material breach of any fiduciary responsibility or obligation imposed by Title I

of ERISA. Other than routine claims for benefits, there is no claim or

proceeding (including any audit or investigation) pending or, to the knowledge

of the Company, threatened, involving any Employee Plan by any person, or by the

IRS, the United States Department of Labor or any other Governmental Entity

against such Employee Plan or the Company or any ERISA Affiliate.

(b) Section 2.11(b) of the Disclosure Letter sets forth a list as of

the date hereof of all (i) employment agreements with officers of the Company or

any ERISA Affiliate, (ii) agreements with consultants who are individuals

obligating the Company or any ERISA Affiliate to make annual cash payments in an

amount of $200,000 or more, (iii) severance agreements, programs and policies of

the Company with or relating to its employees, except such programs and policies

required to be maintained by applicable law, and (iv) plans, programs,

agreements and other arrangements of the Company or any ERISA Affiliate with or

relating to its employees that contain change in control provisions whether or

not listed in other parts of the Disclosure Letter. The Company has made

available to Parent copies of all such agreements, plans, programs and other

arrangements.

(c) There will be no payment, accrual of additional benefits,

acceleration of payments or vesting of any benefit under any Employee Plan or

any other agreement or arrangement to which the Company or any ERISA Affiliate

is a party, and no employee, officer or director of the Company or any ERISA

Affiliate will become entitled to severance, termination allowance or similar

payments, solely by reason of entering into or in connection with the

transactions contemplated by this Agreement (either alone or in combination with

each other).

(d) No Employee Plan that is a welfare benefit plan within the

meaning of Section 3(1) of ERISA provides benefits to former employees of the

Company or its ERISA Affiliates other than pursuant to Section 4980B of the Code

or similar state laws. The Company and its ERISA Affiliates have complied in all

material respects with the provisions of Part 6 of Title I of ERISA and Sections

4980B, 9801, 9802, 9811 and 9812 of the Code.

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(e) There are no controversies relating to any Employee Plan or

other labor matters pending or, to the knowledge of the Company, threatened

between the Company or any ERISA Affiliate and any of its employees. Neither the

Company nor any ERISA Affiliate is a party to or bound by any collective

bargaining agreement, collective labor agreement or other contract or

arrangement with a labor union, trade union or other organization applicable to

persons employed by the Company or any ERISA Affiliate nor does the Company nor

any ERISA Affiliate know of any activities or proceedings of any labor union to

organize any such employees, or is otherwise required (under any legal

requirement, contract or otherwise) to provide benefits or working conditions

beyond the minimum benefits and working conditions required by applicable law to

be provided pursuant to rules and regulations of any jurisdiction in which the

Company and its Subsidiaries have employees, including the Histadrut (General

Federation of Labor), the Coordination Bureau of Economic Organization and the

Industrialists' Association, and the Company has not been officially apprised

that any petition has been filed or proceeding instituted by an employee or

group of employees of the Company or any Subsidiary, with any Governmental

Entity seeking recognition of a bargaining representative. Except as set forth

in Section 2.11 of the Disclosure Letter, neither the Company nor any Subsidiary

has or is subject to, and no employee of the Company or any Subsidiary benefits

from, any extension order (tzavei harchava) or any contract or arrangement with

respect to termination of employment. All of the employees of the Company and

its Subsidiaries are "at will" employees subject to the termination notice

provisions included in employment agreements or applicable law. No strikes, work

stoppage, material grievance, material claim of unfair labor practice, or

dispute against the Company or any ERISA Affiliate has occurred, is pending or,

to the knowledge of the Company or any ERISA Affiliate, threatened, and to the

knowledge of the Company and its ERISA Affiliates there is no basis for any of

the foregoing. To the knowledge of the Company and its ERISA Affiliates, none of

their employees is a member of any labor union, there is no organizational

activity being made or threatened by or on behalf of any labor union with

respect to any employees of the Company or any ERISA Affiliate. Neither the

Company nor any of its ERISA Affiliates has a workers' committee (including any

"Vaad Ovdim" or similar committee or organization).

(f) Neither the Company nor any of its ERISA Affiliates sponsors or

has ever sponsored, maintained, contributed to, or incurred an obligation to

contribute or incurred a liability (contingent or otherwise) with respect to any

Multiemployer Plan or to a Multiple Employer Plan. For these purposes,

"MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section 3(37) and

4001(a)(3) of ERISA, and "MULTIPLE EMPLOYER PLAN" means any Employee Benefit

Plan sponsored by more than one employer, within the meaning of Sections 4063 or

4064 of ERISA or Section 413(c) of the Code.

(g) To the extent permitted by applicable law, each Employee Plan

that is an employee benefit plan (as defined in Section 3(3) of ERISA) or a

Foreign Plan can be amended or terminated at any time, without consent from any

other party and without liability other than for benefits accrued as of the date

of such amendment or termination (other than charges incurred as a result of

such termination). The Company and its ERISA Affiliates have made full and

timely payment of all amounts required to be contributed or paid as expenses or

accrued such payments in accordance with normal

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procedures under the terms of each Employee Plan and applicable law, and the

Company and its ERISA Affiliates shall continue to do so through the Closing.

(h) As of the date hereof, no employee at the level of director or

above of the Company or any Subsidiary has given written notice terminating his

or her employment with the Company or any Subsidiary. To the knowledge of the

Company and its ERISA Affiliates, no key employee, or group of employees, of the

Company or any ERISA Affiliate has any plans to terminate employment with the

Company or any ERISA Affiliate. The Company and its ERISA Affiliates has

complied in all material respects with all applicable laws relating to the

employment of labor, including provisions thereof relating to wages, hours,

overtime, payment of wages or overtime, equal opportunity and collective

bargaining.

(i) With respect to each master and prototype tax-qualified

retirement plan ("M&P PLAN") sponsored or maintained by the Company and/or any

ERISA Affiliate, the Company and any such ERISA Affiliate has, on or before the

end of the 2001 plan year, either adopted or certified in writing its intent to

adopt the required GUST amendments to each such M&P Plan, and the Company hereby

represents and warrants that an application for a GUST opinion letter for each

such M&P Plan was filed with the IRS by the M&P Plan sponsor on or before

December 31, 2000. The Company and each ERISA Affiliate shall also adopt the

GUST-approved M&P Plan by the deadline specified in IRS Announcement 2001-104.

For purposes hereof, "GUST" means the statutes referenced in IRS Announcement

2001-104. With respect to any individually designed tax-qualified retirement

plans sponsored or maintained by the Company or any ERISA Affiliate, the Company

and each such ERISA Affiliate has adopted the required GUST amendments and

submitted the plan to the IRS on or before February 28, 2002 for a favorable

determination letter as to its tax qualified status.

(j) The Company and its ERISA Affiliates, with respect to any

employee benefit plan or arrangements maintained outside of the United States

(each a "FOREIGN PLAN"): (i) each Foreign Plan and the manner in which it has

been administered satisfies all applicable laws, (ii) all contributions to each

Foreign Plan required through the Closing have been and will be made by the

Company (including by way of accruals in the Company's financial statements, to

the extent permitted by US GAAP), (iii) each Foreign Plan is either fully funded

(or fully insured) based upon generally accepted local actuarial and accounting

practices and procedures or adequate accruals for each Foreign Plan have been

made in the Company's financial statements in accordance with United States

generally accepted accounting principles, (iv) there are no pending

investigations by any Governmental Entity involving any Foreign Plan nor any

pending claims (except for claims for benefits payable in the normal operation

of the Foreign Plans), suits or proceedings against any Foreign Plan or

asserting any rights or claims to benefits under any Foreign Plan; and (v) the

consummation of the transactions contemplated by this Agreement will not by

itself create or otherwise result in any material liability with respect to any

Foreign Plan. Without derogating from the above, the Company's or any

Subsidiary's obligations to provide severance pay to its employees are fully

funded or have been properly provided for in the Financial Statements attached

to the Company SEC Reports in accordance with US GAAP. All other liabilities of

the Company relating to its employees (excluding liabilities for illness pay)

were properly accrued in the

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Financial Statements in accordance with United States generally accepted

accounting principles.

(k) To the knowledge of the Company, no employee of the Company or

any Subsidiary is in any material respect in violation of any term of any

employment contract, non-disclosure agreement, non-competition agreement, or any

restrictive covenant to a former employer relating to the right of any such

employee to be employed by the Company or any Subsidiary because of the nature

of the business conducted or presently proposed to be conducted by it or to the

use of trade secrets or proprietary information of others.

(l) All amounts that the Company or any Subsidiary is legally or

contractually required either (i) to deduct from its employees' salaries or to

transfer to such employees' pension or provident, life insurance, incapacity

insurance, continuing education fund or other similar fund or (ii) to withhold

from their employees' salaries and pay to any Governmental Entity as required by

the Israeli Income Tax Ordinance [New Version] and other applicable laws have,

in each case, been duly deducted, transferred, withheld and paid, and the

Company does not have any outstanding obligation to make any such deduction,

transfer, withholding or payment.

(m) Neither the Company nor any Subsidiary is liable for any

material payment to any trust or other fund or to any Governmental Entity, with

respect to unemployment compensation benefits, social security or other benefits

or obligations for Employees (other than routine payments to be made in the

normal course of business and consistent with past practice).

Section 2.12. Environmental Laws and Regulations. Except as

disclosed in Section 2.12 of the Disclosure Letter, (a) each of the Company and

Subsidiaries has been in compliance with all applicable laws relating to

p