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                                                                 EXHIBIT 10.22






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                                  VERITY, INC.

                          LOAN AND SECURITY AGREEMENT


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                               TABLE OF CONTENTS

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1.   DEFINITIONS AND CONSTRUCTIONS .........................................   1
     1.1  Definitions ......................................................   1
     1.2  Accounting Terms .................................................   7

2.   LOAN AND TERMS OF PAYMENT .............................................   7
     2.1  Advances .........................................................   7
     2.2  Interest Rates, Payments, and Calculations .......................   9
     2.3  Crediting Payments ...............................................  10
     2.4  Fees .............................................................  10
     2.5  Additional Costs .................................................  10

3.   CONDITIONS OF LOANS ...................................................  11
     3.1  Conditions Precedent to Initial Advances .........................  11
     3.2  Conditions Precedent to all Advances .............................  11

4.   CREATION OF SECURITY INTEREST .........................................  12
     4.1  Grant of Security Interest .......................................  12
     4.2  Delivery of Additional Documentation Required ....................  12
     4.3  Right to Inspect .................................................  12

5.   REPRESENTATIONS AND WARRANTIES ........................................  12
     5.1  Due Organization and Qualification ...............................  12
     5.2  Due Authorization; No Conflict ...................................  12
     5.3  No Prior Encumbrances ............................................  12
     5.4  Bona Fide Accounts ...............................................  12
     5.5  Merchantable Inventory ...........................................  12
     5.6  Intellectual Property ............................................  13
     5.7  Name; Location of Chief Executive Office .........................  13
     5.8  Litigation .......................................................  13
     5.9  No Material Adverse Change in Financial Statements ...............  13
     5.10 Solvency .........................................................  13
     5.11 Regulatory Compliance ............................................  13
     5.12 Environmental Condition ..........................................  13
     5.13 Taxes ............................................................  14
     5.14 Subsidiaries .....................................................  14
     5.15 Government Consents ..............................................  14
     5.16 Full Disclosure ..................................................  14

6.   AFFIRMATIVE COVENANTS .................................................  14
     6.1  Good Standing ....................................................  14
     6.2  Government Compliance ............................................  14
     6.3  Financial Statements, Reports, Certificates ......................  14
     6.4  Inventory; Returns ...............................................  15
     6.5  Taxes ............................................................  15
     6.6  Insurance ........................................................  15
     6.7  Principal Depository .............................................  16
     6.8  Quick Ratio ......................................................  16
     6.9  Tangible Net Worth ...............................................  16
     6.10 Debt-Tangible Net Worth ..........................................  16
     6.11 Profitability ....................................................  16

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<TABLE>
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     6.12 Registration of Intellectual Property Rights .....................  16
     6.13 Further Assurances ...............................................  16

7.   NEGATIVE COVENANTS ....................................................  17
     7.1  Dispositions .....................................................  17
     7.2  Change in Business ...............................................  17
     7.3  Mergers or Acquisitions ..........................................  17
     7.4  Indebtedness .....................................................  17
     7.5  Encumbrances .....................................................  17
     7.6  Distributions ....................................................  17
     7.7  Investments ......................................................  17
     7.8  Transactions with Affiliates .....................................  17
     7.9  Intellectual Property Agreements .................................  17
     7.10 Subordinated Debt ................................................  18
     7.11 Inventory ........................................................  18
     7.12 Compliance .......................................................  18

8.   EVENTS OF DEFAULT .....................................................  18
     8.1  Payment Default ..................................................  18
     8.2  Covenant Default .................................................  18
     8.3  Material Adverse Effect ..........................................  18
     8.4  Attachment .......................................................  18
     8.5  Insolvency .......................................................  19
     8.6  Other Agreements .................................................  19
     8.7  Subordinated Debt ................................................  19
     8.8  Judgments ........................................................  19
     8.9  Misrepresentations ...............................................  19

9.   BANK'S RIGHTS AND REMEDIES ............................................  19
     9.1  Rights and Remedies ..............................................  19
     9.2  Power of Attorney ................................................  20
     9.3  Accounts Collection ..............................................  21
     9.4  Bank Expenses ....................................................  21
     9.5  Bank's Liability for Collateral ..................................  21
     9.6  Remedies Cumulative ..............................................  21
     9.7  Demand; Protest ..................................................  21
     
10.  NOTICES ...............................................................  21

11.  CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ............................  22

12.  GENERAL PROVISIONS ....................................................  22
     12.1 Successors and Assigns ...........................................  22
     12.2 Indemnification ..................................................  22
     12.3 Time of Essence ..................................................  22
     12.4 Severability of Provisions .......................................  23
     12.5 Amendments in Writing, Integration ...............................  23
     12.6 Counterparts .....................................................  23
     12.7 Survival .........................................................  23
     12.8 Confidentiality ..................................................  23

13.  JUDICIAL REFERENCE ....................................................  23

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      This LOAN AND SECURITY AGREEMENT (the "Agreement") is entered into as of
November 30, 1997, by and between IMPERIAL BANK ("Bank") and VERITY, INC.
("Borrower").


                                    RECITALS

      Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.


                                   AGREEMENT

      The parties agree as follows:

      1.     DEFINITIONS AND CONSTRUCTION

             1.1     Definitions. As used in this Agreement, the following terms
shall have the following definitions:

                     "Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.

                     "Advance" or "advances" means a cash advance under the
Revolving Facility.

                     "Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is controlled by or is under common control with
such Person, and each of such Person's senior executive officers, directors,
and partners.

                     "Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.

                     "Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.

                     "Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.

                     "Closing Date" means the date of this Agreement.

                     "Code" means the California Uniform Commercial Code.

                     "Collateral" means the property described on Exhibit A
attached hereto.

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          "Committed Line" means Two Million Five Hundred Thousand Dollars
($2,500,000); provided that, after Borrower has taken the actions specified in
Section 6.12 to Bank's reasonable satisfaction that would otherwise be required
only upon the occurrence of an Event of Default, the Committed Line shall be
Five Million Dollars ($5,000,000).

          "Contingent Obligation" means, as applied to any Person, any direct
or indirect liability, contingent or otherwise, of that Person with respect to
(i) any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly
or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse
by that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate
cap agreement, interest rate collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; provided, however, that the
term "Contingent Obligation" shall not include endorsements for collection or
deposit in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determined
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith;
provided, however, that such amount shall not in any event exceed the maximum
amount of the obligations under the guarantee or other support arrangement.

          "Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.

          "Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Advances made
under this Agreement, including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless such Indebtedness
is renewable or extendable at the option of Borrower or any Subsidiary to a
date more than one year from the date of determination, but excluding
Subordinated Debt.

          "Daily Balance" means the amount of the Obligations owed at the end
of a given day.

          "Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

          "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.

          "Foreign Exchange Reserve" has the meaning set forth in Section 2.1.2
herein.

          "GAAP" means generally accepted accounting principles as in effect
from time to time.


          "Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters
of credit, (b) all obligations evidenced by notes,



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<PAGE>   6
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.

          "Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.

          "Intellectual Property Collateral" means

          (a)  Copyrights, Trademarks and Patents;

          (b)  Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;

          (c)  Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;

          (d)  Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;

          (e)  All licensed or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;

          (f)  All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and

          (g)  All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.

          "Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products intended
for sale or lease or to be furnished under a contract of service, of every kind
and description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as
is temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.

          "Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

          "IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.

          "Letter of Credit" or "Letters of Credit" has the meaning set forth in
Section 2.1.1 herein.


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     "LIEN" means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

     "Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower, and any other agreement entered into between Borrower and
Bank in connection with this Agreement, all as amended or extended from time to
time.

     "Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.

     "Maturity Date" means September 30, 1998.

     "Negotiable Collateral" means all of Borrower's present and future letters
of credit of which it is a beneficiary, notes, drafts, instruments, securities,
documents of title, and chattel paper, and Borrower's Books relating to any of
the foregoing.

     "Obligations" means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing
or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.

     "Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.

     "Periodic Payments" means all installments or similar recurring payments
that Borrower may now or hereafter become obligated to pay to Bank pursuant to
the terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.

     "Permitted Indebtedness" means:

     (a)  Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;

     (b)  Indebtedness existing on the Closing Date and disclosed in the
Schedule;

     (c)  Indebtedness secured by a Lien described in clause (c) of Permitted
Liens, provided the principal amount of such Indebtedness does not exceed the
lesser of the cost or fair market value of the Equipment financed with the
proceeds of such Indebtedness;

     (d)  Subordinated Debt;

     (e)  Indebtedness to trade creditors incurred in the ordinary course of
business;

     (f)  Other Indebtedness in an aggregate outstanding amount not exceeding
$100,000;



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     (g)  Contingent obligations of Borrower consisting of guaranties (and
other credit support) of the obligations of vendors and suppliers of Borrower
in respect of transactions entered into in the ordinary course of Borrower's
business; and

     (h)  Extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of any of the items of Permitted Indebtedness (a)
through (g) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower.

     "Permitted Investment" means:

     (a)  Investment existing on the Closing Date disclosed in the Schedule;

     (b)  (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than two (2) years from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and other investments in the aggregate amount not
exceeding $100,000;

     (c)  Investments (including debt obligations) received in connection with
the bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with customers or suppliers
arising in the ordinary course of Borrower's business;

     (d)  Investments consisting of (i) compensation of employees, officers and
directors of Borrower so long as the Board of Directors of Borrower determines
that such compensation is in the best interests of Borrower, (ii) travel
advances, employee relocation loans and other employee loans and advances in
the ordinary course of Borrower's business, (iii) loans to employees, officers
or directors relating to the purchase of equity securities of Borrower, and
(iv) other loans to officers and employees approved by the Board of Directors,
not to exceed $150,000 in the aggregate; and

     (e)  other Investments aggregating not in excess of $100,000 at any time.

     "Permitted Liens" means the following:

     (a)  Any Liens existing on the Closing Date and disclosed in the Schedule
or arising under this Agreement or the other Loan Documents;

     (b)  Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank's security
interests, unless required by law;

     (c)  Liens (i) upon or in any equipment acquired, leased or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such equipment, or (ii) existing on such equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;

     (d)  Leases or subleases and licenses or sublicenses granted to others in
the ordinary course of Borrower's business not interfering in any material
respect with the business of Borrower and its Subsidiaries taken as a whole,
and any interest or title of a lessor, licensor or under



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any lease or license provided that such leases, subleases, licenses and
sublicenses do not prohibit the grant of the security interest granted
hereunder;

               (e)  Liens arising from judgements, decrees or attachments to the
extent and only so long as such judgment, decree or attachment has not caused or
resulted in an Event of Default under Section 8.4;

               (f)  Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties in connection with the
importation of goods;

               (g)  Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution;

               (h)  Liens, not otherwise permitted, which Liens secure
obligations of Borrower which do not in the aggregate exceed $100,000 at any
time; and

               (i)  Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (h) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.

               "Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

               "Prime rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.

               "Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed one year, of Borrower
determined in accordance with GAAP.

               "Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.

               "Revolving Facility" means the facility under which the Borrower
may request Bank to issue cash advances, as specified in Section 2.1 hereof.

               "Schedule" means the schedule of exceptions attached hereto, if
any.

               "Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).

               "Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.


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               "Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, Borrower's net worth calculated in accordance with
GAAP minus intangible assets plus Subordinated Debt.

               "Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.

               "Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Assignor connected
with and symbolized by such trademarks.

          1.2  Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.

     2.   LOAN AND TERMS OF PAYMENT

          2.1  Advances.

               (a)  Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the Committed Line minus the face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit) and the Foreign
Exchange Reserve. Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at
any time without penalty, in whole or in part, prior to the Maturity Date.

               (b)  Whenever Borrower desires and Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. California
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or such other individuals who shall have expressly been authorized by
Borrower, or without instructions if in Bank's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a person whom Bank
reasonably believes to be a Responsible Officer or such other individuals who
shall have expressly been authorized by Borrower, and Borrower shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result of
such reliance. Bank will credit the amount of Advances made under this Section
2.1 to Borrower's deposit account designated for receipt of funds in respect of
such Advance.

               (c)  The Revolving Facility shall terminate on the Maturity
Date, at which time all Advances under this Section 2.1 shall be immediately
due and payable.

               2.1.1   Letters of Credit

                       (a)  Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit (each a
"Letter of Credit," collectively, the "Letters of Credit") for the account of
Borrower in an aggregate face amount not to exceed the Committed Line minus the
sum of the then outstanding principal balance of the Advances, the face amount
outstanding Letters of Credit and the Foreign Exchange Reserve; provided that
the face amount of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) shall not in any 

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case exceed One Million Dollars ($1,000,000). Each such Letter of Credit shall
have an expiry date no later than the Maturity Date. All such Letters of Credit
shall be, in form and substance, acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank's form of application and
letter of credit agreement. All amounts actually paid by Bank in respect of a
Letter of Credit shall, when paid, constitute an Advance under this Agreement.

                    (b)  The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any Letters of Credit.

                    (c)  Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such Letter of Credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.

                    (d)  Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Line for Letters of Credit against fluctuations in currency exchange
rates, in an amount equal to ten percent (10%) of the face amount of such Letter
of Credit. The amount of such reserve may be amended by Bank from time to time
to account for fluctuations in the exchange rate. The availability of funds
under the Committed Line shall be reduced by the amount of such reserve for so
long as such Letter of Credit remains outstanding.

               2.1.2     Foreign Exchange Contract: Foreign Exchange
Settlements.

                    (a)  Subject to the terms of this Agreement, Borrower may
enter into foreign exchange contracts (the "Exchange Contracts") not to exceed
an aggregate amount of One Million Dollars ($1,000,000) (the "Contract Limit"),
pursuant to which Bank shall sell to or purchase from Borrower foreign currency
on a spot or forward basis. Bank shall not be obligated to enter into any
Exchange Contracts with Borrower at any time Borrower is out of compliance with
any of the provisions of this Agreement. All Exchange Contracts must provide for
delivery of settlement on or before the Maturity Date. The amount available
under the Committed Line at any time shall be reduced by the following amounts
(the "Foreign Exchange Reserve") on any given day (the "Determination Date"):
(i) on all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed more than two business days after the Determination Date, ten
percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on all
outstanding Exchange Contracts on which delivery is to be effected or settlement
allowed within two business days after the Determination Date, one hundred
percent (100%) of the gross amount of the Exchange Contracts.

                    (b)  Bank may, in its discretion, terminate the Exchange
Contracts at any time when (a) an Event of Default has occurred and is
continuing for (b) that there is no sufficient availability under the Committed
Line and Borrower does not have available funds in its bank account to satisfy
the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts in
accordance with this Agreement, and without limitation of any applicable
indemnities, Borrower agrees to reimburse Bank for any and all fees, costs and
expenses relating thereto or arising in connection therewith.

                    (c)  Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and settlement allowed in
any two business

                                       8
<PAGE>   12
day period to be more than One Million Dollars ($1,000,000) (the "Settlement
Limit"), nor shall Borrower permit the total gross amount of all Exchange
Contracts to which Borrower is a party, outstanding at any one time, to exceed
the Contract Limit. Notwithstanding the above, however, the amount which may be
settled in any two (2) business day period may be increased above the Settlement
Limit up to, but in no event to exceed, the amount of the Contract Limit under
either of the following circumstances:

                    (i)  if there is sufficient availability under the Committed
Line in the amount of the Foreign Exchange Reserve as of each Determination
Date, provided that Bank in advance shall reserve the full amount of the Foreign
Exchange Reserve against the Committed Line; or

                    (ii) if there is insufficient availability under the
Committed Line, as to settlements within any two (2) business day period,
provided that Bank, in its sole discretion, may: (A) verify good funds overseas
prior to crediting Borrower's deposit account with Bank (in the case of
Borrower's sale of foreign currency); or (B) debit Borrower's deposit account
with Bank prior to delivering foreign currency overseas (in the case of
Borrower's purchase of foreign currency).

               (d)  In the case of Borrower's purchase of foreign currency,
Borrower in advance shall instruct Bank upon settlement either to treat the
settlement amount as an advance under the Committed Line, or to debit Borrower's
account for the amount settled.

               (e)  Borrower shall execute all standard form applications and
agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.

               (f)  Without limiting any of the other terms of this Agreement or
any such standard form applications and agreements of Bank, Borrower agrees to
indemnify Bank and hold it harmless from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and expenses (including,
without limitation, reasonable attorneys' fees of counsel of Bank's choice), of
every nature and description which it may sustain or incur, based upon, arising
out of, or in any way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby.

     2.2  Interest Rates, Payments, and Calculations.

          (a)  Interest Rate. Except as set forth in Section 2.2(b), any
Advances shall bear interest, on the average Daily Balance, at a rate equal to
the Prime Rate.

          (b)  Late Payment Fee; Default Rate. If any payment is not made within
ten (10) days of the date such payment is due, Borrower shall pay Bank a late
fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid
amount or (ii) the maximum amount permitted to be charged under applicable law.
All Obligations shall bear interest, from and after the date Borrower receives
written notice of the occurrence of an Event of Default and during the
continuance thereof, at a rate equal to five (5) percentage points above the
interest rate applicable immediately prior to the occurrence of the Event of
Default.

          (c)  Payments. Except as specified in Section 2.4(b), interest
hereunder shall be due and payable on the tenth (10th) calendar day of each
month during the term hereof. Bank shall, at its option, charge such interest,
all Bank Expenses, and all Periodic Payments against any of Borrower's deposit
accounts or against the Committed Line, in which case those amounts shall
thereafter accrue interest at the rate then applicable hereunder. Bank will
notify Borrower of all debits

                                       9
<PAGE>   13
and charges that Bank makes against Borrower's accounts in the ordinary course
of Bank's operations. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.

          (d)  Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. Bank shall notify Borrower of the
change in the ordinary course of Borrower's business. All interest chargeable
under the Loan Documents shall be computed on the basis of a three hundred sixty
(360) day year for the actual number of days elapsed.

     2.3  Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
and during the continuance of an Event of Default, the receipt by Bank of any
wire transfer of funds, check, or other item of payment shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment on account unless such payment is of immediately available federal funds
or unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon
California time shall be deemed to have been received by Bank as of the opening
of business on the immediately following Business Day. Whenever any payment to
Bank under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension, provided
however, that no late fee shall accrue because the relevant date is not a
Business Day.

     2.4  Fees. Borrower shall pay to Bank the following:

          (a)  Facility Fee. A Facility Fee equal to Twenty Thousand Dollars
($20,000), which fee shall be due on the Closing Date and shall be fully earned
and nonrefundable;

          (b)  Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents provided, however, that
Borrower shall be required to reimburse Bank once per year for such audits,
appraisals and examinations unless an Event of Default has occurred; and

          (c)  Bank Expenses. Upon the date hereof, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys' fees and expenses not
to exceed $7,500, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as an when they become due.

     2.5  Additional Costs. In case any change after the date hereof in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this Agreement:

          (a)  subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);

                                       10
<PAGE>   14
               (b)  imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or

               (c)  imposes upon Bank any other condition with respect to its
performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error. Bank agrees that it will allocate all
such increased costs among its customers similarly affected in good faith and
in a manner consistent with Bank's customary practice.

          2.6  Term. This Agreement shall become effective on the Closing Date,
and subject to Section 12.7, shall continue in full force and effect for a term
ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Advances under this Agreement during
the continuance of an Event of Default. Notwithstanding termination, Bank's
Lien on the Collateral shall remain in effect for so long as any Obligations
are outstanding. Provided no Obligations are outstanding, Borrower shall have
the right to terminate this Agreement upon written notice to Bank. Upon any
termination, Bank's Lien on the Collateral shall terminate provided no
Obligations are outstanding and Bank shall cooperate with Borrower promptly to
make such filings (e.g., financing statements and termination of the
Intellectual Property Security Agreement) as Borrower may reasonably request to
evidence such termination.

     3.   CONDITIONS OF LOANS

          3.1  Conditions Precedent to Initial Advance. The obligation of Bank
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:

               (a)  this Agreement;

               (b)  a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;

               (c)  financing statement (Form UCC-1);

               (d)  insurance certificate;

               (e)  payment of the fees and Bank Expenses then due specified in
Section 2.4 hereof; and

               (f)  such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.

          3.2  Conditions Precedent to all Advances. The obligation of Bank to
make each Advance, including the initial Advance, is further subject to the
following conditions:

               (a)  timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and

                                       11
<PAGE>   15
               (b)  the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date, and no Event of Default shall have occurred
and be continuing, or would result from such Advance. The making of each
Advance shall be deemed to be a representation and warranty by Borrower on the
date of such Advance as to the accuracy of the facts referred to in this
Section 3.2(b).

     4.   CREATION OF SECURITY INTEREST

          4.1  Grant of Security Interest.  Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof
assuming Bank has timely and properly filed and taken all other actions
necessary or desirable to perfect and protect such security interest.

          4.2  Delivery of Additional Documentation Required.  Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.

          4.3  Right to Inspect.  Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to
time during Borrower's usual business hours, to inspect Borrower's Books and to
make copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.

     5.   REPRESENTATIONS AND WARRANTIES

          Borrower represents and warrants as follows:

          5.1  Due Organization and Qualification.  Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified and where the failure to so qualify
could result in a Material Adverse Effect.

          5.2  Due Authorization; No Conflict.  The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound except to the extent that
certain intellectual property agreements prohibit the assignment of the rights
thereunder to a third party without the Borrower's or other party's consent.
Borrower is not in default under any agreement to which it is a party or by
which it is bound, which default could have a Material Adverse Effect.

          5.3  No Prior Encumbrances.  Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.

                                       12
<PAGE>   16
     

     5.4  Bona Fide Accounts. The Accounts are bona fide existing obligations.
The property giving rise to such Accounts has been delivered to the account
debtor or to the account debtor's agent for immediate shipment to and
unconditional acceptance by the account debtor.

     5.5  Merchantable Inventory. All Inventory is in all material respects of
good and marketable quality, free from all material defects, normal wear and
tear excepted; provided, however, that the Inventory is the product of rapidly
changing technology and therefore is subject to technological obsolescence.

     5.6  Intellectual Property. Borrower is the sole owner of the Intellectual
Property Collateral, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business or except as permitted under
this Agreement. To Borrower's best knowledge, each of the Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been
judged invalid or unenforceable, in whole or in part, and as of the date
hereof, Borrower has no knowledge that nor has it received any communication
that a claim has been made that any part of the Intellectual Property
Collateral violates the rights of any third party.

     5.7  Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.

     5.8  Litigation. Except as set forth in the Schedule, there are no actions
or proceedings pending by or against Borrower or any Subsidiary before any court
or administrative agency in which an adverse decision could have a Material
Adverse Effect or a material adverse effect on Borrower's interest or Bank's
security interest in the Collateral. Borrower does not have knowledge of any
such pending or threatened actions or proceedings.

     5.9  No Material Adverse Change in Financial Statements. All consolidated
historical financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.

     5.10 Solvency. The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.

     5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940. Borrower is
not engaged principally, or as one of the important activities, in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulations G, T and U of the Board of Governors of the
Federal Reserve System). Borrower has complied with all the provisions of the
Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.

     5.12 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to
the best of Borrower's knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or

                                       13
<PAGE>   17
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.

               5.13    Taxes. Borrower and each Subsidiary has filed or caused
to be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.

               5.14    Subsidiaries. Except as set forth in Schedule 5.14,
Borrower does not own any stock, partnership interest or other equity securities
of any Person, except for Permitted Investments and has no Subsidiaries.

               5.15    Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted, except to the extent that any failure to do so would not have a
Material Adverse Effect.

               5.16    Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.

     6.     AFFIRMATIVE COVENANTS

               Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:

               6.1    Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.

               6.2    Government Compliance. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.

               6.3    Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) as soon as available, but in any event within ninety
(90) days after the end of Borrower's fiscal year, audited consolidated
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
<PAGE>   18
independent certified public accounting firm reasonably acceptable to Bank; (b)
within forty-five (45) days of the last day of each fiscal quarter, copies of
all statements, reports and notices sent or made available generally by Borrower
to its security holders or to any holders of Subordinated Debt and all reports
on Form 10-Q filed with the Securities and Exchange Commission for such period;
(c) promptly upon receipt of notice thereof, a report of any legal actions
pending against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; (d) upon Bank's reasonable request, but in any event not less than
once every calendar quarter, notice of any material change in the composition
of the Intellectual Property Collateral, including, but not limited to, any
subsequent ownership right of the Borrower in or to any Copyright, Patent or
Trademark not specified in any intellectual property security agreement between
Borrower and Bank or knowledge of an event that materially adversely effects
the value of the Intellectual Property Collateral; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.

     Within forty-five (45) days after the last day of each fiscal quarter,
Borrower shall deliver to Bank an aged listing of accounts receivable and
accounts payable.

     Borrower shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit C hereto.

     Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred
and is continuing.

     6.4  Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects, subject to normal wear
and tear and normal obsolescence due to the technological basis of such
Inventory. Returns and allowances, if any, as between Borrower and its account
debtors shall be on the same basis and in accordance with the usual customary
practices of Borrower, as they exist at the time of the execution and delivery
of this Agreement. Borrower shall promptly notify Bank of all returns and
recoveries and of all disputes and claims, where the return, recovery, dispute
or claim involves more than Fifty Thousand Dollars ($50,000).

     6.5  Taxes. Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute
and deliver to Bank, on demand, appropriate certificates attesting to the
payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with
proof satisfactory to Bank indicating that Borrower or a Subsidiary has made
such payments or deposits; provided that Borrower or a Subsidiary need not make
any payment if the amount or validity of such payment is contested in good
faith by appropriate proceedings and is reserved against (to the extent
required by GAAP) by Borrower.

     6.6  Insurance.

          (a)  Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.


PA/714594-3
February 12, 1998


                                       15
<PAGE>   19
          (b)  All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.

     6.7  Principal Depository. Borrower shall maintain its principal depository
and operating accounts with Bank.

     6.8  Quick Ratio. Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Quick Assets to Current Liabilities of not less than
1.50 to 1.00.

     6.9  Tangible Net Worth. Borrower shall maintain, as of the last day of
each fiscal quarter, a Tangible Net Worth of not less than Nineteen Million
Dollars ($19,000,000).

     6.10 Debt-Tangible Net Worth. Borrower shall maintain, as of the last day
of each fiscal quarter, a ratio of Total Liabilities to Tangible Net Worth of
not more than 1.00 to 1.00.

     6.11 Profitability. Borrower shall not suffer a loss in excess of
$7,500,000 for the fiscal quarter ending November 30, 1997 or a loss in excess
of $2,000,000 for the fiscal quarter ending February 28, 1998. Borrower shall be
profitable on an after tax basis for each fiscal quarter thereafter.

     6.12 Registration of Intellectual Property Rights.

          (a)  As a condition to an increase of the Committed Line to
$5,000,000, and in any case upon the occurrence of an Event of Default, Borrower
shall (i) file or cause to be filed on an expedited basis a duly completed
application to register (to the extent not already registered) with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, and thereafter shall diligently pursue the registration of those
intellectual property rights developed or acquired by Borrower from time to time
in connection with any product and (ii) execute, deliver, register and/or file
such additional instruments and documents from time to time as Bank shall
reasonably request to perfect Bank's security interest in the Intellectual
Property Collateral. Bank shall have the right, but not the obligation, to take,
at Borrower's sole expense, any actions that Borrower is required under this
Section 6.12(a) to take but which Borrower fails to take, after five (5) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.12(a).

          (b)  Borrower shall (i) use commercially reasonable efforts to
protect, defend and maintain the validity and enforceability of the Trademarks,
Patents and Copyrights, (ii) use its best efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise Bank in writing of
material infringements detected and (iii) not allow any Trademarks, Patents or
Copyrights to be abandoned, forfeited or dedicated to the public without the
written consent of Bank, which shall not be unreasonably withheld, unless
Borrower determines that reasonable business practices suggest that abandonment
is appropriate.

          (c)  For so long as the actions specified in Section 6.12(a) have not
been taken, Borrower shall cause the outstanding balance of Obligations under
this Agreement to be zero (0) for a period of five (5) consecutive days during
the term of this Agreement.

                                       16
<PAGE>   20
          6.13 Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

     7.   NEGATIVE COVENANTS

          Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:

          7.1  Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment; (iv) the
sale of the capital stock of Verity Interactive SARL or (v) other Transfers not
in excess of $250,000 in the aggregate during the term of this Agreement.

          7.2  Change in Business. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.

          7.3  Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person except for
the merger or consolidation of one or more Subsidiaries of Borrower with or into
Borrower or the merger or consolidation of two or more Subsidiaries of Borrower.

          7.4  Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.

          7.5  Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property (including without limitation the
Intellectual Property Collateral), or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.

          7.6  Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except Borrower may at any time when an Event of Default is not
continuing, repurchase from an officer, director or employee shares of equity
securities of Borrower held by them upon such person's termination of employment
or rendering of service to Borrower.

          7.7  Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.

          7.8  Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.

          7.9  Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way

                                       17
<PAGE>   21
prevent the creation of a security interest in Borrower's rights and interests
in any property included within the definition of the Intellectual Property
Collateral acquired under such contracts, except to the extent that such
provisions are necessary in Borrower's exercise of its reasonable business
judgement.

     7.10 Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amended any material
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent which shall not be unreasonably withheld.

     7.11 Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.

     7.12 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
in a material respect with the Federal Fair Labor Standards Act or violate any
law or regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.

     8.   EVENTS OF DEFAULT

     Any one or more of the following events shall constitute an Event of 
Default by Borrower under this Agreement:

     8.1  Payment Default. If Borrower fails to pay the principal of, or any
interest on, any Advances when due and payable; or fails to pay any portion of
any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by
Borrower of an invoice for such other Obligations;

     8.2  Covenant Default. If Borrower fails to perform any obligation under
Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other
term, provision, condition, covenant or agreement that can be cured, has failed
to cure such default within thirty (30) days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof;

     8.3  Material Adverse Effect. If there occurs a Material Adverse Effect or 
a material impairment of the value or priority of Bank's security interests in
the Collateral;

     8.4  Attachment. If any material portion of Borrower's assets is attached,
seized, subjected to a writ of distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with



                                       18
<PAGE>   22
respect to any of Borrower's assets by the United States Government, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);


            8.5    Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within sixty (60)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);

            8.6    Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;

            8.7    Subordinated Debt. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;

            8.8    Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or 

            8.9    Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other loan Document.

      9.     BANK'S RIGHTS AND REMEDIES

            9.1    Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

                   (a)    Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);

                   (b)    Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;

                   (c)    Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;

                   (d)    Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;

                                       19
<PAGE>   23
               (e)  Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank
a license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;

               (f)  Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;

               (g)  Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure
to Bank's benefits;

               (h)  Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;

               (i)  Bank may credit bid and purchase at any public sale; and 

               (j)  Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.

          9.2  Power of Attorney.  Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
accounts debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle,and adjust all claims under and decisions with respect
to Borrower's policies of insurance; (e) settle and adjust disputes and claims
respecting the accounts directly with account debtors, for amounts and upon
terms which Bank determines to be reasonable; (f) to modify, in its sole
discretion, any intellectual property security agreement entered into between
Borrower and Bank without first obtaining Borrower's approval of or signature to
such modification solely by amending Exhibit A, Exhibit B and Exhibit C,
thereof, as appropriate, to (i) include reference to any right, title or
interest in any Copyrights, Patents or Trademarks acquired by Borrower after the
execution hereof or (ii) to delete any reference to any right, title or interest
in any Copyrights, Patents or Trademarks in which Borrower no longer has or
claims any right, title or interest; (g) to file, in its sole discretion, one or
more financing or continuation statements and amendments thereto, relative to
any of the Collateral without the signature of Borrower where permitted by law;
and (h) dispose of the Collateral in accordance with, but only to the extent
permitted under, the Code (and to register such disposition with appropriate
government authorities); provided Bank may exercise such Power of 


                                       20
<PAGE>   24
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.

          9.3  Accounts Collection. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of
such Account. Borrower shall collect all amounts owing to Borrower for Bank,
receive in trust all payments as Bank's trustee, and immediately deliver such
payments to Bank in their original form as received from the account debtor,
with proper endorsements for deposit.


          9.4  Bank Expenses.  If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the
following; (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the
future or a waiver by Bank of any Event of Default under this Agreement.


          9.5  Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.

          9.6  Remedies Cumulative.  Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.

          9.7  Demand; Protest.  Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.

          10.  NOTICES

               Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:


                                       21
<PAGE>   25
     If to Borrower:     Verity, Inc.
                         894 Ross Drive
                         Sunnyvale, CA 94099
                         Attn: Vice President, Administration and Controller
                         FAX: (408) 542-2020

     If to Bank:         Imperial Bank
                         226 Airport Parkway
                         San Jose, CA 95110-1024
                         Attn: Corporate Banking Center
                         FAX: (408) 451-8523

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.

     11.  CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER

          The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.

     12.  GENERAL PROVISIONS

          12.1 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.

          12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against; (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential
to transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.

          12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.

                                       22
<PAGE>   26
          12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

          12.5 Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.

          12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.

          12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.

          12.8 Confidentiality. In handling any confidential information Bank
and all employees and agents of Bank, including but not limited to accountants,
shall exercise the same degree of care that it exercises with respect to its
own proprietary information of the same types to maintain the confidentiality
of any non-public information thereby received or received pursuant to this
Agreement except that disclosure of such information may be made (i) to the
subsidiaries or affiliates of Bank in connection with their present or
prospective business relations with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, provided that they have entered
into a comparable confidentiality agreement in favor of Borrower and have
delivered a copy to Borrower, (iii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information
that either: (a) is in the public domain or in the knowledge or possession of
Bank when disclosed to Bank, or becomes part of the public domain after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third party
is prohibited from disclosing such information.

     13.  JUDICIAL REFERENCE

               (a)  Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Agreement, which controversy, dispute or claim is not settled
in writing within thirty (30) days after the "Claim Date" (defined as the date
on which a party subject to this Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Santa Clara County if none (the "Court"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim

                                       23
<PAGE>   27
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of the Court (or any subsequently enacted
Rule). Each party shall have one peremptory challenge pursuant to CCP Section
170.6. The referee shall (a) be requested to set the matter for hearing within
sixty (60) days after the date of selection of the referee and (b) try any and
all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgement shall be entered
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents which cannot be resolved by the parties
shall be submitted to the referee as provided herein. The Superior Court is
empowered to issue temporary and/or provisional remedies, as appropriate.

               (b)  Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the referee,
except for trial, shall be conducted without a court reporter except that when
any party so requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.

               (c)  The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgement at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgement or any
appealable order or appealable judgement entered by the referee. The parties
hereto expressly reserve the right to findings of fact, conclusions of laws, a
written statement of decision, and the right to move for a new trial or a
different judgment, which new trial, if granted, is also to be a reference
proceeding under this Section 13.

               (d)  In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through
Section 1294.2 of the CCP as amended from time to time. The limitations with
respect to discovery as set forth hereinabove shall apply to any such
arbitration proceeding.


                                       24
<PAGE>   28


     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.


                              VERITY, INC.

                              By: [SIG]
                              -----------------------------------------
                              Title: V.P. Administration and Controller
                                     Assistant Secretary


                              IMPERIAL BANK

                              By: [SIG]
                              -----------------------------------------
                              Title: Assistant Vice President













                                       25
<PAGE>   29


                                   EXHIBIT A


     The Collateral shall consist of all right, title and interest of Borrower
in and to the following:

     (a)  All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;

     (b)  All inventory, now owned or hereafter acquired, including without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;

     (c)  All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payment of insurance and rights to payment of any kind;

     (d)  all now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;

     (e)  All documents, cash, deposit accounts, securities, securities
accounts, securities entitlements, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing;

     (f)  All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any
of the foregoing; and

     (g)  Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.


                                       26
<PAGE>   30

                                   EXHIBIT B

                  LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM

             DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.

TO: EMERGING GROWTH INDUSTRIES                    DATE:________________________

FAX#: (650) 233-3020                              TIME:________________________
-------------------------------------------------------------------------------

FROM:__________________________________________________________________________
                               CLIENT NAME (BORROWER)

REQUESTED BY:__________________________________________________________________
                              AUTHORIZED SIGNER'S NAME

AUTHORIZED SIGNATURE:__________________________________________________________

PHONE NUMBER:__________________________________________________________________

FROM ACCOUNT #__________________________ TO ACCOUNT #__________________________

REQUESTED TRANSACTION TYPE                        REQUEST DOLLAR AMOUNT

PRINCIPAL INCREASE (ADVANCE)             $_____________________________________
PRINCIPAL PAYMENT (ONLY)                 $_____________________________________
INTEREST PAYMENT (ONLY)                  $_____________________________________
PRINCIPAL AND INTEREST (PAYMENT)         $_____________________________________

OTHER INSTRUCTIONS:____________________________________________________________
_______________________________________________________________________________

     All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                                 BANK USE ONLY

TELEPHONE REQUEST:

The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.

_________________________________________        ______________________________
          Authorized Requester                              Phone #

_________________________________________        ______________________________
           Received By (Bank)                               Phone #

                 _____________________________________________
                          Authorized Signature (Bank)
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                                       27
<PAGE>   31
                                   EXHIBIT C

                             COMPLIANCE CERTIFICATE



TO:       IMPERIAL BANK

FROM:     VERITY, INC.



     The undersigned authorized officer of Verity, Inc. hereby certifies that
in accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending _______ with all required covenants except as
noted below and (ii) all representations and warranties of Borrower stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.


 Please indicate compliance status by circling Yes/No under "Complies" column.


<TABLE>
<CAPTION>
Reporting Covenant                     Required                        Complies
-----------------                     --------                        --------
<S>                                   <C>                             <C>

Quarterly financial statements        Quarterly within 45 days        Yes   No
Annual (CPA Audited)                  FYE within 90 days              Yes   No
A/R & A/P Agings                      Quarterly within 45 days        Yes   No
A/R Audit                             Initial and Semi-Annual         Yes   No
</TABLE>

<TABLE>
<CAPTION>
Financial Covenant                     Required                      Actual          Complies
------------------                     --------                      ------          --------
<S>                                   <C>                            <C>             <C>
Maintain on a Quarterly Basis:
  Minimum Quick Ratio                 1.50:1.00                      ____:1.00       Yes   No
  Minimum Tangible Net Worth          $19,000,000                    $________       Yes   No
  Debt-Tangible Net Worth             1.00:1.00                      ____:1.00       Yes   No
  Profitability/Loss                  $1.00*                         $________       Yes   No


</TABLE>


<TABLE>
<S>                                                                <C>
*11/30/97  Loss <$7,500,000; 2/28.98 Loss <$2,000,000.            --------------------------------------------------
                                                             
Comments Regarding Exceptions: See Attached.                                        BANK USE ONLY

Sincerely,                                                        Received by: 

                                                                              ----------------------------------
-------------------------------------------------------                                  AUTHORIZED
SIGNATURE                                                         SIGNER

-------------------------------------------------------           Date:
TITLE                                                                  -----------------------------------------
                                                                                        
-------------------------------------------------------           Verified:
DATE                                                                       -------------------------------------
                                                                                         AUTHORIZED
                                                                  SIGNER

                                                                  Date:
                                                                       -----------------------------------------
                                                                  
                                                                  Compliance Status:                Yes      No

                                                                  ----------------------------------------------
</TABLE>



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