##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-Q



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|           |   |  |  |                                                                                             
|---------- | - |  |  | --------------------------------------------------------------------------------------------
|(Mark One) |   | 
|           | þ |  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |   |  |  | For the quarterly period ended
    November 30, 2002                                        
|           |   |  |  | OR                                                                                          
|          
|           | o |  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |   |  |  | For the transition period
    from            to                                            

Commission File Number: 0-26880



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Verity, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0182779                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

894 Ross Drive

Sunnyvale, California 94089


(408) 541-1500


(Address, including zip code, and telephone
number, including area code of principal executive
offices)


Indicate by check mark whether registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

Yes þ          No o

Indicate by check mark whether registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).

Yes þ          No o

The number of shares outstanding of the
Registrants Common Stock, $0.001 par value, was 34,804,337
as of December 31, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|CERTIFICATION                
|INDEX TO EXHIBITS            
|EXHIBIT 99.1                 



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##### Table of Contents



VERITY, INC.

FORM 10-Q


TABLE OF CONTENTS

|                              |  |                                                                                                                                                                                                         |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                                                                                                         |    | Page
|                              |  |                                                                                                                                                                                                         |    |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements (unaudited)                                                                                                                                                                        |    |      | 2  | 
|                              |  | Condensed Consolidated Balance Sheets 
    As of November 30, 2002 and May 31, 2002.                                                                                                                   |    |      | 2  | 
|                              |  | Condensed Consolidated Statements of
    Operations  For the Three Months Ended
    November 30, 2002 and November 30, 2001, and the Six
    Months Ended November 30, 2002 and November 30,
    2001. |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  For the Six Months Ended November 30,
    2002 and November 30, 2001                                                                              |    |      | 4  | 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                                                                                                |    |      | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                                                                               |    |      | 11 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                                                          |    |      | 29 | 
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                                 |    |      | 30 | 
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                                       |    |      | 31 | 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                                                                                                               |    |      | 31 | 
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                                                                                         |    |      | 31 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                                                                                 |    |      | 31 | 
|Item 5.                       |  | Other Information                                                                                                                                                                                       |    |      | 31 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                                                                        |    |      | 32 | 
|Signature                     |  |                                                                                                                                                                                                         | 33 |     
|Certifications                |  |                                                                                                                                                                                                         | 34 |     



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.     Financial
Statements


VERITY, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                |                                                                                                                                         |                                            |         |         |         |  |         |         |         | 
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                |                                                                                                                                         | November 30,                               |         | May 31,
|                                |                                                                                                                                         | 2002                                       |         | 2002   
|                                |                                                                                                                                         |                                            |         |        
|                                |                                                                                                                                         | (unaudited)                                |         |        
|                                |                                                                                                                                         |                                           
|                                |                                                                                                                                         | (In thousands, except per                 
|                                |                                                                                                                                         | share data)                               
|ASSETS                          |                                                                                                                                         |                                            |         |         |         |  |         |        
|Current assets:                 |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                | Cash and cash equivalents                                                                                                               |                                            | $       | 19,443  |         |  | $       | 23,251  |        
|                                | Short-term investments                                                                                                                  |                                            |         | 89,981  |         |  |         | 130,672 |        
|                                | Trade accounts receivable, net                                                                                                          |                                            |         | 18,193  |         |  |         | 20,961  |        
|                                | Deferred tax assets                                                                                                                     |                                            |         | 1,186   |         |  |         | 3,114   |        
|                                | Prepaid and other                                                                                                                       |                                            |         | 6,038   |         |  |         | 5,497   |        
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                |                                                                                                                                         | Total current assets                       |         |         | 134,841 |  |         |         | 183,495 | 
|Property and equipment, net     |                                                                                                                                         |                                            | 5,497   |         |         |  | 6,625   |        
|Long-term investments           |                                                                                                                                         |                                            | 128,036 |         |         |  | 91,433  |        
|Deferred tax assets             |                                                                                                                                         |                                            | 16,597  |         |         |  | 16,597  |        
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                |                                                                                                                                         | Total assets                               |         | $       | 284,971 |  |         | $       | 298,150 | 
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|LIABILITIES                     |                                                                                                                                         |                                            |         |         |         |  |         |        
|Current liabilities:            |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                | Accounts payable                                                                                                                        |                                            | $       | 5,036   |         |  | $       | 5,749   |        
|                                | Accrued compensation                                                                                                                    |                                            |         | 8,660   |         |  |         | 10,376  |        
|                                | Other accrued liabilities                                                                                                               |                                            |         | 2,684   |         |  |         | 2,779   |        
|                                | Deferred revenue                                                                                                                        |                                            |         | 12,727  |         |  |         | 14,981  |        
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                |                                                                                                                                         | Total current liabilities                  |         |         | 29,107  |  |         |         | 33,885  | 
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|Contingencies (Note 6)          |                                                                                                                                         |                                            |         |         |         |  |         |        
|STOCKHOLDERS EQUITY            |                                                                                                                                         |                                            |         |         |         |  |         |        
|Common stock, $0.001 par value: |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                | Authorized: 200,000 shares Issued and
    outstanding: 34,564 shares as of November 30, 2002; and
    35,775 shares as of May 31, 2002. |                                            |         | 35      |         |  |         | 36      |        
|Additional paid-in capital      |                                                                                                                                         |                                            | 236,594 |         |         |  | 250,133 |        
|Retained earnings               |                                                                                                                                         |                                            | 15,877  |         |         |  | 12,133  |        
|Other comprehensive income      |                                                                                                                                         |                                            | 3,358   |         |         |  | 1,963   |        
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                |                                                                                                                                         | Total stockholders equity                 |         |         | 255,864 |  |         |         | 264,265 | 
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        
|                                |                                                                                                                                         | Total liabilities and stockholders equity |         | $       | 284,971 |  |         | $       | 298,150 | 
|                                |                                                                                                                                         |                                            |         |         |         |  |         |        

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

2



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |        |        | 
|------------------------------------------------------------------ | -------------------------- | ------------------------------------- | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                   |                            |                                       |        |                 
|                                                                   |                            | Three Months Ended                    |        | Six Months Ended
|                                                                   |                            | November 30,                          |        | November 30,    
|                                                                   |                            |                                       |        |                 
|                                                                   |                            | 2002                                  |        | 2001             |        | 2002 |        | 2001  
|                                                                   |                            |                                       |        |                  |        |      |        |       
|                                                                   |                            |                                       |        |                 
|                                                                   |                            | (unaudited)                           |        | (unaudited)     
|                                                                   |                            |                                      
|                                                                   |                            | (In thousands, except per share data)
|Revenues:                                                          |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Software products          |                                       | $      | 12,949           |        |      | $      | 13,274 |        |   | $      | 25,255 |        |   | $       | 23,541 |       
|                                                                   | Service and other          |                                       |        | 9,942            |        |      |        | 9,286  |        |   |        | 19,646 |        |   |         | 19,124 |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                            | Total revenues                        |        |                  | 22,891 |      |        |        | 22,560 |   |        |        | 44,901 |   |         |        | 42,665 | 
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Costs of revenues:                                                 |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Software products          |                                       |        | 278              |        |      |        | 644    |        |   |        | 652    |        |   |         | 1,186  |       
|                                                                   | Service and other          |                                       |        | 2,876            |        |      |        | 2,757  |        |   |        | 5,446  |        |   |         | 5,803  |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                            | Total costs of revenues               |        |                  | 3,154  |      |        |        | 3,401  |   |        |        | 6,098  |   |         |        | 6,989  | 
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Gross profit                                                       |                            |                                       | 19,737 |                  |        |      | 19,159 |        |        |   | 38,803 |        |        |   | 35,676  |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Operating expenses:                                                |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Research and development   |                                       |        | 5,165            |        |      |        | 5,955  |        |   |        | 11,108 |        |   |         | 11,891 |       
|                                                                   | Marketing and sales        |                                       |        | 9,300            |        |      |        | 13,396 |        |   |        | 19,504 |        |   |         | 27,994 |       
|                                                                   | General and administrative |                                       |        | 2,371            |        |      |        | 2,909  |        |   |        | 4,966  |        |   |         | 5,741  |       
|                                                                   | Restructuring charge       |                                       |        | 993              |        |      |        | 1,563  |        |   |        | 993    |        |   |         | 1,563  |       
|                                                                   | Charitable contribution    |                                       |        |                 |        |      |        | 1,000  |        |   |        |       |        |   |         | 1,000  |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                            | Total operating expenses              |        |                  | 17,829 |      |        |        | 24,823 |   |        |        | 36,571 |   |         |        | 48,189 | 
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Income (loss) from operations                                      |                            |                                       | 1,908  |                  |        |      | (5,664 | )      |        |   | 2,232  |        |        |   | (12,513 | )     
|Other income, net                                                  |                            |                                       | 1,904  |                  |        |      | 2,629  |        |        |   | 3,808  |        |        |   | 5,499   |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Income (loss) before provision for (benefit
    from) income taxes |                            |                                       | 3,812  |                  |        |      | (3,035 | )      |        |   | 6,040  |        |        |   | (7,014  | )     
|Provision for (benefit from) income taxes                          |                            |                                       | 1,449  |                  |        |      | (1,153 | )      |        |   | 2,296  |        |        |   | (2,665  | )     
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss)                                                  |                            | $                                     | 2,363  |                  |        | $    | (1,882 | )      |        | $ | 3,744  |        |        | $ | (4,349  | )     
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss) per share  basic                                |                            | $                                     | 0.07   |                  |        | $    | (0.05  | )      |        | $ | 0.11   |        |        | $ | (0.12   | )     
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss) per share  diluted                              |                            | $                                     | 0.07   |                  |        | $    | (0.05  | )      |        | $ | 0.10   |        |        | $ | (0.12   | )     
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Number of shares  basic                                           |                            |                                       | 34,699 |                  |        |      | 35,161 |        |        |   | 35,123 |        |        |   | 35,261  |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       
|Number of shares  diluted                                         |                            |                                       | 35,766 |                  |        |      | 35,161 |        |        |   | 36,206 |        |        |   | 35,261  |       
|                                                                   |                            |                                       |        |                  |        |      |        |        |        |   |        |        |        |   |         |       

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

3



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |          |        |        |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | ------- | ------ | -------- | ------ | ------ | -
|                                               |                                                                                                            |                                                          
|                                               |                                                                                                            | Six Months Ended                                         
|                                               |                                                                                                            | November 30,                                             
|                                               |                                                                                                            |                                                          
|                                               |                                                                                                            | 2002                                                      |                                                         | 2001    
|                                               |                                                                                                            |                                                           |                                                         |         
|                                               |                                                                                                            |                                                          
|                                               |                                                                                                            | (unaudited)                                              
|                                               |                                                                                                            |                                                          
|                                               |                                                                                                            | (In thousands)                                           
|Cash flows from operating
    activities:      |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               | Net income (loss)                                                                                          |                                                           | $                                                       | 3,744    |        |         | $      | (4,349   | )     
|                                               | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                           |                                                         |          |        |         |        |          |       
|                                               |                                                                                                            | Depreciation                                              |                                                         |          | 1,726  |         |        |          | 2,265  |       
|                                               |                                                                                                            | Provision for doubtful accounts                           |                                                         |          | 463    |         |        |          | 59     |       
|                                               |                                                                                                            | Deferred income taxes                                     |                                                         |          | 1,928  |         |        |          | (2,665 | )     
|                                               |                                                                                                            | Amortization of premium (discount) on
    securities, net |                                                         |          | 771    |         |        |          | (911   | )     
|                                               | Changes in operating assets and liabilities:                                                               |                                                           |                                                         |          |        |         |        |          |       
|                                               |                                                                                                            | Trade accounts receivable                                 |                                                         |          | 2,883  |         |        |          | 11,242 |       
|                                               |                                                                                                            | Prepaid and other current assets                          |                                                         |          | (490   | )       |        |          | (266   | )     
|                                               |                                                                                                            | Accounts payable                                          |                                                         |          | (769   | )       |        |          | (466   | )     
|                                               |                                                                                                            | Accrued compensation and other accrued liabilities        |                                                         |          | (1,942 | )       |        |          | (3,234 | )     
|                                               |                                                                                                            | Deferred revenue                                          |                                                         |          | (2,309 | )       |        |          | (3,355 | )     
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               |                                                                                                            |                                                           | Net cash provided by (used in) operating
    activities |          |        | 6,005   |        |          |        | (1,680 | )
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|Cash flows from investing
    activities:      |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               | Acquisition of equipment and leasehold
    improvements                                                    |                                                           |                                                         | (598     | )      |         |        | (2,328   | )     
|                                               | Purchases of marketable securities                                                                         |                                                           |                                                         | (244,761 | )      |         |        | (278,209 | )     
|                                               | Maturity of marketable securities                                                                          |                                                           |                                                         | 96,771   |        |         |        | 174,382  |       
|                                               | Proceeds from sale of marketable securities                                                                |                                                           |                                                         | 151,813  |        |         |        | 111,203  |       
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               |                                                                                                            |                                                           | Net cash provided by investing activities               |          |        | 3,225   |        |          |        | 5,048  |  
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|Cash flows from financing
    activities:      |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               | Proceeds from the sale of common stock, net of
    issuance costs                                          |                                                           |                                                         | 3,020    |        |         |        | 6,736    |       
|                                               | Repurchases of common stock                                                                                |                                                           |                                                         | (16,558  | )      |         |        | (9,994   | )     
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               |                                                                                                            |                                                           | Net cash used in financing activities                   |          |        | (13,538 | )      |          |        | (3,258 | )
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|Effect of exchange rate changes on cash        |                                                                                                            |                                                           | 500                                                     |          |        |         | (135   | )       
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|                                               |                                                                                                            |                                                           | Net decrease in cash and cash equivalents               |          |        | (3,808  | )      |          |        | (25    | )
|Cash and cash equivalents, beginning of period |                                                                                                            |                                                           | 23,251                                                  |          |        |         | 12,210 |         
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         
|Cash and cash equivalents, end of period       |                                                                                                            | $                                                         | 19,443                                                  |          |        | $       | 12,185 |         
|                                               |                                                                                                            |                                                           |                                                         |          |        |         |        |         

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

4



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##### Table of Contents



VERITY, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Information as of November 30, 2002 and
for the three and six months ended


November 30, 2002 and 2001 and thereafter
is unaudited)




|   |                                   
|-- | ----------------------------------
|1. | Interim Financial Data (Unaudited)

The unaudited condensed consolidated financial
statements for Verity, Inc. (the Company or
Verity) as of November 30, 2002 and for the
three and six months ended November 30, 2002 and 2001 have
been prepared on the same basis as the Companys audited
financial statements and, in the opinion of management, include
all material adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial
position and results of operations in accordance with generally
accepted accounting principles. Although certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, the
Company believes the disclosures made are adequate to make the
information presented not misleading. The accompanying financial
statements should be read in conjunction with the Companys
annual financial statements contained in the Companys
Annual Report on Form 10-K for the year ended May 31,
2002.

The Companys balance sheet as of
May 31, 2002 was derived from the Companys audited
financial statements, but does not include all disclosures
necessary for the presentation to be in accordance with
generally accepted accounting principles.



|   |                                                                     
|-- | --------------------------------------------------------------------
|2. | Computation of Net Income (Loss) and Net
    Income (Loss) Per Share

Basic earnings per share are computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Dilutive common equivalent shares
consist of in-the-money stock options.
In-the-money options are those where the exercise
price is lower than the average market price being used to
determine the value. Veritys average market price for the
quarter ended November 30, 2002 was $10.3193. All common
equivalent shares have been excluded from the computation of
diluted net loss per share for the three and six months ended
November 30, 2001 because the effect would be anti-dilutive.

Basic and diluted net income (loss) per
share are calculated as follows for the three and six months
ended November 30, 2002 and 2001 (in thousands, except
per share data):

|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |        |  
|-------- | ------------------------------------------- | ------------------ | - | ---------------- |  | ---- | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|         |                                             |                    |   |                 
|         |                                             | Three Months Ended |   | Six Months Ended
|         |                                             | November 30,       |   | November 30,    
|         |                                             |                    |   |                 
|         |                                             | 2002               |   | 2001             |  | 2002 |   | 2001  
|         |                                             |                    |   |                  |  |      |   |       
|Basic:   |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 34,699           |  |      |   | 35,161 |   |  |   | 35,123 |  |  |   | 35,261 |  
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 2,363            |  |      | $ | (1,882 | ) |  | $ | 3,744  |  |  | $ | (4,349 | )
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.07             |  |      | $ | (0.05  | ) |  | $ | 0.11   |  |  | $ | (0.12  | )
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|Diluted: |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 34,699           |  |      |   | 35,161 |   |  |   | 35,123 |  |  |   | 35,261 |  
|         | Common equivalent shares from stock options |                    |   | 1,067            |  |      |   |       |   |  |   | 1,083  |  |  |   |       |  
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Shares used in per share calculation        |                    |   | 35,766           |  |      |   | 35,161 |   |  |   | 36,206 |  |  |   | 35,261 |  
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 2,363            |  |      | $ | (1,882 | ) |  | $ | 3,744  |  |  | $ | (4,349 | )
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.07             |  |      | $ | (0.05  | ) |  | $ | 0.10   |  |  | $ | (0.12  | )
|         |                                             |                    |   |                  |  |      |   |        |   |  |   |        |  |  |   |       

5



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of November 30, 2002 and 2001, zero and
13,664,707 anti-dilutive shares have been excluded from the
dilutive effect of common stock equivalent shares.



|   |            
|-- | -----------
|3. | Investments

As of November 30, 2002, available-for-sale
securities consist of the following (in thousands):

|                                        |                   |           |         |            |  |       |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | --------- | ------- | ---------- |  | ----- | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |           |         | Gross      |  |      
|                                        |                   | Amortized |         | Unrealized |  | Fair 
|                                        |                   | Cost      |         | Gains      |  | Value
|                                        |                   |           |         |            |  |      
|Corporate commercial paper  short-term |                   | $         | 89,331  |            |  | $     | 650   |       |  | $ | 89,981  |        
|Corporate commercial paper  long-term  |                   |           | 126,545 |            |  |       | 1,491 |       |  |   | 128,036 |        
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        
|                                        | Total investments |           | $       | 215,876    |  |       | $     | 2,141 |  |   | $       | 218,017 | 
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        

At November 30, 2002, scheduled maturities
of investments classified as available-for-sale are as follows
(in thousands):

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Within one year                    |  | $ | 89,981  | 
|After one year through three years |  |   | 128,036 | 
|                                   |  |   |         | 
|                                   |  | $ | 218,017 | 
|                                   |  |   |         | 

As of May 31, 2002, available-for-sale
securities consist of the following (in thousands):

|                                        |                   |           |         |            |  |       |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | --------- | ------- | ---------- |  | ----- | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |           |         | Gross      |  |      
|                                        |                   | Amortized |         | Unrealized |  | Fair 
|                                        |                   | Cost      |         | Gains      |  | Value
|                                        |                   |           |         |            |  |      
|Corporate commercial paper  short-term |                   | $         | 130,002 |            |  | $     | 670   |       |  | $ | 130,672 |        
|Corporate commercial paper  long-term  |                   |           | 90,391  |            |  |       | 1,042 |       |  |   | 91,433  |        
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        
|                                        | Total investments |           | $       | 220,393    |  |       | $     | 1,712 |  |   | $       | 222,105 | 
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        



|   |                            
|-- | ---------------------------
|4. | Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the
change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from
non-owner sources. The following are the components of
comprehensive income (loss) (in thousands):

|                                                                  |  |                    |       |                  |  |      |        |      |  |   |       |  |  |   |        |  
|----------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ------ | ---- |  | - | ----- |  |  | - | ------ | -
|                                                                  |  |                    |       |                 
|                                                                  |  | Three Months Ended |       | Six Months Ended
|                                                                  |  | November 30,       |       | November 30,    
|                                                                  |  |                    |       |                 
|                                                                  |  | 2002               |       | 2001             |  | 2002 |        | 2001
|                                                                  |  |                    |       |                  |  |      |        |     
|Net income (loss)                                                 |  | $                  | 2,363 |                  |  | $    | (1,882 | )    |  | $ | 3,744 |  |  | $ | (4,349 | )
|Foreign currency translations gain (loss)                         |  |                    | 166   |                  |  |      | (131   | )    |  |   | 887   |  |  |   | (131   | )
|Unrealized gain (loss) on available-for-sale
    investments, net |  |                    | (108  | )                |  |      | 967    |      |  |   | 508   |  |  |   | 1,677  |  
|                                                                  |  |                    |       |                  |  |      |        |      |  |   |       |  |  |   |        |  
|Comprehensive income (loss)                                       |  | $                  | 2,421 |                  |  | $    | (1,046 | )    |  | $ | 5,139 |  |  | $ | (2,803 | )
|                                                                  |  |                    |       |                  |  |      |        |      |  |   |       |  |  |   |        |  



|   |                 
|-- | ----------------
|5. | Business Segment

The Company has sales and marketing operations
located outside the United States in the Netherlands, the United
Kingdom, France, Germany, South Africa, Mexico, Australia, a
joint investment partnership in Brazil and a development and
technical support operation in Canada. Foreign branch and
subsidiary revenues

6



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consist primarily of maintenance and consulting
services and are being allocated based on foreign branch and
subsidiary location.

|          |        |                    |   |                  |        |      |   |        |        |  |   |        |        |  |   |        |        | 
|--------- | ------ | ------------------ | - | ---------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|          |        |                    |   |                 
|          |        | Three Months Ended |   | Six Months Ended
|          |        | November 30,       |   | November 30,    
|          |        |                    |   |                 
|          |        | 2002               |   | 2001             |        | 2002 |   | 2001  
|          |        |                    |   |                  |        |      |   |       
|Revenues: |        |                    |   |                  |        |      |   |        |        |  |   |        |        |  |   |       
|          | USA    |                    | $ | 19,197           |        |      | $ | 19,562 |        |  | $ | 37,568 |        |  | $ | 36,743 |       
|          | Europe |                    |   | 3,080            |        |      |   | 2,684  |        |  |   | 6,224  |        |  |   | 5,417  |       
|          | ROW    |                    |   | 614              |        |      |   | 314    |        |  |   | 1,109  |        |  |   | 505    |       
|          |        |                    |   |                  |        |      |   |        |        |  |   |        |        |  |   |       
|          |        | Consolidated       |   | $                | 22,891 |      |   | $      | 22,560 |  |   | $      | 44,901 |  |   | $      | 42,665 | 
|          |        |                    |   |                  |        |      |   |        |        |  |   |        |        |  |   |       

|                   |        |              |   |         |        |  |   |        |        | 
|------------------ | ------ | ------------ | - | ------- | ------ |  | - | ------ | ------ | 
|                   |        | November 30, |   | May 31,
|                   |        | 2002         |   | 2002   
|                   |        |              |   |        
|Long-lived assets: |        |              |   |         |        |  |   |       
|                   | USA    |              | $ | 20,347  |        |  | $ | 21,106 |       
|                   | Europe |              |   | 762     |        |  |   | 838    |       
|                   | ROW    |              |   | 985     |        |  |   | 1,278  |       
|                   |        |              |   |         |        |  |   |       
|                   |        | Consolidated |   | $       | 22,094 |  |   | $      | 23,222 | 
|                   |        |              |   |         |        |  |   |       

Transfers between geographic areas are recorded
at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities.
Long-lived assets of geographic areas are those assets used in
the Companys operations in each area.

No single customer accounted for more than 10% of
the Companys total revenues for the three and six month
periods ended November 30, 2002 and 2001. Revenues derived
from sales to the United States government and its agencies were
11.1% and 6.3% of the Companys total revenues for the
three month periods ended November 30, 2002 and 2001,
respectively, and 10.1% and 6.3% of the Companys total
revenues for the six month periods ended November 30, 2002
and 2001, respectively.



|   |              
|-- | -------------
|6. | Contingencies

On June 7, 2001, Verity filed a complaint in
federal district court in the Northern District of California,
San Jose Division, against BroadVision, Inc. (Case
No. C01-20501-PVT-ADR). BroadVision is a software company
that Verity in the past has licensed to distribute Veritys
copyrighted software known as the Verity Developer Kit
(VDK). Verity alleges in its complaint that under
the terms of the parties licenses, BroadVision was
authorized to distribute certain limited portions of VDK as an
embedded component of specified software applications of
BroadVision. Verity further alleges that BroadVision has
distributed portions of VDK that it was not authorized to
distribute, failed to prevent end users from accessing
unlicensed functions and encouraged end users to make use of
unlicensed functions of VDK. Verity further alleges that it
terminated its license with BroadVision on April 24, 2001
and that BroadVision no longer has any right to distribute any
portion of VDK.

Based on the foregoing allegations, Verity has
asserted claims against BroadVision for copyright infringement,
declaratory relief, unfair competition, interference with
economic advantage, breach of contract, and breach of the
implied covenant of good faith and fair dealing. Verity seeks by
its complaint, among other things, an injunction to prohibit
BroadVision from further distribution of VDK, damages, including
statutory damages, according to proof based on
BroadVisions unauthorized distribution of VDK and
attorneys fees.

7



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

BroadVision answered Veritys complaint on
June 28, 2001 and denied the material allegations of the
complaint and asserted affirmative defenses to Veritys
claims. BroadVision also asserted a counterclaim alleging that
Verity had breached the parties license and the implied
covenant of good faith and fair dealing contained therein
(1) by failing to pay BroadVision referral fees that it
claims Verity owes to BroadVision for BroadVisions efforts
in securing the sale of Verity Advanced K-2 Search Modules; and
(2) by failing to provide support to BroadVision for VDK
after Verity terminated the parties license. BroadVision
seeks by its counterclaim, among other things, damages according
to proof, a declaration that BroadVision has not breached the
parties license and attorneys fees.

Verity answered BroadVisions counterclaim
on July 23, 2001 and denied the material allegations of the
counterclaim and asserted various affirmative defenses to
BroadVisions claims. On August 8, 2002, Verity filed
a first amended complaint against BroadVision which, among other
things, added a claim for contributory copyright infringement
against BroadVision based on allegations that BroadVision
knowingly facilitated the use by end users of unlicensed
functionality of VDK. BroadVision answered Veritys amended
complaint on August 29, 2002 and denied the material
allegations of the amended complaint and asserted affirmative
defenses to Veritys claims. BroadVision also reasserted
its counterclaim described above. Verity answered the
counterclaim on September 23, 2002 and denied the material
allegations of the counterclaim and asserted various affirmative
defenses to BroadVisions claims.

The action is currently in the discovery phase.
The trial date has been set for July 14, 2003.

The Company intends to defend all of these
actions vigorously. However, there can be no assurance that any
of the complaints discussed above will be resolved without
costly litigation, or in a manner that is not materially adverse
to Veritys financial position, results of operations or
cash flows. No estimate can be made of the possible loss or
possible range of loss, if any, associated with the resolution
of these contingencies and accordingly, the Company has not
recorded a liability.



|   |                         
|-- | ------------------------
|7. | Stock Repurchase Program

On June 20, 2002, Verity announced an
extension of the stock repurchase program it initiated on
September 12, 2001. The program calls for the repurchase of
outstanding shares of Veritys common stock up to an
aggregate value of $50.0 million. Through November 30,
2002, Verity repurchased and retired 3,156,300 shares of its
common stock through open market transactions, valued at
approximately $36.5 million. Verity repurchased and retired
1,654,100 and 920,300 shares, valued at approximately
$16.6 million and $10.0 million in the six month
periods ended November 30, 2002 and 2001, respectively. The
program will terminate at the end of the current fiscal year
ending May 31, 2003 unless extended or shortened by the
Board of Directors.



|   |                                 
|-- | --------------------------------
|8. | Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This standard
eliminates the amortization of goodwill and requires goodwill to
be reviewed at least annually for impairment, the useful lives
of previously recognized intangible assets to be reassessed and
the remaining amortization periods to be adjusted accordingly.
This standard is effective for the Companys fiscal year
beginning on June 1, 2002. The adoption of SFAS
No. 142 had no impact on the Companys financial
position or results of operations.

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121),
however it retains the fundamental provisions of SFAS
No. 121 for (1) the recognition and measurement of the
impairment of long-lived assets to be held and used and
(2) the measurement of long-lived assets to be disposed of
by sale. SFAS No. 144 develops a single accounting model
for long-lived assets to be disposed of by sale, whether
previously held and used or newly

8



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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquired assets and consequently amends
Accounting Principles Board Opinion No. 30, Reporting
Results of Operations  Reporting the Effects of
Disposal of a Division of a Business. Additionally, SFAS
No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 is effective
for the Companys fiscal year beginning June 1, 2002.
The adoption of SFAS No. 144 did not have a significant
impact on the Companys financial position or results of
operations.

In November 2001, the Emerging Issues Task Force
(EITF) of the FASB reached a consensus on Issue
No. 01-09, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors
Products. EITF No. 01-09 addresses whether
consideration from a vendor to a reseller of the vendors
products is an adjustment to the selling prices of the
vendors products and, therefore, should be deducted from
revenue when recognized in the vendors results of
operations, or a cost incurred by the vendor for assets or
services received from the reseller and, therefore, should be an
expense when recognized in the vendors results of
operations. EITF No. 01-09 is effective for the Company
beginning November 1, 2001. The Companys adoption of
EITF No. 01-09 did not have a significant impact on the
Companys financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 nullifies the guidance of
the EITF in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Under EITF Issue No. 94-3, an entity
recognized a liability for an exit cost on the date that the
entity committed itself to an exit plan. In SFAS No. 146,
the FASB acknowledges that an entitys commitment to a plan
does not, by itself, create a present obligation to other
parties that meets the definition of a liability and requires
that a liability for a cost that is associated with an exit or
disposal activity be recognized when the liability is incurred.
It also establishes that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be
effective for exit or disposal activities that are initiated
after December 31, 2002. The Company does not expect an
impact on its financial position and results of operations from
the adoption of SFAS No. 146.

9.     Restructuring
Costs

During each of the periods ended
November 30, 2002 and November 30, 2001, the Company
executed restructuring efforts designed to reduce costs and to
better align its expense levels with current revenue levels and
ensure conservative spending during the current period of
economic uncertainty, as described below.

|                                                     |                                        |                             |   |              |     |  |   |     |     | 
|---------------------------------------------------- | -------------------------------------- | --------------------------- | - | ------------ | --- |  | - | --- | --- | 
|                                                     |                                        | November 30,                |   | November 30,
|                                                     |                                        | 2002                        |   | 2001        
|                                                     |                                        |                             |   |             
|                                                     |                                        |                            
|                                                     |                                        | (in millions)              
|Restructuring charges: (six month periods
    ended) |                                        |                             |   |              |     |  |   |    
|                                                     | Severance costs                        |                             | $ | 0.7          |     |  | $ | 1.2 |    
|                                                     | Legal and other outside services costs |                             |   | 0.1          |     |  |   | 0.3 |    
|                                                     | Other charges                          |                             |   | 0.2          |     |  |   | 0.1 |    
|                                                     |                                        |                             |   |              |     |  |   |    
|                                                     |                                        | Total restructuring charges |   | $            | 1.0 |  |   | $   | 1.6 | 
|                                                     |                                        |                             |   |              |     |  |   |    

With respect to the restructuring executed during
the quarter ended November 30, 2002, the Company
implemented this worldwide restructuring of its corporate
structure to focus on reducing expenses and improving efficiency
due to continued macro-economic and capital spending issues
affecting the software industry. In connection with the
restructuring, the Company recorded in the quarter ended
November 30, 2002, a $1.0 million restructuring
charge, of which approximately $0.7 million was related to
severance costs associated with the reduction in the worldwide
workforce by approximately 50 employees, approximately

9



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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$0.1 million to legal and other outside
services in connection with the restructuring, and approximately
$0.2 million to other costs associated with the
restructuring. The restructuring impacted operations in the
U.S., Canada and the Netherlands and was concentrated in
research and development and, to a lesser extent, sales and
marketing.

|                                |                              |               |      |                  |  |       |      |       |  |   |     |     |  |   |      |     | 
|------------------------------- | ---------------------------- | ------------- | ---- | ---------------- |  | ----- | ---- | ----- |  | - | --- | --- |  | - | ---- | --- | 
|                                |                              | Workforce     |      | Legal and Other  |  |       |      |      
|                                |                              | Reduction     |      | Outside Services |  | Other |      | Total
|                                |                              |               |      |                  |  |       |      |      
|                                |                              |               |      |                 
|                                |                              | (in millions) |      |                 
|Quarter Ended November 30, 2002 |                              |               |      |                  |  |       |      |       |  |   |     |     |  |   |      |    
|Restructuring provision         |                              | $             | 0.7  |                  |  | $     | 0.1  |       |  | $ | 0.2 |     |  | $ | 1.0  |    
|Cash payments                   |                              |               | (0.6 | )                |  |       | (0.1 | )     |  |   | 0.0 |     |  |   | (0.7 | )  
|                                |                              |               |      |                  |  |       |      |       |  |   |     |     |  |   |      |    
|                                | Balance at November 30, 2002 |               | $    | 0.1              |  |       | $    | 0.0   |  |   | $   | 0.2 |  |   | $    | 0.3 | 
|                                |                              |               |      |                  |  |       |      |       |  |   |     |     |  |   |      |    

Of the total $1.0 million restructuring
charge, approximately $0.3 million remains unpaid at
November 30, 2002. Of the $0.3 million, approximately
$0.1 million relates to severance costs to be paid in
future quarters, approximately $0.2 million to other costs
associated with the restructuring, and the balance to legal and
other outside services. The unpaid amount will be paid out over
the next quarter.

With respect to the restructuring executed during
the quarter ended November 30, 2001, the Company
implemented this worldwide restructuring and recorded a
$1.6 million restructuring charge, of which approximately
$1.2 million was related to severance costs associated with
the reduction in the worldwide workforce by 65 employees,
approximately $0.3 million to legal and other outside
services in connection with the restructuring and approximately
$0.1 million to other costs associated with the
restructuring. The restructuring impacted operations in the
U.S., Canada, the U.K., Germany, France, the Netherlands, Sweden
and South Africa.

10.     Subsequent
Event

On December 17, 2002, the Company completed
the purchase of certain assets and obligations of Inktomi
Corporations (Inktomis) enterprise
search software business. Under the terms of the deal, the
Company acquired from Inktomi, a provider of Web search and
enterprise information retrieval solutions, the assets relating
to Inktomis enterprise search software business, which
includes basic search, categorization and content refinement
capabilities, as well as its XML technology assets. The Company
paid a purchase price of $25 million in cash, and assumed
Inktomis obligations under certain existing enterprise
search business contracts, including customer support
obligations. In addition, the Company employed selected
development, sales and marketing, and support personnel from
Inktomis enterprise search business unit.

10



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the consolidated financial statements and
related notes, which appear in our Annual Report on
Form 10-K for the fiscal year ended May 31, 2002. The
following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including those
discussed below and elsewhere in this Quarterly Report on
Form 10-Q, particularly under the heading
 Risk Factors below.

Overview

We offer solutions and technology that address
the business portal market. The business portal market includes
corporate portals used for sharing information within an
enterprise, e-commerce portals for online selling and market
exchange portals for business-to-business activities. Business
portals provide personalized information to employees, partners,
customers and suppliers. We expect that for the foreseeable
future we will continue to derive the largest portion of our
revenues from licensing our technology for enterprise
applications and business portal solutions.

Results of Operations

The following table sets forth the percentage of
total revenues represented by certain items in our Condensed
Consolidated Statements of Operations for the periods indicated:

|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |      |       | 
|------------------------------------------------------------------ | -------------------------- | ------------------------ | ---- | ------------ | ----- | ---- | ----- | ---- | ----- |  | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                                                   |                            |                          |      |             
|                                                                   |                            | Three Months             |      | Six Months  
|                                                                   |                            | Ended                    |      | Ended       
|                                                                   |                            | November 30,             |      | November 30,
|                                                                   |                            |                          |      |             
|                                                                   |                            | 2002                     |      | 2001         |       | 2002 |       | 2001
|                                                                   |                            |                          |      |              |       |      |       |     
|                                                                   |                            |                          |      |             
|                                                                   |                            | (unaudited)              |      | (unaudited) 
|Revenues:                                                          |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   | Software products          |                          |      | 56.6         | %     |      |       | 58.8 | %     |  |      | 56.2 | %     |  |       | 55.2 | %    
|                                                                   | Service and other          |                          |      | 43.4         |       |      |       | 41.2 |       |  |      | 43.8 |       |  |       | 44.8 |      
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   |                            | Total revenues           |      |              | 100.0 |      |       |      | 100.0 |  |      |      | 100.0 |  |       |      | 100.0 | 
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Costs of revenues:                                                 |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   | Software products          |                          |      | 1.2          |       |      |       | 2.9  |       |  |      | 1.5  |       |  |       | 2.8  |      
|                                                                   | Service and other          |                          |      | 12.6         |       |      |       | 12.2 |       |  |      | 12.1 |       |  |       | 13.6 |      
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   |                            | Total costs of revenues  |      |              | 13.8  |      |       |      | 15.1  |  |      |      | 13.6  |  |       |      | 16.4  | 
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Gross profit                                                       |                            |                          | 86.2 |              |       |      | 84.9  |      |       |  | 86.4 |      |       |  | 83.6  |     
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Operating expenses:                                                |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   | Research and development   |                          |      | 22.6         |       |      |       | 26.4 |       |  |      | 24.7 |       |  |       | 27.9 |      
|                                                                   | Marketing and sales        |                          |      | 40.6         |       |      |       | 59.4 |       |  |      | 43.4 |       |  |       | 65.6 |      
|                                                                   | General and administrative |                          |      | 10.4         |       |      |       | 12.9 |       |  |      | 11.1 |       |  |       | 13.5 |      
|                                                                   | Restructuring charge       |                          |      | 4.3          |       |      |       | 6.9  |       |  |      | 2.2  |       |  |       | 3.7  |      
|                                                                   | Charitable contribution    |                          |      | 0.0          |       |      |       | 4.4  |       |  |      | 0.0  |       |  |       | 2.3  |      
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|                                                                   |                            | Total operating expenses |      |              | 77.9  |      |       |      | 110.0 |  |      |      | 81.4  |  |       |      | 113.0 | 
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Income (loss) from operations                                      |                            |                          | 8.3  |              |       |      | (25.1 | )    |       |  | 5.0  |      |       |  | (29.4 | )   
|Other income, net                                                  |                            |                          | 8.4  |              |       |      | 11.7  |      |       |  | 8.5  |      |       |  | 12.9  |     
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Income (loss) before provision for (benefit
    from) income taxes |                            |                          | 16.7 |              |       |      | (13.4 | )    |       |  | 13.5 |      |       |  | (16.5 | )   
|Provision for (benefit from) income taxes                          |                            |                          | 6.3  |              |       |      | (5.1  | )    |       |  | 5.1  |      |       |  | (6.3  | )   
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     
|Net income (loss)                                                  |                            |                          | 10.4 | %            |       |      | (8.3  | )%   |       |  | 8.4  | %    |       |  | (10.2 | )%  
|                                                                   |                            |                          |      |              |       |      |       |      |       |  |      |      |       |  |       |     

11



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| |         
| | --------
| | Revenues

|                   |  |                       |      |              |  |        |      |  |  |  |     |  
|------------------ |  | --------------------- | ---- | ------------ |  | ------ | ---- |  |  |  | --- | -
|                   |  | November 30,          |      | November 30, |  |       
|                   |  | 2002                  |      | 2001         |  | Change
|                   |  |                       |      |              |  |       
|                   |  |                       |      |             
|                   |  | (dollars in millions) |      |             
|Total revenues     |  |                       |      |              |  |        |      |  |  |  |     |  
|Three months ended |  | $                     | 22.9 |              |  | $      | 22.6 |  |  |  | 1.5 | %
|Six months ended   |  | $                     | 44.9 |              |  | $      | 42.7 |  |  |  | 5.2 | %

The increase in our total revenues for the three
month period ended November 30, 2002, compared with the
same period a year ago, was primarily due to an increase in
service and other revenues, partially offset by a decrease in
software product sales. The increase in our total revenues for
the six month period ended November 30, 2002 was primarily
due to an increase in software product sales, particularly our
K2 Enterprise application, and to a lesser extent to an increase
in service and other revenues.

Revenues derived from foreign operations
accounted for 16.1% and 13.3% of total revenues for the three
month periods ended November 30, 2002 and 2001,
respectively, and 16.3% and 13.9% of total revenues for the six
month periods ended November 30, 2002 and 2001,
respectively. Our export sales consist primarily of products
licensed for delivery outside of the United States. For the
three month periods ended November 30, 2002 and 2001,
export sales accounted for 21.9% and 18.2% of total revenues,
respectively. For the six month periods ended November 30,
2002 and 2001, export sales accounted for 20.7% and 19.8% of
total revenues, respectively.

No single customer accounted for more than 10% of
our total revenues for the three and six month periods ended
November 30, 2002 and 2001. Revenues derived from sales to
the United States government and its agencies were 11.1% and
6.3% of our total revenues for the three month periods ended
November 30, 2002 and 2001, respectively, and 10.1% and
6.3% of our total revenues for the six month periods ended
November 30, 2002 and 2001, respectively.

|                          |                              |                       |      |              |   |        |      |      |   |  |      |    | 
|------------------------- | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ---- | -- | 
|                          |                              | November 30,          |      | November 30, |   |       
|                          |                              | 2002                  |      | 2001         |   | Change
|                          |                              |                       |      |              |   |       
|                          |                              |                       |      |             
|                          |                              | (dollars in millions) |      |             
|Software product revenues |                              |                       |      |              |   |        |      |      |   |  |      |   
|Three months ended        |                              | $                     | 12.9 |              |   | $      | 13.3 |      |   |  | (2.5 | )%
|                          | Percentage of total revenues |                       |      | 56.6         | % |        |      | 58.8 | % |  |      |    | 
|Six months ended          |                              | $                     | 25.3 |              |   | $      | 23.5 |      |   |  | 7.3  | % 
|                          | Percentage of total revenues |                       |      | 56.2         | % |        |      | 55.2 | % |  |      |    | 

We experienced a modest decrease in software
product sales in the three month period ended November 30,
2002, compared with the same period a year ago. The increase in
software product revenues for the six month period ended
November 30, 2002 was principally due to increased sales of
our K2 Enterprise application. In addition, software product
sales in the quarter ended August 31, 2001 were unusually
low, contributing to the increase in software product revenues
for the six month period, despite the decrease in software
product revenues for the second quarter ended November 30,
2002.

|                           |                              |                       |      |              |   |        |      |      |   |  |     |   | 
|-------------------------- | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | --- | - | 
|                           |                              | November 30,          |      | November 30, |   |       
|                           |                              | 2002                  |      | 2001         |   | Change
|                           |                              |                       |      |              |   |       
|                           |                              |                       |      |             
|                           |                              | (dollars in millions) |      |             
|Service and other revenues |                              |                       |      |              |   |        |      |      |   |  |     |  
|Three months ended         |                              | $                     | 9.9  |              |   | $      | 9.3  |      |   |  | 7.1 | %
|                           | Percentage of total revenues |                       |      | 43.4         | % |        |      | 41.2 | % |  |     |   | 
|Six months ended           |                              | $                     | 19.6 |              |   | $      | 19.1 |      |   |  | 2.7 | %
|                           | Percentage of total revenues |                       |      | 43.8         | % |        |      | 44.8 | % |  |     |   | 

Our service and other revenues consist primarily
of fees for software maintenance, consulting and training. The
increases in service and other revenues for the three and six
month periods ended November 30, 2002, compared with the
same periods a year ago, were primarily due to increased sales
of consulting services.

12



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| |                  
| | -----------------
| | Costs of Revenues

|                           |                                         |                       |     |              |   |        |     |     |   |  |       |    | 
|-------------------------- | --------------------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ----- | -- | 
|                           |                                         | November 30,          |     | November 30, |   |       
|                           |                                         | 2002                  |     | 2001         |   | Change
|                           |                                         |                       |     |              |   |       
|                           |                                         |                       |     |             
|                           |                                         | (dollars in millions) |     |             
|Costs of software products |                                         |                       |     |              |   |        |     |     |   |  |       |   
|Three months ended         |                                         | $                     | 0.3 |              |   | $      | 0.6 |     |   |  | (56.8 | )%
|                           | Percentage of software product revenues |                       |     | 2.2          | % |        |     | 4.9 | % |  |       |    | 
|Six months ended           |                                         | $                     | 0.7 |              |   | $      | 1.2 |     |   |  | (45.0 | )%
|                           | Percentage of software product revenues |                       |     | 2.6          | % |        |     | 5.0 | % |  |       |    | 

Costs of our software products consists primarily
of product media, duplication, manuals, packaging materials,
shipping expenses, and in certain instances, royalties for
licensing of third-party software incorporated in our products.
The decreases in costs of software products in absolute dollars
and as a percentage of software product revenues for the three
and six month periods ended November 30, 2002, compared
with the same periods a year ago, were primarily attributable to
decreased costs of third-party software components and to
decreased costs for manuals and other shipping expenses.

In addition, during fiscal years 2002 and 2003,
we did not capitalize any software development costs as these
costs were not material.

|                           |                                          |                       |     |              |   |        |     |      |   |  |      |    | 
|-------------------------- | ---------------------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ---- | -- | 
|                           |                                          | November 30,          |     | November 30, |   |       
|                           |                                          | 2002                  |     | 2001         |   | Change
|                           |                                          |                       |     |              |   |       
|                           |                                          |                       |     |             
|                           |                                          | (dollars in millions) |     |             
|Costs of service and other |                                          |                       |     |              |   |        |     |      |   |  |      |   
|Three months ended         |                                          | $                     | 2.9 |              |   | $      | 2.8 |      |   |  | 4.3  | % 
|                           | Percentage of service and other revenues |                       |     | 28.9         | % |        |     | 29.7 | % |  |      |    | 
|Six months ended           |                                          | $                     | 5.4 |              |   | $      | 5.8 |      |   |  | (6.2 | )%
|                           | Percentage of service and other revenues |                       |     | 27.7         | % |        |     | 30.3 | % |  |      |    | 

Costs of service and other revenues consist of
costs incurred in providing consulting services, customer
training, telephone support and product upgrades to customers.
The slight increase in absolute dollars of costs of service and
other revenues for the three month period ended
November 30, 2002, compared with the same period a year
ago, was due to increased personnel costs due to higher
headcount. The decrease as a percentage of costs of service and
other revenues was related to an increase in service and other
revenues.

The decrease in absolute dollars and as a
percentage of costs of service and other revenues for the six
month period ended November 30, 2002, compared with the
same period a year ago, was primarily due to reduced
compensation and other employee related expenses resulting from
lower average headcount. This results from the reduction in
staffing in our professional services organization during the
quarter ended November 30, 2001.

Operating Expenses

|                         |                              |                       |      |              |   |        |      |      |   |  |       |    | 
|------------------------ | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ----- | -- | 
|                         |                              | November 30,          |      | November 30, |   |       
|                         |                              | 2002                  |      | 2001         |   | Change
|                         |                              |                       |      |              |   |       
|                         |                              |                       |      |             
|                         |                              | (dollars in millions) |      |             
|Research and development |                              |                       |      |              |   |        |      |      |   |  |       |   
|Three months ended       |                              | $                     | 5.2  |              |   | $      | 6.0  |      |   |  | (13.3 | )%
|                         | Percentage of total revenues |                       |      | 22.6         | % |        |      | 26.4 | % |  |       |    | 
|Six months ended         |                              | $                     | 11.1 |              |   | $      | 11.9 |      |   |  | (6.6  | )%
|                         | Percentage of total revenues |                       |      | 24.7         | % |        |      | 27.9 | % |  |       |    | 

Research and development expenses consist
primarily of employee compensation and benefits, payments to
outside contractors, depreciation on equipment used for
development and corporate overhead allocations. We anticipate
that research and development expenditures will continue to
comprise a significant percentage

13



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##### Table of Contents



of total revenues, because in our judgment, they
are essential to maintaining our competitive position. We
believe that research and development expenses will increase in
absolute dollars, in our quarter ending February 28, 2003,
primarily as a result of our acquisition of certain assets and
obligations of Inktomis enterprise search software
business. See Item 5. Other Information in PART
II. OTHER INFORMATION.


The decreases in research and development
expenses in absolute dollars and as a percentage of total
revenues for the three and six month periods ended
November 30, 2002, compared with the same periods a year
ago, were primarily due to a decrease in compensation and other
employee related expenses associated with the reduction in
staffing in our research and development organization during the
quarter ended November 30, 2002.

|                    |                              |                       |      |              |   |        |      |      |   |  |       |    | 
|------------------- | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ----- | -- | 
|                    |                              | November 30,          |      | November 30, |   |       
|                    |                              | 2002                  |      | 2001         |   | Change
|                    |                              |                       |      |              |   |       
|                    |                              |                       |      |             
|                    |                              | (dollars in millions) |      |             
|Marketing and sales |                              |                       |      |              |   |        |      |      |   |  |       |   
|Three months ended  |                              | $                     | 9.3  |              |   | $      | 13.4 |      |   |  | (30.6 | )%
|                    | Percentage of total revenues |                       |      | 40.6         | % |        |      | 59.4 | % |  |       |    | 
|Six months ended    |                              | $                     | 19.5 |              |   | $      | 28.0 |      |   |  | (30.3 | )%
|                    | Percentage of total revenues |                       |      | 43.4         | % |        |      | 65.6 | % |  |       |    | 

Marketing and sales expenses consist primarily of
employee compensation and benefits, tradeshows, outbound
marketing and other lead generation activities, public
relations, travel expenses associated with our sales staff and
corporate overhead allocations. We anticipate that we will
continue to make significant investments in marketing and sales
with the goal of continuing to align marketing and sales
expenses with anticipated revenues. We believe that marketing
and sales expenses will increase in absolute dollars, in our
quarter ending February 28, 2003, primarily as a result of
our acquisition of certain assets and obligations of
Inktomis enterprise search software business. See
Item 5. Other Information in PART II.
OTHER INFORMATION.

The decrease in marketing and sales expenses in
absolute dollars for the three month period ended
November 30, 2002, compared with the same period a year
ago, was primarily due to a $3.7 million decrease in
compensation and other employee related expenses associated with
the reduction in staffing in our marketing and sales
organization during the quarters ended November 30, 2002
and November 30, 2001, and to a $0.3 million decrease
in overall marketing program spending. The decrease in marketing
and sales expenses as a percentage of total revenues for the
three month period ended November 30, 2002 was due to the
decrease in absolute costs combined with the increase in total
revenues for the period.

The decrease in marketing and sales expenses in
absolute dollars for the six month period ended
November 30, 2002, compared with the same period a year
ago, was primarily due to a $7.3 million decrease in
compensation and other employee related expenses associated with
the reduction in staffing in our marketing and sales
organization during the quarters ended November 30, 2002
and November 30, 2001, and to a $0.5 million decrease
in overall marketing program spending. The decrease in marketing
and sales expenses as a percentage of total revenues for the
three month period ended November 30, 2002 was due to the
decrease in absolute costs combined with the increase in total
revenues for the period.

|                           |                              |                       |     |              |   |        |     |      |   |  |       |    | 
|-------------------------- | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ----- | -- | 
|                           |                              | November 30,          |     | November 30, |   |       
|                           |                              | 2002                  |     | 2001         |   | Change
|                           |                              |                       |     |              |   |       
|                           |                              |                       |     |             
|                           |                              | (dollars in millions) |     |             
|General and administrative |                              |                       |     |              |   |        |     |      |   |  |       |   
|Three months ended         |                              | $                     | 2.4 |              |   | $      | 2.9 |      |   |  | (18.5 | )%
|                           | Percentage of total revenues |                       |     | 10.4         | % |        |     | 12.9 | % |  |       |    | 
|Six months ended           |                              | $                     | 5.0 |              |   | $      | 5.7 |      |   |  | (13.5 | )%
|                           | Percentage of total revenues |                       |     | 11.1         | % |        |     | 13.5 | % |  |       |    | 

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##### Table of Contents



General and administrative expenses consist
primarily of personnel costs for finance, legal, human resources
and general management, provisions for doubtful accounts,
insurance, fees for external professional advisors and corporate
overhead allocations. General and administrative costs were
unusually low in the quarter ended November 30, 2002,
primarily as a result of decreased expenses for outside
professional services, and we believe they will increase in
absolute dollars during the next quarter.

The decrease in general and administrative
expenses in absolute dollars for the three month period ended
November 30, 2002, compared with the same period a year
ago, was primarily due to a $0.4 million decrease in
expenses for outside professional services including legal fees,
and audit and tax fees. The decrease as a percentage of total
revenues for the three month period ended November 30, 2002
was due to the decrease in absolute costs combined with the
increase in total revenues.

The decrease in general and administrative
expenses in absolute dollars for the six month period ended
November 30, 2002, compared with the same period a year
ago, was primarily due to a $0.7 million decrease in
expenses for outside professional services including legal fees,
and audit and tax fees, and to a $0.1 million decrease in
bad debt expense. The decrease as a percentage of total revenues
for the six month period ended November 30, 2002 was due to
the decrease in absolute costs combined with the increase in
total revenues.

|                     |                              |                       |     |              |   |        |     |     |   |  |       |    | 
|-------------------- | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ----- | -- | 
|                     |                              | November 30,          |     | November 30, |   |       
|                     |                              | 2002                  |     | 2001         |   | Change
|                     |                              |                       |     |              |   |       
|                     |                              |                       |     |             
|                     |                              | (Dollars in millions) |     |             
|Restructuring charge |                              |                       |     |              |   |        |     |     |   |  |       |   
|Three months ended   |                              | $                     | 1.0 |              |   | $      | 1.6 |     |   |  | (36.5 | )%
|                     | Percentage of total revenues |                       |     | 4.3          | % |        |     | 6.9 | % |  |       |    | 
|Six months ended     |                              | $                     | 1.0 |              |   | $      | 1.6 |     |   |  | (36.5 | )%
|                     | Percentage of total revenues |                       |     | 2.2          | % |        |     | 3.7 | % |  |       |    | 

During each of the periods ended
November 30, 2002 and November 30, 2001, we executed
two restructuring efforts designed to reduce costs and to better
align our expense levels with current revenue levels and ensure
conservative spending during the current period of economic
uncertainty.

|                                                     |                             |               |     |              |  |   |     |     | 
|---------------------------------------------------- | --------------------------- | ------------- | --- | ------------ |  | - | --- | --- | 
|                                                     |                             | November 30,  |     | November 30,
|                                                     |                             | 2002          |     | 2001        
|                                                     |                             |               |     |             
|                                                     |                             |              
|                                                     |                             | (In millions)
|Restructuring charges: (six month periods
    ended) |                             |               |     |              |  |   |     |    
|Severance costs                                      |                             | $             | 0.7 |              |  | $ | 1.2 |    
|Legal and other outside services costs               |                             |               | 0.1 |              |  |   | 0.3 |    
|Other charges                                        |                             |               | 0.2 |              |  |   | 0.1 |    
|                                                     |                             |               |     |              |  |   |     |    
|                                                     | Total restructuring charges |               | $   | 1.0          |  |   | $   | 1.6 | 
|                                                     |                             |               |     |              |  |   |     |    

During the quarter ended November 30, 2002,
we implemented a worldwide restructuring of our corporate
structure to focus on reducing expenses and improving efficiency
due to continued macro-economic and capital spending issues
affecting the software industry. In connection with the
restructuring, we recorded in the quarter ended
November 30, 2002, a $1.0 million restructuring
charge, of which approximately $0.7 million was related to
severance costs associated with the reduction in the worldwide
workforce by approximately 50 employees, approximately
$0.1 million to legal and other outside services in
connection with the restructuring, and approximately
$0.2 million to other costs associated with the
restructuring. The restructuring impacted operations in the
U.S., Canada and the Netherlands and was concentrated in
research and development and, to a lesser extent, sales and
marketing.

15



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##### Table of Contents



|                                |                              |            |      |               |  |       |      |       |  |   |     |     |  |   |      |     | 
|------------------------------- | ---------------------------- | ---------- | ---- | ------------- |  | ----- | ---- | ----- |  | - | --- | --- |  | - | ---- | --- | 
|                                |                              |            |      | Legal and     |  |       |      |      
|                                |                              | Workforce  |      | Other Outside |  |       |      |      
|                                |                              | Reduction  |      | Services      |  | Other |      | Total
|                                |                              |            |      |               |  |       |      |      
|                                |                              |           
|                                |                              | (Millions)
|Quarter Ended November 30, 2002 |                              |            |      |               |  |       |      |       |  |   |     |     |  |   |      |    
|Restructuring provision         |                              | $          | 0.7  |               |  | $     | 0.1  |       |  | $ | 0.2 |     |  | $ | 1.0  |    
|Cash payments                   |                              |            | (0.6 | )             |  |       | (0.1 | )     |  |   | 0.0 |     |  |   | (0.7 | )  
|                                |                              |            |      |               |  |       |      |       |  |   |     |     |  |   |      |    
|                                | Balance at November 30, 2002 |            | $    | 0.1           |  |       | $    | 0.0   |  |   | $   | 0.2 |  |   | $    | 0.3 | 
|                                |                              |            |      |               |  |       |      |       |  |   |     |     |  |   |      |    

Of the total $1.0 million restructuring
charge, approximately $0.3 million remains unpaid at
November 30, 2002. Of the $0.3 million, approximately
$0.1 million relates to severance costs to be paid in
future quarters, approximately $0.2 million to other costs
associated with the restructuring, and the balance to legal and
other outside services. The unpaid amount will be paid out over
the next quarter.

During the quarter ended November 30, 2001,
we implemented a worldwide restructuring and recorded a
$1.6 million restructuring charge, of which approximately
$1.2 million was related to severance costs associated with
the reduction in the worldwide workforce by 65 employees,
approximately $0.3 million to legal and other outside
services in connection with the restructuring and approximately
$0.1 million to other costs associated with the
restructuring. The restructuring impacted operations in the
U.S., Canada, the U.K., Germany, France, the Netherlands, Sweden
and South Africa.

|                         |                              |                       |     |              |   |        |     |     |   |  |        |    | 
|------------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ------ | -- | 
|                         |                              | November 30,          |     | November 30, |   |       
|                         |                              | 2002                  |     | 2001         |   | Change
|                         |                              |                       |     |              |   |       
|                         |                              |                       |     |             
|                         |                              | (Dollars in millions) |     |             
|Charitable contributions |                              |                       |     |              |   |        |     |     |   |  |        |   
|Three months ended       |                              | $                     | 0.0 |              |   | $      | 1.0 |     |   |  | (100.0 | )%
|                         | Percentage of total revenues |                       |     | 0.0          | % |        |     | 4.4 | % |  |        |    | 
|Six months ended         |                              | $                     | 0.0 |              |   | $      | 1.0 |     |   |  | (100.0 | )%
|                         | Percentage of total revenues |                       |     | 0.0          | % |        |     | 2.3 | % |  |        |    | 

On September 14, 2001, we made a
$1 million donation to help the victims of the
September 11th terrorist attacks in New York, Pennsylvania
and Washington D.C. Our donation kicked off the United Way
Silicon Valley 9/11 Response Fund. The donation provided
immediate support to established emergency assistance agencies,
such as the American Red Cross and Salvation Army, both of whom
are founding members of the United Way, locally and nationally.

|                   |                              |                       |     |              |   |        |     |      |   |  |       |    | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ----- | -- | 
|                   |                              | November 30,          |     | November 30, |   |       
|                   |                              | 2002                  |     | 2001         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Other income, net  |                              |                       |     |              |   |        |     |      |   |  |       |   
|Three months ended |                              | $                     | 1.9 |              |   | $      | 2.6 |      |   |  | (27.6 | )%
|                   | Percentage of total revenues |                       |     | 8.4          | % |        |     | 11.7 | % |  |       |    | 
|Six months ended   |                              | $                     | 3.8 |              |   | $      | 5.5 |      |   |  | (30.8 | )%
|                   | Percentage of total revenues |                       |     | 8.5          | % |        |     | 12.9 | % |  |       |    | 

Other income consists primarily of interest
income and realized gains from our investments in marketable
securities.

The decreases in other income in absolute dollars
for the three and six month periods ended November 30,
2002, compared with the same period a year ago, were primarily
due to decreasing overall yields on our portfolio of marketable
securities caused by the decreasing interest rate environment,
partially offset by slightly higher average balances of
marketable securities. The decrease in other income as a
percentage of total revenues for the three and six month periods
ended November 30, 2002 were due to the decreases in
absolute dollars combined with the increases in total revenues.

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|                               |                              |                       |     |              |   |        |      |      |    |  |    |  | 
|------------------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | ---- | ---- | -- |  | -- |  | 
|                               |                              | November 30,          |     | November 30, |   |       
|                               |                              | 2002                  |     | 2001         |   | Change
|                               |                              |                       |     |              |   |       
|                               |                              |                       |     |             
|                               |                              | (Dollars in millions) |     |             
|Income tax provision (benefit) |                              |                       |     |              |   |        |      |      |    |  |    | 
|Three months ended             |                              | $                     | 1.4 |              |   | $      | (1.2 | )    |    |  | nm | 
|                               | Percentage of total revenues |                       |     | 6.3          | % |        |      | (5.1 | )% |  |    |  | 
|Six months ended               |                              | $                     | 2.3 |              |   | $      | (2.7 | )    |    |  | nm | 
|                               | Percentage of total revenues |                       |     | 5.1          | % |        |      | (6.3 | )% |  |    |  | 

Income tax provision (benefit) includes U.S. and
foreign income taxes, as well as the provision for U.S. taxes on
undistributed earnings of international subsidiaries. Certain
items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of this
difference is reported as deferred income taxes.

We expect the tax savings for fiscal 2003 due to
research and development tax credits to result in a marginally
lower effective tax rate and accordingly applied an effective
tax rate of 38.0% to the results of our quarter ended
November 30, 2002. For the same reasons, we also applied an
effective tax rate of 38.0% to the results of the six month
period ended November 30, 2002 and the three and six month
periods ended November 30, 2001. We will continue to
reassess the impact of our research and development expenses on
our effective tax rate in future periods.

Liquidity and Capital Resources

|                        |                                                         |               |   |              |   |  |   |      |  
|----------------------- | ------------------------------------------------------- | ------------- | - | ------------ | - |  | - | ---- | -
|                        |                                                         | November 30,  |   | November 30,
|                        |                                                         | 2002          |   | 2001        
|                        |                                                         |               |   |             
|                        |                                                         |              
|                        |                                                         | (In millions)
|Six month periods ended |                                                         |               |   |              |   |  |   |     
|                        | Net cash provided by (used in) operating
    activities |               | $ | 6.0          |   |  | $ | (1.7 | )
|                        | Net cash provided by investing activities               |               | $ | 3.2          |   |  | $ | 5.0  |  
|                        | Net cash used in financing activities                   |               | $ | (13.5        | ) |  | $ | (3.3 | )

As of November 30, 2002, we had
$237.5 million in cash and cash equivalents and
available-for-sale securities compared to $245.4 million at
May 31, 2002. At November 30, 2002, our principal
sources of liquidity were our cash and cash equivalents and
short-term investments of $109.4 million. As of
November 30, 2002, we had no outstanding debt obligations.

Cash provided by operating activities for the six
month period ended November 30, 2002 was primarily due to
net income of $3.7 million, plus depreciation expense of
$1.7 million, a $2.9 million decrease in accounts
receivable, and a $1.9 million decrease in deferred income
tax, partially offset by a $2.3 million decrease in
deferred revenue and a $1.9 million decrease in accrued
compensation and other accrued liabilities. Cash used in
connection with operating activities in the six month period
ended November 30, 2001 was primarily due to our net loss
of $4.4 million, a $3.4 million decrease in deferred
revenue, a $3.2 million decrease in accrued compensation
and other accrued liabilities, and a $2.7 million increase
in deferred tax assets, offset largely by an $11.2 million
decrease in accounts receivable.

Cash provided by investing activities for the six
month periods ended November 30, 2002 and 2001 was the
result of net sales of marketable securities partially offset by
capital expenditures of $0.6 million and $2.3 million
in the respective periods. For the six month periods ended
November 30, 2002 and 2001, the capital expenditures
consisted primarily of purchases for computer hardware and
software.

Cash used in financing activities for the six
month period ended November 30, 2002 consisted of
$16.6 million in repurchases of our common stock through
our stock repurchase program, partially offset by a
$3.0 million in proceeds from the sale of common stock as a
result of stock option exercises and from the issuance of common
stock in connection with our Employee Stock Purchase Plan. Cash
used in financing activities for the six month period ended
November 30, 2001 consisted of $10.0 million in
repurchases of our common stock through our stock repurchase
program, partially offset by $6.7 million in proceeds from
the sale

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of common stock as a result of stock option
exercises and from the issuance of common stock in connection
with our Employee Stock Purchase Plan.


Our principal commitments as of November 30,
2002 consist of obligations under operating leases, totaling
$10.1 million over the life of these leases.

On June 20, 2002, we announced an extension
of the stock repurchase program we initiated on
September 12, 2001. The program calls for the repurchase of
outstanding shares of our common stock up to an aggregate value
of $50.0 million. Through November 30, 2002, we
repurchased and retired 3,156,300 shares of its common stock
through open market transactions, valued at approximately
$36.5 million. The program will terminate at the end of the
current fiscal year ending May 31, 2003 unless extended or
shortened by our board of directors.

We believe that our current cash and cash
equivalents, interest income and cash generated from operations,
if any, will provide adequate liquidity to meet our working
capital and operating resource expenditure requirements through
at least fiscal 2004. If the global economy weakens further, our
cash, cash equivalents and investments balances may decline. As
a result, or if our spending plans materially change, we may
find it necessary to seek to obtain additional sources of
financing to support our capital needs, but we cannot assure you
that a financing will be available on commercially reasonable
terms, or at all.



| |                     
| | --------------------
| | Business Acquisition

On December 17, 2002, we completed the
purchase of certain assets and obligations of Inktomi
Corporations enterprise search software business. Under
the terms of the deal, we acquired from Inktomi, a leading
provider of Web search and enterprise information retrieval
solutions, the assets relating to Inktomis enterprise
search software business, which includes basic search,
categorization and content refinement capabilities, as well as
its XML technology assets. We paid a purchase price of
$25 million in cash, and assumed Inktomis obligations
under certain existing enterprise search business contracts,
including customer support obligations. In addition, we employed
selected development, sales and marketing, and support personnel
from Inktomis enterprise search business unit. See
Item 5. Other Information in PART II.
OTHER INFORMATION.

In addition to the cash commitment in this
transaction, we may also incur substantial costs related to the
integration of this business. These costs may be incurred in
subsequent quarters and may affect our results of operations.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This standard
eliminates the amortization of goodwill and requires goodwill to
be reviewed at least annually for impairment, the useful lives
of previously recognized intangible assets to be reassessed and
the remaining amortization periods to be adjusted accordingly.
This standard is effective for our fiscal year beginning on
June 1, 2002. The adoption of SFAS No. 142 did not
have a significant impact on our financial position or results
of operations.

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121),
however it retains the fundamental provisions of SFAS
No. 121 for (1) the recognition and measurement of the
impairment of long-lived assets to be held and used and
(2) the measurement of long-lived assets to be disposed of
by sale. SFAS No. 144 develops a single accounting model
for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired assets and
consequently amends Accounting Principles Board Opinion
No. 30, Reporting Results of Operations 
Reporting the Effects of Disposal of a Division of a
Business. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS
No. 144 is effective for our fiscal year beginning
June 1, 2002. The adoption of SFAS No. 144 did not
have a significant impact on our financial position or results
of operations.

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In November 2001, the EITF of the FASB reached a
consensus on Issue No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products. EITF No. 01-09 addresses
whether consideration from a vendor to a reseller of the
vendors products is an adjustment to the selling prices of
the vendors products and, therefore, should be deducted
from revenue when recognized in the vendors results of
operations, or a cost incurred by the vendor for assets or
services received from the reseller and, therefore, should be an
expense when recognized in the vendors results of
operations. EITF No. 01-09 is effective for us beginning
November 1, 2001. The adoption of EITF No. 01-09 did
not have a significant impact on our financial position or
results of operations.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 nullifies the guidance of
the Emerging Issues Task Force (EITF) in EITF Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
Under EITF Issue No. 94-3, an entity recognized a liability
for an exit cost on the date that the entity committed itself to
an exit plan. In SFAS 146, the FASB acknowledges that an
entitys commitment to a plan does not, by itself, create a
present obligation to other parties that meets the definition of
a liability and requires that a liability for a cost that is
associated with an exit or disposal activity be recognized when
the liability is incurred. It also establishes that fair value
is the objective for the initial measurement of the liability.
SFAS 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. We do not
expect an impact on our financial position and results of
operations from the adoption of SFAS 146.

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RISK FACTORS

The risks and uncertainties described below
are not the only risks and uncertainties we face. Additional
risks and uncertainties not currently known to us or that we
currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our
business, results of operations and financial condition would
suffer. In that event, the trading price of our common stock
could decline, and our stockholders may lose all or part of
their investment in our common stock. The discussion below and
elsewhere in this report also includes forward-looking
statements, and our actual results may differ substantially from
those discussed in these forward-looking statements as a result
of the risks discussed below.

Risks Related to Our Business

We have
sustained quarterly and annual losses in the past and may not be
able to maintain profitability

We have incurred net losses in the past and,
although we reported net income in fiscal year 2002 and the
first two quarters of fiscal year 2003, we may not be able to
maintain profitability. In the future, our revenues may decline,
remain flat, or grow at a rate slower than was experienced in
the first two quarters of fiscal year 2002, especially in light
of the current economic environment. To achieve revenue growth
and maintain fiscal year profitability, we must:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | increase market acceptance of our products;                                                                          
|
| |  | respond effectively to competitive developments;                                                                     
|
| |  | execute sales despite the recent economic
    slowdown and resulting decrease in our customers capital
    spending;
|
| |  | attract, retain and motivate qualified personnel;
    and                                                            
|
| |  | upgrade our technologies and commercialize our
    products and services incorporating these technologies.           

We cannot assure you that we will be successful
in achieving any of these goals or that we will experience
increased revenues, positive cash flows, or achieve long-term
profitability.

Our revenues
and operating results may fluctuate in future periods, which
could adversely affect our stock price

The results of operations for any quarter are not
necessarily indicative of results to be expected in future
periods. We expect our stock price to vary with our operating
results and, consequently, any adverse fluctuations in our
operating results could have an adverse effect on our stock
price. Our operating results have in the past been, and will
continue to be, subject to quarterly fluctuations as a result of
a number of factors. These factors include:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the downturn in capital spending by customers as
    a result of the current economic slowdown;                                                                                                  
|
| |  | the size and timing of orders;                                                                                                                                                                   
|
| |  | changes in the budget or purchasing patterns of
    corporations and government agencies, foreign country exchange
    rates, or pricing pressures from competitors;                             
|
| |  | increased competition in the software and
    Internet industries;                                                                                                                               
|
| |  | the introduction and market acceptance of new
    technologies and standards in search and retrieval, Internet,
    document management, database, networking, and communications
    technology;
|
| |  | variations in sales channels, product costs, the
    mix of products sold, or the success of quality control measures;                                                                           
|
| |  | the integration of people, operations, and
    products from acquired businesses and technologies;                                                                                               

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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in operating expenses and personnel;                                                                                                                                                                                                                                    
|
| |  | changes in accounting principals, such as a
    requirement that stock options be included in compensation, as
    is currently being considered by Congress and, which if adopted,
    would increase our compensation expenses and have a negative
    effect on our earnings;
|
| |  | the overall trend toward industry consolidation;
    and                                                                                                                                                                                                                        
|
| |  | changes in general economic and geo-political
    conditions and specific economic conditions in the computer and
    software industries.                                                                                                                                      

Any of the factors, some of which are discussed
in more detail below, could materially and adversely impact our
operations and financial results, and consequently our stock
price.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Our expenditures are tied to anticipated
    revenues, and therefore imprecise forecasts may result in poor
    operating results

Revenues are difficult to forecast because the
market for search and retrieval software is uncertain and
evolving. Because we generally ship software products within a
short period after receipt of an order, we typically do not have
a material backlog of unfilled orders, and revenues in any
quarter are substantially dependent on orders booked in that
quarter. In addition, a portion of our revenues is derived from
royalties based upon sales by third-party vendors of products
incorporating our technology. These revenues may be subject to
extreme fluctuation and are difficult for us to predict. Our
expense levels are based, in part, on our expectations as to
future revenues and are to a large extent fixed in the short
term. Therefore, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any
significant shortfall of demand in relation to our expectations
or any material delay of customer orders would have an almost
immediate adverse affect on our operating results and on our
ability to achieve profitability.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Demand for our products may be adversely
    affected if unfavorable economic and market conditions do not
    improve or continue to decline

Adverse economic conditions worldwide have
contributed to slowdowns in the software Information Technology
spending environment and may continue to impact our business,
resulting in reduced demand for our products as a result of a
decrease in capital spending by our customers, increased price
competition for our products and higher overhead costs as a
percentage of revenues. Decreased demand for our products would
result in decreased revenues, which could harm our operating
results and cause the price of our common stock to fall.

Changes in
effective tax rates could affect our results

Our future effective tax rates could be adversely
affected by earnings being lower than anticipated in countries
where we have lower statutory rates, changes in the valuation of
our deferred tax assets and liabilities, or by changes in tax
laws or interpretations thereof.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | The size and timing of large orders may
    materially affect our quarterly operating results

The size and timing of individual orders may
cause our operating results to fluctuate significantly. Our
operating results for a quarter could be materially and
adversely affected if one or more large orders are either not
received or are delayed or deferred by customers. A significant
portion of our revenues in recent quarters has been derived from
these relatively large sales to a limited number of customers,
and we currently anticipate that future quarters will continue
to reflect this trend. Sales cycles for these customers can be
up to nine months or longer. In addition, customer order
deferrals in anticipation of new products may cause our
operating results to fluctuate. Like many software companies, we
have generally recognized a substantial portion of our revenues
in the last month of each quarter, with these revenues
concentrated in the last weeks of the quarter. Accordingly, the
cancellation or deferral of even a small number of purchases of
our products could harm our business in any particular quarter.
In addition, to the extent that the significant sales occur
earlier than expected, operating results for subsequent quarters
may fail to keep pace or even decline.

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| |                                                 
| | ------------------------------------------------
| | Our sales cycle is lengthy and
    unpredictable

Any delay in sales of our products and services
could cause our quarterly revenue and operating results to
fluctuate. The typical sales cycle of our products is lengthy,
generally between six to nine months, unpredictable, and
involves significant investment decisions by prospective
customers, as well as our education of potential customers
regarding the use and benefits of our products. Our customers
spend a substantial amount of time before purchasing our
products in performing internal reviews and obtaining capital
expenditure approvals. We believe our sales cycle lengthened in
2002 as a result of macro-economic factors and we cannot be
certain that this cycle will not continue to lengthen in the
future.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Our business may suffer due to risks
    associated with international sales

Historically, our foreign operations and export
sales account for a significant portion of our annual revenues.
Our international business activities are subject to a number of
risks, each of which could impose unexpected costs on us that
would have an adverse effect on our operating results. These
risks include:



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | difficulties in complying with regulatory
    requirements and standards;
|
| |  | tariffs and other trade barriers;                                        
|
| |  | costs and risks of localizing products for
    foreign countries;        
|
| |  | reliance on third parties to distribute our
    products;                
|
| |  | longer accounts receivable payment cycles;                               
|
| |  | potentially adverse tax consequences;                                    
|
| |  | limits on repatriation of earnings; and                                  
|
| |  | burdens of complying with a wide variety of
    foreign laws.            

We currently engage in only limited hedging
activities to protect against the risk of currency fluctuations.
Fluctuations in currency exchange rates could cause sales
denominated in U.S. dollars to become relatively more expensive
to customers in a particular country, leading to a reduction in
sales or profitability in that country. Also, these fluctuations
could cause sales denominated in foreign currencies to affect a
reduction in the current U.S. dollar revenues derived from
sales in a particular country. Furthermore, future international
activity may result in increased foreign currency denominated
sales and, in this event, gains and losses on the conversion to
U.S. dollars of accounts receivable and accounts payable
arising from international operations may contribute
significantly to fluctuations in our results of operations. The
financial stability of foreign markets could also affect our
international sales. In addition, income earned in various
countries where we do business may be subject to taxation by
more than one jurisdiction, thereby adversely affecting our
consolidated after-tax earnings. We cannot assure you that any
of these factors will not have an adverse effect on the revenues
from our future international sales and, consequently, our
results of operations.

Service and other revenues derived from foreign
operations accounted for 16.3%, 13.9%, 6.3% and 6.7% of total
revenues for the six month period ended November 30, 2002,
and fiscal years 2002, 2001, and 2000, respectively. Our export
sales consist primarily of products licensed for delivery
outside of the United States. For the six months ended
November 30, 2002 and fiscal years 2002, 2001 and 2000,
export sales accounted for 20.7%, 21.8%, 26.0% and 19.0% of
total revenues, respectively. We expect that revenues derived
from foreign operations and export sales will continue to
account for a significant percentage of our revenues for the
foreseeable future. These revenues may fluctuate significantly
as a percentage of revenues from period to period. In addition,
a portion of these revenues was derived from sales to foreign
government agencies, which may be subject to risks similar to
those described immediately below.

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| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A portion of our revenues is derived from
    sales to the federal government, which are subject to budget
    cuts and, consequently, the potential loss of revenues upon
    which we have historically relied

Revenues derived from sales to the federal and
state governments and their agencies were 10.1%, 6.1%, 7.4% and
7.8% of total revenues for the six months ended
November 30, 2002 and fiscal years 2002, 2001 and 2000,
respectively. Future reductions in government spending on
information technologies could harm our operating results. In
recent years, budgets of many government agencies have been
reduced, causing certain customers and potential customers of
our products to re-evaluate their needs. These budget reductions
are expected to continue over at least the next several years.

Almost all of our government contracts contain
termination clauses, which permit contract termination upon our
default or at the option of the other contracting party. We
cannot assure you a cancellation will not occur in the future,
and any termination would adversely affect our operating results.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | We must successfully introduce new products
    or our customers will purchase our competitors
    products

During the past few years, management and other
personnel have focused on modifying and enhancing our core
technology to support a broader set of search and retrieval
solutions for use on enterprise-wide systems, over online
services, over the Internet and on CD-ROM. In order for our
strategy to succeed and to remain competitive, we must continue
to leverage our core technology to develop new product offerings
by us and by our original equipment manufacturer, or OEM,
customers that address the needs of these new markets or we must
acquire new technology. The development of new products, whether
by leveraging our core technology or by acquiring new
technology, is expensive. If these products do not generate
substantial revenues, our business and results of operations
will be adversely affected. We cannot assure you that any of
these products will be successfully developed and completed on a
timely basis or at all, will achieve market acceptance or will
generate significant revenues.

Our future operating results will depend upon our
ability to increase the installed base of our information
retrieval technology and to generate significant product
revenues from our core products. Our future operating results
will also depend upon our ability to successfully market our
technology to online and Internet publishers who use this
technology to index their published information in our format.
To the extent that customers do not adopt our technology for
indexing their published information, it will limit the demand
for our products.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to enhance our existing
    products to conform to evolving industry standards in our
    rapidly changing markets, our products may become
    obsolete

The computer software industry is subject to
rapid technological change, changing customer requirements,
frequent new product introductions, and evolving industry
standards that may render existing products and services
obsolete. As a result, our position in our existing markets or
other markets that we may enter could be eroded rapidly by
product advancements by competitors. If we are unable to develop
and introduce products in a timely manner in response to
changing market conditions or customer requirements, our
financial condition and results of operations would be
materially and adversely affected.

The life cycles of our products are difficult to
estimate. Our future success will depend upon our ability to
keep pace with technological developments, conform to evolving
industry standards, particularly client/server and Internet
communication and security protocols, as well as publishing
formats such as HTML and XML, and address increasingly
sophisticated customer needs. We cannot assure you that we will
not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new
products, or that new products and product enhancements will
meet the requirements of the marketplace and achieve market
acceptance.

We strive to achieve compatibility between our
products and the text publication formats we believe are or will
become popular and widely adopted. We invest substantial
resources in development efforts aimed at achieving
compatibility. Any failure by us to anticipate or respond
adequately to technology or market developments could result in
a loss of competitiveness or revenue. For instance, to date we
have focused our

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efforts on integration with the Adobe PDF and
Lotus Notes environments and, more recently, the Microsoft
Exchange environment. Should any of these products or
technologies lose or fail to achieve acceptance in the
marketplace or be replaced by other products or technologies,
our business could be materially and adversely affected.


We embed our basic search engine in key OEM
application products and, therefore, our sales of information
retrieval products depend on our ability to maintain
compatibility with these OEM applications. We cannot assure you
that we will be able to maintain compatibility with these
vendors products or continue to be the search technology
of choice for OEMs. The failure to maintain compatibility with
or be selected by OEMs would materially and adversely affect our
sales. Further, the failure of the products of our key OEM
partners to achieve market acceptance could harm our results of
operations.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Our software products are complex and may
    contain errors that could damage our reputation and decrease
    sales

Our complex software products may contain errors
that may be detected at any point in the products life
cycles. We have in the past discovered software errors in some
of our products and have experienced delays in shipment of
products during the periods required to correct these errors. We
cannot assure you that, despite our testing and quality
assurance efforts and similar efforts by current and potential
customers, errors will not be found. The discovery of an error
may result in loss of or delay in market acceptance and sales,
diversion of development resources, injury to our reputation, or
increased service and warranty costs, any of which could harm
our business. Although we generally attempt by contract to limit
our exposure to incidental and consequential damages, and to cap
our liabilities to our proceeds under the contract, if a court
fails to enforce the liability limiting provisions of our
contracts for any reason, or if liabilities arise which are not
effectively limited, our operating results could be harmed.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on proprietary technology
    licensed from third parties, the loss of which could delay
    shipments of products incorporating this technology and could be
    costly

Some of the technology used by our products is
licensed from third parties, generally on a nonexclusive basis.
We believe that there are alternative sources for each of the
material components of technology we license from third parties.
However, the termination of any of these licenses, or the
failure of the third-party licensors to adequately maintain or
update their products, could result in delay in our ability to
ship these products while we seek to implement technology
offered by alternative sources. Any required replacement
licenses could prove costly. Also, any delay, to the extent it
becomes extended or occurs at or near the end of a fiscal
quarter, could harm our quarterly results of operations. While
it may be necessary or desirable in the future to obtain other
licenses relating to one or more of our products or relating to
current or future technologies, we cannot assure you that we
will be able to do so on commercially reasonable terms or at all.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to compete successfully will
    depend, in part, on our ability to protect our intellectual
    property rights, which we may not be able to
    protect

We rely on a combination of patent, trade
secrets, copyright and trademark laws, nondisclosure agreements
and other contractual provisions and technical measures to
protect our intellectual property rights. The source code for
our proprietary software is protected both as a trade secret and
as a copyrighted work. Policing unauthorized use of our
products, however, is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims
of infringement or invalidity. Litigation could result in
substantial costs and diversion of resources and could harm our
business regardless of the outcome of the litigation.

Effective copyright and trade secret protection
may be unavailable or limited in some foreign countries. To
license our products, we frequently rely on shrink
wrap licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of several
jurisdictions. In addition, employees, consultants and others
who participate in the development of our products may breach
their agreements with us regarding

24



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our intellectual property, and we may not have
adequate remedies for any such breach. We also realize that our
trade secrets may become known through other means not currently
foreseen by us. Notwithstanding our efforts to protect our
intellectual property, our competitors may be able to develop
products that are equal to or superior to our products without
infringing on any of our intellectual property rights.




| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Our products employ technology that may
    infringe on the proprietary rights of third parties, which may
    expose us to litigation

Third parties may assert that our products
infringe their proprietary rights, or may assert claims for
indemnification resulting from infringement claims against us.
Any such claims may cause us to delay or cancel shipment of our
products, which could harm our business. In addition,
irrespective of the validity or the successful assertion of
claims, we could incur significant costs in defending against
claims. To date, we have not incurred any such claims.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We have been sued, and are at risk of
    future securities class action litigation, due to our past and
    expected stock price volatility

In the past, securities class action litigation
has often been brought against companies following a decline in
the market price of their securities. For example, in December
1999 our stock price dramatically declined and a number of
lawsuits were filed against us.

Because we expect our stock price to continue to
fluctuate significantly, we may be the target of similar
litigation in the future. Securities litigation could result in
substantial costs and divert managements attention and
resources, and could seriously harm our business.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we lose key personnel, or are unable to
    attract additional qualified personnel, our ability to conduct
    and grow our business will be impaired

We believe that hiring and retaining qualified
individuals at all levels is essential to our success, and we
cannot assure you that we will be successful in attracting and
retaining the necessary personnel. In addition, we are highly
dependent on our direct sales force for sales of our products as
we have limited distribution channels. Continuity of technical
personnel is an important factor in the successful completion of
development projects, and any turnover of our research and
development personnel could harm our development and marketing
efforts.

Our future success also depends on our continuing
ability to identify, hire, train and retain other highly
qualified sales, technical and managerial personnel. Competition
for this type of personnel is intense, and we cannot assure you
that we will be able to attract, assimilate or retain other
highly qualified technical and managerial personnel in the
future. The inability to attract, hire or retain the necessary
sales, technical and managerial personnel could harm our
business.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on Regent Pacific Management
    Corporation for the management of Verity, and the loss of these
    services could adversely affect our business

Regent Pacific Management Corporation, a
management firm of which Gary J. Sbona, our chairman of the
board and chief executive officer, is chief executive officer,
provides management services for our company under a management
services agreement. The management services provided under our
agreement with Regent Pacific include the services of Regent
Pacific personnel as part of Veritys management team. The
agreement terminates on August 31, 2003, but provides us
with an option to further extend the term of this agreement
through February 2004. If we exercise this option, the agreement
will terminate after February 2004 unless Regent Pacific and the
board agree to further extend it. If the agreement with Regent
Pacific were canceled or not renewed, the loss of the Regent
Pacific personnel could negatively affect our operations,
especially during the transition phase to a new management.
Similarly, if any adverse change in Veritys relationship
with Regent Pacific occurs, it could hinder managements
ability to direct our business and materially and adversely
affect our results of operations and financial condition.

25



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| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition from companies
    with significantly greater financial, technical, and marketing
    resources, which could adversely affect our ability to maintain
    or increase sales of our products

The business portal software market is intensely
competitive and we cannot assure you that we will maintain our
current position of market share. A number of companies offer
competitive products addressing this market. We compete with
Alta Vista, Autonomy, Convera, Epicentric, FAST, Google,
Hummingbird/ PC Docs/ Fulcrum, Lotus, Mercado, Microsoft,
Thunderstone and Viador, among others. We also compete
indirectly with database vendors, such as Oracle, that offer
information search and retrieval capabilities with their core
database products and web platform companies, such as Netscape.

In the future, we may encounter competition from
a number of companies. Many of our existing competitors, as well
as a number of other potential new competitors, have
significantly greater financial, technical and marketing
resources than we do. Because the success of our strategy is
dependent in part on the success of our strategic customers,
competition between our strategic customers and the strategic
customers of our competitors, or failure of our strategic
customers to achieve or maintain market acceptance could harm
our competitive position. Although we believe that our products
and technologies compete favorably with competitive products, we
cannot assure you that we will be able to compete successfully
against our current or future competitors or that competition
will not harm our business.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our recent acquisition of the Inktomi
    enterprise search software assets and other potential
    acquisitions may have unexpected consequences or impose
    additional costs on us

Our business is highly competitive and our growth
is dependent upon market growth and our ability to enhance our
existing products and introduce new products on a timely basis.
One of the ways we may address the need to develop new products
is through acquisitions of complementary businesses and
technologies, such as our acquisition of Inktomis
enterprise search software assets. From time to time, we
consider and evaluate potential business combinations both
involving our acquisition of another company and transactions
involving the sale of Verity through, among other things, a
possible merger or consolidation of our business into that of
another entity. Acquisitions involve numerous risks, including
the following:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in integration of the operations,
    technologies, and products of the acquired companies;                                                       
|
| |  | the risk of diverting managements attention
    from normal daily operations of the business;                                                                 
|
| |  | accounting consequences, including changes in
    purchased research and development expenses, resulting in
    variability in our quarterly earnings;         
|
| |  | potential difficulties in completing projects
    associated with purchased in-process research and development;                                               
|
| |  | risks of entering markets in which we have no or
    limited direct prior experience and where competitors in these
    markets have stronger market positions;
|
| |  | the potential loss of key employees of the
    acquired company;                                                                                               
|
| |  | the assumption of known and potentially unknown
    liabilities of the acquired company;                                                                       
|
| |  | we may find that the acquired company or assets
    do not further our business strategy or that we paid more than
    what the company or assets are worth;   
|
| |  | we may have product liability associated with the
    sale of the acquired companys products;                                                                 
|
| |  | we may have difficulty maintaining uniform
    standards, controls, procedures and policies;                                                                   
|
| |  | our relationship with current and new employees
    and clients could be impaired;                                                                             
|
| |  | the acquisition may result in litigation from
    terminated employees or third parties who believe a claim
    against us would be valuable to pursue;        

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our due diligence process may fail to identify
    significant issues with product quality, product architecture
    and legal contingencies, among other matters; and
|
| |  | insufficient revenues to offset increased
    expenses associated with acquisitions.                                                                                  

Acquisitions may also cause us to:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issue common stock that would dilute our current
    stockholders percentage ownership;                                                           
|
| |  | record goodwill and non-amortizable intangible
    assets that will be subject to impairment testing and potential
    periodic impairment charges;
|
| |  | incur amortization expenses related to certain
    intangible assets; or                                                                           
|
| |  | incur large and immediate write-offs.                                                                                                              

We cannot assure you that our acquisition of
Inktomis enterprise search software assets and future
acquisitions will be successful and will not adversely affect
our business. We must also maintain our ability to manage any
growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions we make could harm our
business.

Risks Related to Our Industry



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on increasing use of the
    Internet, intranets, extranets and portals and on the growth of
    electronic commerce. If the use of the Internet, intranets,
    extranets and portals and electronic commerce do not grow as
    anticipated, our business will be seriously harmed

The products of most of our customers depend on
the increased acceptance and use of the Internet as a medium of
commerce and on the development of corporate intranets,
extranets and portals. As a result, acceptance and use may not
continue to develop at historical rates and a sufficiently broad
base of business customers may not adopt or continue to use the
Internet as a medium of commerce. The lack of such development
would impair demand for our products and would adversely affect
our ability to sell our products. Demand and market acceptance
for recently introduced services and products over the Internet
and the development of corporate intranets, extranets and
portals are subject to a high level of uncertainty, and there
exist few proven services and products.

The business of many of our customers would be
seriously harmed if:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | use of the Internet, the Web and other online
    services does not continue to increase or increases more slowly
    than expected;                                                                             
|
| |  | the infrastructure for the Internet, the Web and
    other online services does not effectively support expansion
    that may occur; or                                                                         
|
| |  | the Internet, the Web and other online services
    do not create a viable commercial marketplace, inhibiting the
    development of electronic commerce and reducing the need for our
    products and services.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Capacity constraints may restrict the use
    of the Internet as a commercial marketplace, which would
    restrict our growth

The Internet may not be accepted as a viable
long-term commercial marketplace for a number of reasons. These
include:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | potentially inadequate development of the
    necessary communication and network infrastructure, particularly
    if rapid growth of the Internet continues;
|
| |  | delayed development of enabling technologies and
    performance improvements;                                                                               
|
| |  | delayed development or adoption of new standards
    and protocols; and                                                                                      

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| |   |                                   
| | - | ----------------------------------
| |  | increased governmental regulation.

Our ability to grow our business is dependent on
the growth of the Internet and, consequently, any adverse events
would impair our ability to grow our business.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Security risks and concerns may deter the
    use of the Internet for conducting electronic commerce, which
    would adversely affect the demand for our products

A significant barrier to electronic commerce and
communications is the secure transmission of confidential
information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or
other events or developments could result in compromises or
breaches of our security systems or those of other web sites to
protect proprietary information. If any well-publicized
compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce
and communications, resulting in reduced demand for our
products, thus adversely affecting our revenues.



| |                                                                   
| | ------------------------------------------------------------------
| | Security risks expose us to additional
    costs and to litigation

Anyone who circumvents our security measures
could misappropriate proprietary information or cause
interruptions in our services or operations. The Internet is a
public network, and data is sent over this network from many
sources. In the past, computer viruses, software programs that
disable or impair computers, have been distributed and have
rapidly spread over the Internet. We may be required to expend
significant capital and other resources to protect against the
threat of security breaches or to alleviate problems caused by
breaches. To the extent that our activities may involve the
storage and transmission of proprietary information, such as
credit card numbers, security breaches could expose us to a risk
of loss or litigation and possible liability. Our security
measures may be inadequate to prevent security breaches, and our
business would be harmed if we do not prevent them.

Risks Related to Ownership of Our Common
Stock



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | The market price of our common stock will
    fluctuate and you may lose all or part of your
    investment

Our common stock is quoted for trading on the
Nasdaq National Market. The market price for our common stock
may continue to be highly volatile for a number of reasons
including:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | future announcements concerning Verity or its
    competitors;                                   
|
| |  | quarterly variations in operating results;                                                       
|
| |  | announcements of technological innovations;                                                      
|
| |  | the introduction of new products or changes in
    product pricing policies by us or competitors;
|
| |  | announcements of acquisitions by us or
    competitors;                                          
|
| |  | proprietary rights or other litigation; and                                                      
|
| |  | changes in earnings estimates by analysts or
    other factors.                                  

In addition, stock prices for many technology
companies fluctuate widely for reasons, which may be unrelated
to operating results. These fluctuations, as well as general
economic, market and political conditions such as recessions,
terrorist attacks or military conflicts, may materially and
adversely affect the market price of our common stock.

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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have implemented certain anti-takeover
    provisions that may prevent or delay an acquisition of Verity
    that might be beneficial to our stockholders

Provisions of our certificate of incorporation
and bylaws, as well as provisions of Delaware law, could make it
more difficult for a third-party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions
include:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishment of a classified board of directors
    such that not all members of the board may be elected at one
    time;                                                                                  
|
| |  | the ability of the board of directors to issue
    without stockholder approval up to 1,999,995 shares of preferred
    stock to increase the number of outstanding shares and thwart a
    takeover attempt;
|
| |  | no provision for cumulative voting in the
    election of directors, which would otherwise allow less than a
    majority of stockholders to elect director candidates;                                      
|
| |  | limitations on who may call special meetings of
    stockholders;                                                                                                                                            
|
| |  | prohibiting stockholder action by written
    consent, thereby requiring all stockholder actions to be taken
    at a meeting of our stockholders; and                                                       
|
| |  | establishing advance notice requirements for
    nominations for election to the board of directors or for
    proposing matters that can be acted upon by stockholders at
    stockholder meetings.         

We also have in place a Share Purchase Rights
Plan, commonly referred to as a poison pill. In
addition, the anti-takeover provisions of Section 203 of
the Delaware General Corporations Law and the terms of our stock
option plan may discourage, delay or prevent a change in control
of Verity.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Risk.The primary objective of our
investment activities is to preserve the principal while at the
same time maximizing yields without significantly increasing the
risk. To achieve this objective, we maintain our portfolio of
cash equivalents and investments in a variety of securities,
including both government and corporate obligations and money
market funds. As of November 30, 2002, approximately 46% of
our portfolio matures in one year or less, with the remainder
maturing in less than three years. We do not use derivative
financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy,
limit the amount of credit exposure to any one issuer.

The following table presents the amounts of our
cash equivalents and investments that are subject to interest
rate risk by year of expected maturity and average interest
rates as of November 30, 2002:

|                       |  |        |        |        |  |                        |        |        |  |       |        |            |  |   |        |   |  |   |         |  |  |   |         | 
|---------------------- |  | ------ | ------ | ------ |  | ---------------------- | ------ | ------ |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------- |  |  | - | ------- | 
|                       |  | FY2003 |        | FY2004 |  | FY2005                 |        | FY2006 |  | Total |        | Fair Value
|                       |  |        |        |        |  |                        |        |        |  |       |        |           
|                       |  |        |        |        |  |                        |        |        |  |      
|                       |  |        |        |        |  | (Dollars in thousands) |        |        |  |      
|Cash equivalents       |  | $      | 19,443 |        |  |                        |       |        |  |       |       |            |  |   |       |   |  | $ | 19,443  |  |  | $ | 19,443  | 
|Average interest rate  |  |        | 1.0    | %      |  |                        |       |        |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Short-term investments |  | $      | 73,195 |        |  | $                      | 16,786 |        |  |       |       |            |  |   |       |   |  | $ | 89,981  |  |  | $ | 89,981  | 
|Average interest rate  |  |        | 3.9    | %      |  |                        | 4.2    | %      |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Long-term investments  |  |        |       |        |  | $                      | 52,375 |        |  | $     | 45,853 |            |  | $ | 29,808 |   |  | $ | 128,036 |  |  | $ | 128,036 | 
|Average interest rates |  |        |       |        |  |                        | 4.3    | %      |  |       | 3.6    | %          |  |   | 3.4    | % |  |   |         |  |  |   |         | 

Foreign Currency Risk.We transact business in various
foreign currencies, including the Euro, the British pound, the
Canadian dollar, the Australian dollar, the Swedish krona, the
South African rand, the Mexican peso, the Brazilian real and the
Singaporean dollar. We have established a foreign currency
hedging program utilizing foreign currency forward exchange
contracts to hedge certain sales contracts and payables
denominated in foreign currency. Under this program,
fluctuations in foreign currencies during the period from the
signing of the contract until payment are partially offset by
realized gains and losses on the hedging instruments. The goal
of this hedging program is to lock in exchange rates on certain
sales contracts and

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payables denominated in foreign currencies. The
notional amount of hedged contracts and the estimated fair value
are not material.







|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Evaluation of disclosure controls and
    procedures.Our chief executive
    officer and our chief financial officer, after evaluating the
    effectiveness of Veritys disclosure controls and
    procedures(as defined in the Securities Exchange Act
    of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date within
    90 days before the filing date of this quarterly report,
    have concluded that our disclosure controls and procedures are
    effective to ensure that information required to be disclosed by
    Verity in reports that we file or submit under the Exchange Act
    (i) is accumulated and communicated to Veritys
    management, including our chief executive officer and our chief
    financial officer, to allow timely decisions regarding required
    disclosure, and (ii) is recorded, processed, summarized and
    reported within the time periods specified in Securities and
    Exchange Commission rules and forms.
|
| | (b) | Changes in internal
    controls.There were no significant
    changes in our internal controls or to our knowledge in other
    factors that could significantly affect these controls
    subsequent to the date of their evaluation. There were no
    significant deficiencies or material weaknesses, and therefore
    there were no corrective actions taken.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

It should be noted that a control system, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people or by management override of the control. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and we cannot
assure investors that any design will succeed in achieving its
stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.

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PART II. OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

On June 7, 2001, Verity filed a complaint in
federal district court in the Northern District of California,
San Jose Division, against BroadVision, Inc. (Case
No. C01-20501-PVT-ADR). BroadVision is a software company
that Verity in the past has licensed to distribute Veritys
copyrighted software known as the Verity Developer Kit
(VDK). Verity alleges in its complaint that under
the terms of the parties licenses, BroadVision was
authorized to distribute certain limited portions of VDK as an
embedded component of specified software applications of
BroadVision. Verity further alleges that BroadVision has
distributed portions of VDK that it was not authorized to
distribute, failed to prevent end users from accessing
unlicensed functions and encouraged end users to make use of
unlicensed functions of VDK. Verity further alleges that it
terminated its license with BroadVision on April 24, 2001
and that BroadVision no longer has any right to distribute any
portion of VDK.

Based on the foregoing allegations, Verity has
asserted claims against BroadVision for copyright infringement,
declaratory relief, unfair competition, interference with
economic advantage, breach of contract, and breach of the
implied covenant of good faith and fair dealing. Verity seeks by
its complaint, among other things, an injunction to prohibit
BroadVision from further distribution of VDK, damages, including
statutory damages, according to proof based on
BroadVisions unauthorized distribution of VDK and
attorneys fees.

BroadVision answered Veritys complaint on
June 28, 2001 and denied the material allegations of the
complaint and asserted affirmative defenses to Veritys
claims. BroadVision also asserted a counterclaim alleging that
Verity had breached the parties license and the implied
covenant of good faith and fair dealing contained therein
(1) by failing to pay BroadVision referral fees that it
claims Verity owes to BroadVision for BroadVisions efforts
in securing the sale of Verity Advanced K-2 Search Modules; and
(2) by failing to provide support to BroadVision for VDK
after Verity terminated the parties license. BroadVision
seeks by its counterclaim, among other things, damages according
to proof, a declaration that BroadVision has not breached the
parties license and attorneys fees.

Verity answered BroadVisions counterclaim
on July 23, 2001 and denied the material allegations of the
counterclaim and asserted various affirmative defenses to
BroadVisions claims. On August 8, 2002, Verity filed
a first amended complaint against BroadVision which, among other
things, added a claim for contributory copyright infringement
against BroadVision based on allegations that BroadVision
knowingly facilitated the use by end users of unlicensed
functionality of VDK. BroadVision answered Veritys amended
complaint on August 29, 2002 and denied the material
allegations of the amended complaint and asserted affirmative
defenses to Veritys claims. BroadVision also reasserted
its counterclaim described above. Verity answered the
counterclaim on September 23, 2002 and denied the material
allegations of the counterclaim and asserted various affirmative
defenses to BroadVisions claims.

The action is currently in the discovery phase.
The trial date has been set for July 14, 2003.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

Not Applicable.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults upon Senior
    Securities

Not Applicable.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

The Companys Annual Meeting of Stockholders
was held on October 10, 2002. Proxies for the meeting were
solicited pursuant to Regulation 14A. At the meeting,
managements nominees for two director positions

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and one other proposal were submitted to the
stockholders of the Company. Managements nominees for
director were elected by the following vote:


|                      |  |            |            |          |  |  |           | 
|--------------------- |  | ---------- | ---------- | -------- |  |  | --------- | 
|                      |  |           
|                      |  | Shares    
|                      |  |           
|Nominee               |  | Voting For |            | Withheld
|                      |  |            |            |         
|Steven M. Krausz      |  |            | 29,124,341 |          |  |  | 2,567,480 | 
|Charles P. Waite, Jr. |  |            | 29,124,846 |          |  |  | 2,566,975 | 

Gary J. Sbona, Steven M. Krausz, Charles P.
Waite, Jr., Stephen A. MacDonald, Karl C. Powell and Anthony J.
Bettencourt continued to serve as directors of the Company after
the annual meeting. Mr. Bettencourt and Mr. MacDonald
will continue to serve until the Annual Meeting of Stockholders
to be held in 2003. Mr. Sbona will continue to serve as the
Chairman of the Board and Mr. Powell will continue to serve
as a director until the Annual Meeting of Stockholders to be
held in 2004. Mr. Krausz and Mr. Waite will continue
to serve until the Annual Meeting of Stockholders to be held in
2005.

A proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent auditors of the
Company for its fiscal year ending May 31, 2003 was also
submitted to a vote of the stockholders of the Company. The
proposal was approved by the following vote:

|                 |            |                      |  |             |           |                  |  |  |       |  |  |  |     | 
|---------------- | ---------- | -------------------- |  | ----------- | --------- | ---------------- |  |  | ----- |  |  |  | --- | 
|For the Proposal |            | Against the Proposal |  | Abstentions |           | Broker Non-Votes
|                 |            |                      |  |             |           |                 
|                 | 27,582,194 |                      |  |             | 4,101,150 |                  |  |  | 8,477 |  |  |  | N/A | 






|        |                  
|------- | -----------------
|Item 5. | Other Information

Acquisition of Assets

On December 17, 2002, the Company completed
the purchase of certain assets from Inktomi Corporation, a
Delaware corporation, and certain of its subsidiaries
(collectively, Inktomi), pursuant to an Asset
Purchase Agreement among Inktomi and the Company (the
Purchase Agreement). Under the terms of the Purchase
Agreement and related agreements, the Company purchased certain
assets and entered into a license agreement relating to
Inktomis enterprise search software business. The Company
paid a purchase price of $25,000,000 in cash and assumed
Inktomis obligations under certain existing enterprise
search business contracts. The funds used to purchase the assets
of Inktomi came directly out of the Companys working
capital. The terms of the Purchase Agreement, including the
purchase price, were determined through arms-length negotiations
between the Company and Inktomi.

Non-audit Services

Consistent with Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, the Company is responsible for
listing the non-audit services approved by the Companys
Audit Committee to be performed by PricewaterhouseCoopers LLP,
the companys external auditor. Non-audit services are
defined as services other than those provided in connection with
an audit or a review of the financial statements of the Company.
Following the quarterly period covered by this filing, the Audit
Committee approved new or recurring engagements of
PricewaterhouseCoopers LLP for the following non-audit services:
(1) tax compliance services; (2) tax consulting
services; and (3) financial due diligence in connection
with potential mergers or acquisitions.






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

A.     Exhibits 
See Exhibit Index

B.     Reports on
Form 8-K

No Current Reports on Form 8-K were filed
during the quarter covered by this report.

32



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##### Table of Contents






SIGNATURE

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



| |             
| | ------------
| | VERITY, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ STEPHEN W. YOUNG

| |                               
| | ------------------------------
| |                               
| | Stephen W. Young              
| | Chief Operating Officer &     
| | Acting Chief Financial Officer

Dated: January 10, 2003

33



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##### Table of Contents






CERTIFICATION

I, Gary J. Sbona, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Verity, Inc.;                                                                                                                                                                                                                                                                               
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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



| |                        
| | -----------------------
| | /s/ GARY J. SBONA      
| |                        
| | Gary J. Sbona          
| | Chief Executive Officer

Date: January 10, 2003

34



---



##### Table of Contents



CERTIFICATION

I, Stephen W. Young, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Verity, Inc.;                                                                                                                                                                                                                                                                               
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



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



| |                               
| | ------------------------------
| | /s/ STEPHEN W. YOUNG          
| |                               
| | Stephen W. Young              
| | Chief Operating Officer &     
| | Acting Chief Financial Officer

Date: January 10, 2003

35



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##### Table of Contents






INDEX TO EXHIBITS

|        |    |                         |  |                                                                                                                                                                                                                                                                
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 2  | .1                      |  | Asset Purchase Agreement between Inktomi
    Corporation, Quiver, Inc., Ultraseek Corporation, Quiver Ltd.
    and the Company, dated November 13, 2002.(1)                                                                                                    
|        | 2  | .2                      |  | Amendment No. 1 to Asset Purchase Agreement
    between Inktomi Corporation, Inktomi Quiver Corporation,
    Ultraseek Corporation, Quiver Ltd. and the Company, dated
    December 17, 2002, amending Asset Purchase Agreement dated
    November 13, 2002.(1)
|        | 3  | .1                      |  | Restated Certificate of Incorporation of the
    Company.(2)                                                                                                                                                                                                   
|        | 3  | .2                      |  | By-Laws.(2)                                                                                                                                                                                                                                                    
|        | 99 | .1                      |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                                                                                                                                                                      



---



|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the exhibits with
    corresponding numbers from the Companys Form 8-K
    filed December 20, 2002.                 
|   
|(2) | Incorporated by reference from the exhibits with
    corresponding numbers from the Companys Form 10-Q for
    the quarter ended November 30, 2000.